The wrong way to innovate

In the midst of the ongoing hue and cry earlier this year about the impact of outsourcing and offshoring on America's ability to innovate, the Computer Systems Policy Project released a position paper entitled "Choose to Compete," outlining ways to "ensure our nation's continued technology leadership and [to] help create new American jobs." The CSPP—a consortium of CEOs from eight leading technology companies—purports to be worried about innovation and recommends what government can do to help industry in its efforts to innovate. But to think that the solution lies in government spending and action alone is misguided.

Let's look critically at some of the points the "Choose to Compete" report makes. Take productivity improvements. The report states: "Between 1995 and 2003, American productivity grew more than twice as fast [as from 1973 to 1994], which—if sustained—will double our standard of living in less than 25 years."

But consultant Pamela Gordon, president of Technology Forecasters, points out in a recent article that U.S. job losses—fostered in part by outsourcing—are actually a big contributor to reported productivity gains: "As a company outsources functions previously performed in-house, the number of employees (the denominator in the equation) shrinks. Even if that company's revenue remains the same, decreases or increases slightly, the productivity ratio still can dramatically increase," Gordon writes.

Further, outsourcing engineering jobs, in which the engineers need intimate knowledge of manufacturing capability to take advantage of it, or improve it, further negatively affects innovation. (For more on offshoring, see "The Perfect Storm Brews Offshore.") Hiring people overseas, or worse, replacing U.S. jobs with offshore ones, trains foreign workers with no allegiance to the U.S. and little ability, desire or reason to create U.S. jobs. U.S. engineers invented television, but no TVs are manufactured, or even designed, here anymore. The same goes for more-recent innovations such as notebook computers, PCs and now a good portion of the low-end server market.

The CSPP report implies that we have more good jobs than ever before, but is that really true? The report says, "Growth in IT-related jobs in many industries, such as finance, insurance, transportation, public utilities and wholesale trade, averaged about 7 percent from 1992 to 2001, compared to job growth of only 2 percent across the economy, according to the U.S Department of Commerce."

Hiring people overseas trains foreign workers with no allegiance to the U.S. and little ability, desire or reason to create U.S. jobs.

But what's happened since 2001? Outsourcing and offshoring have taken on a frenetic pace. Many of those jobs are gone. Will they ever return? Do Solectron or Flextronics plan to open new board-level assembly facilities in the U.S. again? Intel now hires engineers in China; U.S. hiring is on an exception-only basis. Did CSPP member Motorola consider hiring U.S. engineers before it announced the decision to hire 1,500 in India last summer? Depending on past trends to predict the future, when the future is clearly not going to be the same as the past, and presenting them as a validation of your agenda is misleading.

The report states that U.S. workers can rely on a "can-do attitude, entrepreneurial qualities and willingness to embrace innovation and change" that's evidently superior to those qualities in the rest of the world's workers. So why outsource? "The IT industry is committed to strengthening America's leadership position and growing American jobs." I would love to see data on how many engineers have been hired overseas, directly or indirectly, by the CSPP companies (Dell, EMC, Hewlett-Packard, IBM, Intel, Motorola, NCR, Unisys) versus how many have been hired in the U.S. over the past three years and the plans for the next three to five years to validate that claim.

This organization has an agenda. I'm glad that it is so frank about it, because it's an important agenda that gives American engineers something to work with. It is calling for investment and improvement in education. It wants government to fund research that will benefit its member companies. It is asking the government to dismantle trade barriers and lift H1-B restrictions. However, it also wants to further reduce the corporate tax burden and depreciate capital equipment even faster (which has further tax benefits), and it wants government to fund university research and improved K-12 education. If I were uncharitable, I would wonder if the members of the CSPP want to increase their companies' profits and shift even more of the tax burden to individual taxpayers, at the expense of long-term competitiveness.

Yes, it's important to compete globally. Yes, it's a good idea to take advantage of global engineering and manufacturing talent when it makes sense (to localize products, for instance). Yes, it's important to take advantage of cost reduction wherever it makes sense. But everything that makes sense today does not necessarily make long-term sense, and every action has side effects that may not be immediately obvious. Predicting the future is hard, and nobody is very good at it. However, we know that technological innovation is a key to competitiveness, high-paying jobs and an improved standard of living. The more we leverage someone else's R&D, the less innovation we'll have that can positively contribute to our own GDP.

What hasn't been made clear in the position paper, nor in any of the reports I've read of its presentation to Congress, is the role of corporations in the solution. As written, it appears to be all on the federal government's shoulders. What I would like to see is a win-win model in which, for example, these companies and all others that choose to take advantage of the proposed government tax breaks would use a substantial part of that money to hire U.S. R&D workers and contribute to education.

Are the expectations and recommendations of the CSPP member companies viable, or are they doing a disservice to U.S. competitiveness? Send your thoughts to feedback@eb.reedbusiness.com.