In light of the rise of Asia in research and development (R&D) and the challenge it poses on American supremacy, SPRIE invited industry and academic R&D leaders for a panel discussion entitled "The Globalization of R&D" on February 10, 2005. The panel included Dr. John Seely Brown, visiting scholar, Annenberg Center, USC; Dr. Kris Halvorsen, vice president and director, Solutions and Services Research Center, Hewlett-Packard; and Dr. Yoshio Nishi, director of research at the Center for Integrated Systems, director of Stanford Nanofabrication Facility, National Nanotechnology Infrastructure Network. Participants discussed a wide array of issues, including the economic rationale for new models of R&D, national/regional comparative advantage in R&D, and the coordination of global R&D.

The Economic Rationale for New Models of R&D

Dr. Nishi highlighted the economic rationale behind the quest for new models of R&D. While back in the early 1990s, a $200 million investment in R&D would grant a semiconductor company a one-year lead in technology, by the early 2000s, a one-year lag would transpire with the same investment level. Such an escalation of R&D cost points to the mounting importance of the efficiency of R&D--or as Dr. Nishi put it, the importance of generating "the right technology at the right time for the right cost." The economic forces will not only alter how R&D activities are organized and distributed within and across firms, markets, regions, and countries but also influence the breadth and depth of knowledge searches. For example, R&D alliance might become a viable and lucrative scheme for cost/risk sharing in R&D. The search for non-silicon-based devices might rise in importance as silicon fabrication reaches its limits. By the same token, the division of innovative labor across nations/regions might deepen to further exploit respective comparative advantages.

Regional Comparative Advantage in R&D

One strand of development is the globalization of R&D, which necessitates comparative advantages across regions. Dr. Brown maintained, "I'm moving my analysis from individual firms to [regional] 'niches.' What I see happening is that thousands of [regional] niches are developing all over the place. What's interesting is how dynamic these niches are in building their unique capabilities." The availability of innovative talents, for example, varies significantly across regions. Invoking "the law of large numbers," Dr. Brown pointed out that given its enormous population size, Asia could produce a large number of engineers, even if they are only a tiny fraction of the total population. Currently, the U.S. produces 50,000 engineers every year; the number is 500,000 for Asia--and it is rapidly growing. Meanwhile, more and more immigrant talents choose to return to their home countries after receiving higher education and some work experience in the U.S. Few U.S. companies can afford to ignore such alarming trends. "We need to move with the market for talent," commented Dr. Halvorsen who overseas HP's global R&D activities. Take HP's R&D effort in Bangalore, India as an example. The effort had a humble start in the mid-1980s. Yet, within ten years, the number of local technical staff grew to 3,000. Today, the number is approaching 10,000.

Market-specific demand also pushes R&D to relocate. As Dr. Halvorsen put it, "when success depends on [geographical] closeness, … you need to do design in close loop with the rest of the activities." Furthermore, overseas R&D might well find its way back into the U.S. As explained by Dr. Brown, "The rise of the middle class in China and India at 1/10 of the price point [of the U.S.]" could spur innovations at 1/10 of the price point. Innovations taking place in China or India might be totally unheard of in the U.S. and eventually finds its way into the U.S. market.

The Coordination of Global R&D

While the globalization of R&D brings many promises, it also poses acute challenges to firms that need to coordinate R&D efforts across national boundaries. As Professor William Miller pointed out, "Increase in R&D cost forces specialization. Then you have to put together an assembly of specialists. The problem is that they are everywhere. Therefore, being able to pull them together becomes the differentiator." The story of Li & Fung serves as a perfect example. Li & Fung is a global leader in the apparel business. In 2002, the company contracted with 7,500 factories in 37 countries and generated a revenue of $5 billion. In an industry with thin margins of a few percent, the company continues to uphold a return-on-equity of 30-50%. Yet, Li & Fung owns no factories. Its competitive advantage lies entirely in its expertise in assessing and orchestrating the unique capabilities of each of the 7,500 suppliers. As Dr. Brown summed up, "Making money will depend less on what you own than on what you can mobilize--[i.e. the ability to] orchestrate."

In a parallel argument, Dr. Halvorsen proposed the new model of "meta-national" R&D. Different from the traditional multinational setup, where R&D is orchestrated from the center and diffused to the peripheral, in a meta-national setup, innovation for different parts of the system are consciously placed in different parts of the world. Advances are made in parallel and feedbacks flow bi-directionally.

An even more decentralized model was advanced by Dr. Brown. Dubbed a "swarm ecosystem," such a system is characterized by one (or more) assemblers and hyper-competition among a constellation of component suppliers. The assembler merely provides the focal model with no detailed design, and leaves it to the component suppliers to compete for coming up with the best fit. In this model, the assembler does not orchestrate the development process from top-down; rather, progress is made from the bottom-up. Yet, at the end of the day, only the fittest component suppliers survive and the result is a highly efficient and competitive system that best exploits its own niches.

Other Issues

Panelists and the audience also engaged in lively discussions about intellectual property rights, organizational learning, institutional innovations, the role of public policy, and the impact of culture on innovation. The globalization of R&D--particularly rising competencies in Greater China and their network of relations to Silicon Valley and their worldwide implications--is a new priority area of research for SPRIE.

The Stanford Project on Regions of Innovation and Entrepreneurship (SPRIE) is a multidisciplinary research program of the Asia-Pacific Research Center (APARC) at Stanford University which focuses on innovation and entrepreneurship in leading high technology regions in the United States and Asia. SPRIE has an active community of scholars at Stanford as well as research affiliates in the United States, China, Taiwan, Japan, Korea, Singapore, and India.

New Fellowships

As part of a new initiative on Greater China, SPRIE will select two outstanding post-docs or young scholars as the inaugural SPRIE Fellows at Stanford for the academic year 2005-2006 for research and writing on Greater China and its role in the global knowledge economy. The primary focus of the program is the intersection of innovation and entrepreneurship and underlying contemporary political, economic, technological, and/or business factors in Greater China (including Taiwan, Mainland China, Singapore). Topics of particular interest include, but are not limited to, university-industry linkages, globalization of R&D, venture capital industry development, networks and flows of managerial and technical leaders, and leading high technology clusters in Greater China. Industries of ongoing research at SPRIE include semiconductors, wireless, and software.

SPRIE Fellows at Stanford will be expected to be in residence for at least three academic quarters, beginning the Fall quarter of 2005. Fellows take part in Center activities, including research forums, seminars, and workshops throughout the academic year, and are required to present their research findings in SPRIE seminars. They will also participate as members of SPRIE's team in its public and invitation-only seminars and workshops with academic, business, and government leaders. Fellows will also participate in the publication programs of SPRIE and APARC. The Fellowship carries a stipend of $40,000.

How To Apply

Applicants should submit

1. A statement of purpose not to exceed five single-spaced pages which describes the research and writing to be undertaken during the fellowship period, as well as the projected product(s) that will be published;
2. a curriculum vitae (with research ability in Chinese preferred); and
3. 2 letters of recommendation from faculty advisors or other scholars. All applicants must have Ph.D. degrees conferred by August 30, 2005.

Address all applications to:

Stanford Project on Regions of Innovation and Entrepreneurship,
Asia-Pacific Research Center,
Encina Hall -East 301,
Stanford University,
Stanford, California
USA 94305-6055

Questions? Please contact Rowena Rosario, Administrative Associate

Deadline for receipt of all materials: January 14, 2005

Applicants will be notified of fellowship decisions in March 2005

Focus on Innovation and Entrepreneurship in Greater China

SPRIE is a multidisciplinary research program at Stanford University which focuses on innovation and entrepreneurship in leading high technology regions in the United States and Asia. SPRIE has an active community of scholars at Stanford as well as research affiliates in the United States, Mainland China, Taiwan, Japan, Korea, Singapore, and India. During 2005, SPRIE is expanding a new initiative on the rise of leading high technology regions in Greater China and their impact on the global knowledge economy. Specific research topics include university-industry linkages for commercialization of technology, globalization of R&D, venture capital industry development and its impact on new venture formation, and networks and flows of managerial and technical leaders. In addition, industries of ongoing research at SPRIE include semiconductors, wireless, and software.

New SPRIE Research Fellows: Research Assistantships with Support for International Field Research

As part of this new initiative on innovation and entrepreneurship in Greater China, SPRIE will select outstanding Stanford students as the inaugural SPRIE Research Scholars. SPRIE Research Scholars will work with SPRIE faculty and senior researchers at Stanford for two (or more) academic quarters in 2005 to gather and analyze data, conduct interviews in Silicon Valley, contribute to publications, and advance progress on the overall project agenda. During summer 2005, they will conduct SPRIE field research through interviews or surveys with business and government leaders in Beijing, Shanghai, or Hsinchu. As part of SPRIE's international research team, they will have the opportunity to interact closely with project leaders and visiting scholars at Stanford as well as partners in Asia, such as the Ministry of Science and Technology, Tsinghua University, or Zhongguancun Science Park in Mainland China or the Industrial Technology Research Institute (ITRI) in Taiwan. They will also participate in SPRIE's public and invitation-only seminars and workshops with academic, business, and government leaders. The financial award will include RA support at 15-20 hours/week (or equivalent) plus summer stipend to cover travel, living expenses, and research.

How To Apply (limited to current Stanford graduate students and exceptional seniors and juniors)

Successful candidates will have demonstrated a track record of superior analytical ability, strong oral and written communication skills (including full fluency in English and Chinese), knowledge of high technology and entrepreneurship, high motivation, and willingness to be part of a dynamic international research team.

Applicants should submit

1) A brief statement (not to exceed one single-spaced page) which describes the candidate's interests and skills,

2) a curriculum vitae, and

3) contact information for 2 references, preferably recent professors, advisors, or employers

Send applications to

SPRIE

Encina Hall East 301

Stanford University

Stanford, CA 94305-6055

Questions? Please contact Wena Rosario, Administrative Associate.

Deadline for receipt of all materials: December 31, 2005

Applicants will be notified of decisions in January 2005.

Are federal fiscal deficits accelerating deindustrialisation in the United States? For four decades, employment in U.S. manufacturing as a share of the labour force has fallen further and faster than in other industrial countries. In the mid-1960s, manufacturing output was 27 per cent of gross national product and manufacturing's share of employment was 24 percent. By 2003, these numbers had fallen to about 13.8 percent and 10.5 percent respectively. Employment in manufacturing remains weak, with an absolute decline of 18,000 jobs in September shown in the Labor Department's payroll survey.

At the same time, the orgy of tax-cutting, with big revenue losses, continues unabated. On October 6, House and Senate negotiators approved an expansive tax bill that showers businesses and farmers with about $145bn in rate cuts and new loopholes -- on top of what were already unprecedented fiscal deficits. These are principally financed by foreign central banks, which hold more than half the outstanding stock of US Treasury bonds. Moreover, meagre saving by American households is forcing US companies also to borrow heavily abroad.

The upshot is a current account deficit of more than $600 billion a year. America's cumulative net foreign indebtedness is about 30 percent of gross domestic product and rising fast. How will this affect manufacturing? The transfer of foreign savings to the US is embodied more in goods than in services. Outsourcing to India aside, most services are not so easily traded internationally. Thus when U.S. spending rises above output (income), the net absorption of foreign goods -- largely raw materials and manufactures -- increases. True, in this year and last the high price of oil has also boosted the current account deficit. However, since the early 1980s, the trade deficit in manufactures alone has been about as big as the current account deficit -- that is, as big as America's saving shortfall (for more detail, see http://siepr.stanford.edu).

If U.S. households' and companies' spending on manufactures is more or less independent of whether the goods are produced at home or abroad, domestic production shrinks by the amount of the trade deficit in manufactures. The consequent job loss depends on labor productivity in manufacturing, which rises strongly through time. If the trade deficit in manufactures is added back to domestic production to get "adjusted manufactured output", and labor productivity (output per person) in manufacturing stays constant, we get projected manufacturing employment. In 2003, actual manufacturing employment was just 10.5 percent of the US labor force, but it would have been 13.9 percent without a trade deficit in manufactures: the difference is 4.7m lost jobs.

In the 1980s, employment in manufacturing began to shrink substantially because of the then large current account deficit attributed to the then large fiscal deficit: Ronald Reagan's infamous twin deficits. With fiscal consolidation under Bill Clinton, the savings gap narrowed but was not closed because personal saving weakened. Now under George W. Bush, the fiscal deficit has exploded while private saving is still weak. The result is heavy borrowing from foreigners and all-time highs in the current account deficit. The main component remains the trade deficit in manufactures, intensifying the shrinkage in manufacturing jobs.

Is there cause for concern? Note that I do not suggest that the trend in overall employment has decreased, but only that its composition has tilted away from tradable goods -- largely manufactures. In the long run, growth in service employment will largely offset the decline in manufacturing. However, the rate of technical change in manufacturing is higher than in other sectors. It is hard to imagine the US sustaining its technological leadership with no manufacturing sector at all.

More uncomfortably, more Congressmen, pundits and voters feel justified in claiming that foreigners use unfair trade practices to steal U.S. jobs, particularly in manufacturing, and hence in urging protectionism. The irony is that, if imports were somehow greatly reduced, this would prevent the transfer of foreign saving to the United States and lead to a credit crunch, with a possibly even greater loss of US jobs.

The answer is not tariffs, exchange rate changes or subsidies to manufacturing that further increase the fiscal deficit. The proper way of reducing protectionist pressure and relieving anxiety about U.S. manufacturing is for the government to consolidate its finances and move deliberately towards running surpluses -- in short, to eliminate the U.S. economy's saving deficiency.