competing to win in the global economy: productivity, innovation, and education michael treacy...
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Competing to Win in the Global Economy:
Productivity, innovation, and education
Michael Treacy
February 20th, 2007
2Copyright Treacy & Company, 2007
3Copyright Treacy & Company, 2007
We are seeing only the tip of the offshoring iceberg
• Only a small fraction of total jobs have been shifted offshore
• Imports and productivity improvements, rather than offshoring, are the major causes of job dislocation
• Companies continue to perform tasks which aren’t differentiating and at which they aren’t very good
• All in all, offshoring has changed our economy only at the margins, but its impact is growing
Over time, all work will migrate to where it is done bestOver time, all work will migrate to where it is done best
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???(40,000)
0.0
10.0
20.0
Employees per MM
carsproduced
OnshoreOutsourcing
(19,000)
91,0
00
24,0
00
Job Loss - The Case of General Motors
30.0
40.0
50.0
60.0
70.0
80.0
90.0
1979 2004
OffshoreOutsourcing
(8,000)
ProductivityGains
(40,000)
67,000 jobs lost
In 25 years!
Work sent to:• Johnson Controls• Arvin Meritor• Lear Siegler• foreign suppliers
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While all of this has been going on . . .
• Foreigners have been onshoring
• Toyota 30,000 US jobs
• Mercedes 7,000 US jobs
• Honda 24,000 US jobs
• BMW 4,700 US jobs
• Nissan 15,000 US jobs
• Robert Bosch 25,000 US jobs
• Toyota’s US operations
• $15.2 billion annual purchase of US production materials
• $ 4.0 billion annual purchase of US based services
• 189,000 US jobs to support total US business
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Why are jobs at a certain location?
• Jobs are placed within the scope of our market horizon, which has expanded as transportation and communications constraints have fallen
localregional national global
• Certain place-based jobs are required to service each local market
• Advantaged resources at a location create local jobs to exploit them
– Production Economy: mineral deposit, forests, agricultural land
– Knowledge Economy: research universities, centers of excellence
• Superior wage productivity: comparative advantage– Productivity: units per hour
– Wages: dollars per hour
– Wage Productivity: units per dollar
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The Theory of Comparative Advantage
• Absolute Advantage – Adam Smith, 1776
– "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. “
• Comparative Advantage - David Ricardo, 1817
– Example – wine & cloth produced in Portugal & England
– A country is said to have a comparative advantage in the production of a good (say cloth) if it can produce cloth at a lower opportunity cost than another country
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10 20 30 40 50 60 70 80 90 100 110
10
20
30
40
50
60
70
80
90
100
110
Labor Productivity
GD
P p
er C
apit
a
Source: Based on Most Recent OECD Data (2005) Indexed to 100 US
US
Japan France
Germany
UK
South Korea
India
China
PolandBrazil
India IT
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What does “winning” mean in the global economy?
• Increase wages, which each individual can enjoy
• Increase shared social programs, which people can collectively enjoy
• Work less - convert the dividend to leisure
• Keep wages lower to attract lots of foreign work
What should a country do with a productivity dividend?What should a country do with a productivity dividend?
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10 20 30 40 50 60 70 80 90 100 110
10
20
30
40
50
60
70
80
90
100
110
Labor Productivity
GD
P p
er C
apit
a
Source: Based on Most Recent OECD Data (2005) Indexed to 100 US
US
Canada
Japan France
Germany
UK
South Korea
India
China
PolandBrazil
India IT
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Labor Productivity in the Canadian Business Sector as a Percentage of the US:A Twenty One Year Decline of Nearly 20 Percent from 1984-2005
Sources: Data for Canada from Aggregate Productivity Measures; data for US from US Bureau of Labor Statistics series
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Implications of Comparative Advantage
• In the shorter term, labor arbitrage will create wage productivity advantages for developing economies, but they are not sustainable beyond 20 years
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Implications of Comparative Advantage
• In the shorter term, labor arbitrage will create wage productivity advantages for developing economies, but they are not sustainable beyond 20 years
• Innovation – in products and know how - will be the only basis of sustainable advantage
• In the longer term, the inherent innovation capabilities of a nation will rest on two foundations:
– Business environment for catalyzing change – competitive markets, access to capital, labor flexibility, regulation, taxation
– Education system for producing talent of superior skill, experience, and motivation
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The world has equal access to Productivity Tools
• The continuing revolution in software
– Automation
– Personal productivity
– Collaboration
• Ongoing process transformation
– Re-engineering – design efficiency
– Outsourcing – economies of focus
– Process utilities – economies of scale
• Management Insight
– Business definition, scale, & efficient capital allocation
– Leadership & employee engagement
– Innovation & change
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Business Environment
• The power of consumer-biased markets
– Which does our legislation, regulation, and litigation favor: employees, companies, or consumers?
• The critical role of risk capital
– How comfortable is capital in accepting knowledge risk?
– How efficiently can good ideas find risk capital?
• The importance of labor flexibility
– Does the labor environment support organizational meritocracy?
– How costly is it to change labor strategies?
• Regulation and taxation
– What is the economic overhead cost of doing business?
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The mix of jobs will change significantly in coming decades
• The clerical job will go the way of the farm job
– What automation doesn’t eliminate, self-service will
• Place-based jobs are being “hollowed out”
– Doctors, trades men, and even professors will see significant change
• Unskilled jobs become semi-skilled; semi-skilled jobs become skilled
– Flipping burgers becomes an information task
• Skilled labor will remain in centers that reinforce mastery
– Mechanical watch making isn’t leaving Switzerland anytime soon
• Specialized knowledge professionals concentrated in centers of renewal
– Increasingly, these are the people that define the work of others
Our higher education system must have tactical and strategic impact Our higher education system must have tactical and strategic impact
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Education content is affecting offshoring already
Per
cen
t o
f im
po
rts
fro
m lo
w-w
age
cou
ntr
ies
20%
40%
$8 $12$10 $14 $18$16 $20
1991
Plastic &Rubber
1991
Apparel
1991Fabricated
Metal1991
IndustrialMachinery
1991
TransportationEquipment
Real Average Hourly Wage (2001)
Source: HBR, “How Offshore Work Affects Your Industry” November 2004
2001
2001
2001
2001
2001
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A few questions to consider in higher education
• How can we most efficiently invest in the feedstock of higher education?
– Primary school and high school education standards
– The undiscussable responsibility of parents
– Early childhood development
• Are foreign students as big an asset if they increasingly return home after their education?
• Are our institutions of learning sufficiently differentiated to meet the needs of a diverse range of inherent intellectual abilities?
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IQ Score <75 75-90 90-110 110-125 >125
US Population 5 20 50 20 5
High school dropout 55 35 6 0.4 <0.4
Source: Gottfredson, L. S. (1997). "Why g matters: The complexity of everyday life." Intelligence, 24(1), 79–132
Intelligence, not education, may become the great divide
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A few questions to consider in higher education
• How can we most efficiently invest in the feedstock of higher education?
– Primary school and high school education standards
– The undiscussable responsibility of parents
– Early childhood development
• Are foreign students as big an asset if they increasingly return home after their education?
• Are our institutions of learning sufficiently differentiated for the diverse range of inherent intellectual abilities?
• How can we improve the collaboration between universities and business in the pursuit of innovation?
• How do we reconcile our need for elite institutions with fairness?
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Our elite institutions must educate more and train less
What did I learn at M.I.T.?
• A taste for life at the knowledge frontier
– Research, innovation and education
• A lifelong desire to learn and improve
– Teaching quality and learning to learn
• Open and integrative thinking
– Appreciation for all the disciplines
• Poise, presence, and purpose
– Social skills and ambition
From a Keynote Address on the occasion of the 125th anniversary of The School of Engineering at the University of Toronto (April, 1998)
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Conclusions
• Labor productivity investments are merely rear guard action against the rise of wage productive emerging economies
• Innovation - in products and know how - holds the key to our future success
• As the world moves toward increasing economic specialization, we must decide where we will excel, and invest to build those centers of excellence
• Economic development depends more than ever on government policy – education & economic
• Only business leaders with real vision will lead the transformation of this economy
Competing to Win in the Global Economy:
Productivity, innovation, and education
Michael Treacy
February 20th, 2007