Business Without Borders

A recent paper "Are Elite Universities Losing Their Competitive Edge," by E. Han Kim, Adair Morse, Luigi Zingales (discussed by Greg Mankiw) argues that information technology has eroded locational externalities in economics, the advantage of having good colleagues around for collaboration. The advantage of being at Harvard isn't what it used to be:

We study the ... research productivity of economics and finance faculty who have ever been affiliated with the top 25 universities in the last three decades. We find that there was a positive effect of being affiliated with an elite university in the 1970s; this effect weakened in the 1980s and disappeared in the 1990s. We find ... that its decline is due to the reduced importance of physical access to productive research colleagues.

The collaborative efforts among academics occur between people within countries and between people in different countries.

Thomas Friedman says a similar phenomena is happening in the world of business, locational advantage is falling and this can also occur both within and between countries. Because of this, in many cases what appears to be outsourcing is really something else, global collaboration. With global collaboration there is no real home to the ideas that are being produced anymore than there is a home to a mathematical proof done jointly by two people through a series of emails with attachments or some other information sharing technology. Because global collaboration opens up considerable opportunities that didn't exist previously, enhancing these opportunities increases world economic growth and has the potential to create new jobs and help to lift the poor out of poverty, even more so if developing countries have the ability to take advantage of the opportunities afforded by such collaborative efforts:

Outsourcing, Schmoutsourcing! Out Is Over, by Thomas L. Friedman, Commentary, NY Times: ...I was recently interviewing Ramalinga Raju, chairman of India's Satyam Computer Services ... one of India's top firms doing outsourced work from America, and Mr. Raju told me how Satyam had just started outsourcing some of its American work to Indian villages. ... There is enough bandwidth now, even reaching big Indian villages, to parcel out this work, and the villagers are very eager. "The attrition level is low, and the commitment levels high," Mr. Raju said. "It is a way of breathing economic life into villages." It gives educated villagers a chance to stay on the land, he said, and not have to migrate to the cities.

A short time later I was interviewing Katie Jacobs Stanton, a senior product manager at Google, and Krishna Bharat, founder of Google's India lab. They told me that Google had just launched Google Finance, but what was interesting was that Google Finance was entirely conceived by the Google team in India and then Google engineers from around the world fed into that team — rather than the project's being driven by Google headquarters in Silicon Valley.

It's called "around sourcing" instead of outsourcing, because there is no more "out" anymore. Out is over. ... Mr. Bharat added: "We have entered the generation of the virtual office. Product development happens across the global campus now."

Last story. ... I meet Andy Astor, chief executive of EnterpriseDB, which provides special features for the open-source database called PostgreSQL. His primary development team ... consists of 60 Pakistani engineers in Islamabad... "The New Jersey team — software architects, product managers and executives — comes to work a couple of hours early, while the Islamabad team comes in late, and we have at least five to six hours per day of overlap," Mr. Astor said. "We therefore have multiple face-to-face meetings every day, which makes a huge difference... We treat videoconference meetings as if we were all in the same room."...

[W]e are seeing the emergence of collaborative business models that were simply unimaginable a decade ago. Today, there are so many more tools, so many more ideas, so many more people able to put these ideas and tools together to discover new things, and so much better communications to disseminate these new ideas across the globe.

If more countries can get ... enough telecom and bandwidth so their people can get connected; steadily improving education and decent, corruption-free economic governance; and the rule of law..., there is every reason for optimism that we could see even faster global growth in this century, with many more people lifted out of poverty.

I'm not happy that the song "It's a Small World" is now playing in my head. Damn you Tom Friedman. Still, this seems like a pretty good argument for policies that encourage, or at least do not limit, this type of global collaborative effort.

Comments

[cm]

Well, I guess as long as you don't have to "collaborate", everything is dandy. So, the NJ team comes "a couple" hours early. How much is "a couple", and earlier than what? Let's say nominally the "regular" start time is 9:30 (perhaps I'm a bit optimistic here). I take it "a couple" is at least two. So that would be 7:30. Is that every day? The article doesn't say. (Who takes the kids to daycare?) Do they also leave "a couple" hours early? The article says neither. The time difference is around 10 hours (depends on DST). With 5 hours overlap that's 7:30-12:30 in NJ and 17:30-22:30 in Pakistan.

In my business unit, a similar game is played, although less formally. No overlap, phone conferences at the fringes of "office hours". But invariably 10 PM is in the picture for one side of the exchange.

Good to wax about this "efficiency" as an outside observer.

[camille roy]

There has been a balance of care and exploitation in the relationship of the (American) corporation to the American worker. As the corporation loses its national roots, that is replaced by a purer form of exploitation.

As an abstraction, it's a nice idea. In practice it's about as smelly as a Chinese factory, and for the same reasons.

[reason]

I see two sides here, customisation vs commoditisation. Lower costs will increase demand especially for costly but higher productivity custom software. This will increase the demand for onshore designers/first response support workers who can spend time sitting next to users AND understand the underlying technology. Problems may arise is the process of training workers who understand the technology breaks down (it is a danger as people learn by doing).

On the other side where software is commoditised it will all go offshore in the end. Smart DEVELOPMENT will mean more different products and more customisation. Basic GROWTH means more commoditisation. I think DEVELOPMENT is basically an adjunct of URBANISATION (see the recently deceased Jane Jacobs), we need policies to encourage DEVELOPMENT as against merely growth (including in DEVELOPED economies).

I would like to see economists talking about the difference between development and growth more. In a weak sense, it is pretty much the same as the difference between quality and quantity (between a PRIUS and a HUMMER for instance). Taxes to discourage wasteful or polluting use of primary resources would be a tip in the right direction for instance. We need to move in the direction of a higher quality world rather than higher quantity world - if you like to a fresh asparagus world rather than a big mac world. I would like to call it just growing up.

[Ninjaplease]

So finally Tom Friedman, the bane of the American Worker, admits by proxy that Comparative Advantage is a lie in terms of skill sets.

It's all about how poor you are.

[Live Wire]

I look at the list in the last paragraph... bandwidth, steadily improving education, corruption-free economic governance, and rule of law... and realize just how far America is falling behind Friedman's world ideal.

[Blissex]

Well, that distance no longer exists for many tasks is not that new (and we geeks that have been working on distributed open source projects have known for twenty years).

And indeed «Comparative Advantage is a lie in terms of skill sets. It's all about how poor you are.» because those skills are easily acquired, if the capital equipment is not expensive, and it is not for many things. Look at Japan that went from feudalism to modernity in a few decades, followed by Taiwan, Korea and Singapore. As to the latter, have people here seen photographs of pre-WWII Singapore?

There is a huge difference between being poor and being underdeveloped: Saudi Arabia is rich but underdeveloped country, Singapore is poor but highly developed.

As to universities there are some points that most people seem not to realize as to elite western universities:

* They are elite mostly because of reputation, because of political reasons usually, which make them desirable to employers and thus to aspiring employees.

* Education in many/most of these elite universities is bad or awful; what matters is that they have extremely selective admission policies, so the students tend to be either very smart or very well connected, even if untutored when they leave it.

* Research in many/most of these elite universities would be terrible (because smug arrogance and untutored talent does not lead to good research), except that by having a lot of money they simply buy prestigious names once these have already done the best part of their research somewhere else.

This all means that in practice western countries have very, very little advantage in terms of skills; western elite universities do confer a large advantage for employment rewards and security, but this is mostly because of their brand, not because their product is actually superior (except that because of selection their graduates are indeed a bit smarter or better connected). A bit like having an MBA...

So what matters in the end is how cheap («poor you are») capital and living costs are, and there is no question that they are way cheaper in the third world.

What is happening is that the first world is going through a phase of ''headquarterisation'' (ugly name), which has already happened inside countries.

Within the USA and then UK there used to be many semi-disconnected regions, with their own stock exchanges, company headquarters, concentrations of lawyers; viceversa cities like New York or London used to have significant manufacturing.

What happened is that productive activities have been moving to the national ''periphery'', and rent based ones have been concentrating into national ''headquarters'' cities (in larger countries like the USA these are specialized by function).

This happened because rent based activities (intermediation of various sort) depend much more on physical interaction and ''cabals'' with and between the powers-that-be than productive activities, which depend a lot more of low local costs.

Now this is happening to the whole world: productive activities are being pushed to every more distant peripheries, and first world countries are turning every more into headquarters areas.

[dryfly]

The advantage of being at Harvard isn't what it used to be

The advantage of being at Harvard is exactly what it used to be and always was... meeting & socializing with other rich people who are also at Harvard. It was always about connections and had little to do with 'the content'. If all you want is 'quality content' go to the Univ of Minnesota or Illinois... or Middle East Tech in Ankara for that matter.

But the deals involve money and the people with the money aren't at Minnesota or MET... But they are associated with Harvard, Stanford, Princeton, etc.

Another example of Deepthroat's Law: Follow the Money.

[Blissex]

«"The New Jersey team — software architects, product managers and executives»

This is BTW exactly the example of ''headquarterisation'' I was mentioning.

For a story similar to the EnterpriseDB story, and even more clearly delineated, and a few years old:

http://www.zdnetasia.com/news/software/0,39044164,39198088,00.htm

«The company was initially rooted in Malaysia when it started operations in 1999 but subsequently moved its headquarters to Seattle in the United States in May 2000.
"We shifted our operational HQ to the U.S., but our plan was always to keep R&D in Malaysia," he said. "Just imagine how much cheaper it is to compete in R&D compared to the U.S. It's about one-third or more in terms of cost savings."»

http://seattlepi.nwsource.com/venture/funding.asp?company=Entellium

«But Johnston's experience adds yet another wrinkle to the outsourcing debate. That's because the 36-year-old moved Entellium's headquarters to Seattle from Malaysia last year, a move that he said will add jobs to the U.S. economy.
Since opening the headquarters here, Johnston has raised venture capital from Ignition, inked reseller agreements with 27 partners and built a customer list of about 100 companies. The former Apple sales manager declined to disclose revenues, but predicted the company will be profitable by early next year.
For Entellium to survive, he said a North American headquarters was necessary. It was not an easy process, taking the better part of five months to complete the legal transfer.
"I preferably don't want to go through that experience again," he said.
Several factors led to the decision to relocate to the United States, including a more mature customer base for hosted software and easier access to capital.
"When we went to the venture capital market in Southeast Asia and said we want to raise money to take on Salesforce.com and some of the better funded U.S. companies, despite our reputation, they thought we were suicidal," said Johnston. "There was no way we could raise capital."»

As you can see the overall theme is that skills are thoroughly generic commodities to be bought wherever they are cheapest, but HQ/rent style connections are not commodities, and they have to be sought after.

However the idea that skills are generic commodities is not entirely correct, because there are several different grades of skills, just as oil is not a generic commodity, because there are rather different grades of oil.

[NinjaPlease]

Blissex,

What FLOSS or whatever license project do you work on?

I did some compatibility testing reivew for Wine and contributed minor documentation stuff to the Sea Monkey branch of Mozilla (before Deer Park.)

and I hate Gentoo.

Anyway...

I live in NJ.

The absolute best American business I can think of is owning a datastorage company. It's like realestate only cheaper because what you're selling is security of intangible data.

While this can be easily outsourced, it seems that companies are more willing to outsource their products rather than their data security (maybe they need someone onsite to yell at.)

[save_the_rustbelt]

It is hard to argue with Freidman or the economists, but here is the real question:

Do we want to retain an American middle class or not.

If the answer is no, politicians and economists should be honest about.

[save_the_rustbelt]

ILLEGALS GRANTED SOCIAL SECURITY
The Washington Times
May 19, 2006

"The Senate voted yesterday to allow illegal aliens to collect Social Security benefits based on past illegal employment -- even if the job is obtained through forged or stolen documents."

Now I am really pissed!!! And we know where the American middle class is headed - down.

[camille roy]

I think what we see here is the pundit class and the elite financial class (including economists) shifting their loyalty overseas, following the money as it were, because the corporatists have already shifted.

The key factor for American workers in this shift is that no company has any committment to education/training anymore. I don't think it is widely understood how much training companies used to do. Now they simply use you while you're fresh and then dump you or go off shore.

I think this American complicity in the destruction of the American software industry (among many others) is going to look pretty skanky in retrospect.

[camille roy]

From Stephen Roach at Morgan Stanley today:

The win-win theory of globalization -- workers in poor countries get rich through trade but then turn around and buy things made by rich countries -- just isn’t working. That’s because both the speed and scope of an IT-enabled globalization has broken the mold of the classic theory of comparative advantage. In days of yore, it was fine -- albeit painful -- for rich countries to give up market share in tradable manufactured products. That’s because highly-educated knowledge workers could seek refuge and shelter in nontradable services. However, with nontradables becoming tradable and with educational attainment and skillsets rising rapidly in the developing world, the security of the old way has all but vanished. Sadly, that provides both the justification and the opening for protectionists.

[Lee A. Arnold]

"Locational advantage" has been decreasing, in fits and starts, since the invention of human language. This new acceleration is another instance of increased communication and transportation in our industrial era.

Colleges and universities are about to run into a severe branding problem. They need to transform the institution, in order to deal with a virtual attendance that is one or two orders of magnitude larger than their physical student populations.

For one thing, universities are not going to be able to stay on top of the explosion of information in almost every field of study.

For another, they aren't going to be able to hold onto the best teachers.

Is it possible that, in the subject areas which don't require laboratories or some other sort of building installation, outstanding teachers and professors become single proprietors, after the manner of Plato and the Academy, on the web?

Of course, there were always a few subject areas where a student never much benefitted from completing higher education, and could usually do far better on his or her own: fine arts or mechanical inventions, for example.

Soon, the social network provided by physical attendance at colleges may be almost entirely obviated. It is already possible to find people who think more clearly about various academic topics, by reading blogs, for example.

[Blissex]

«Do we want to retain an American middle class or not. If the answer is no, politicians and economists should be honest about.»

The ideal situation for the Galts of this world seems to be a ''plantation economy'', with a vast mass of desperate workers, a few well paid but subservient supervisors, and the owners on top.

So, the answer seems to be "no", perhaps because a powerful middle class is an annoyance. They get uppity, they don't know their place. Much better a large number of desperate immigrants without the vote.

A lot of economics is about power...

[Emmanuel]

I am sorry, but I cannot take anything Tom Friedman says seriously. Milton Friedman needs to be refuted through careful counterargument, but Tom is, er, something else.

The value of an elite education is in the brand on the diploma and the network it confers to its graduates. Also worth looking at is the oft-cited Shanghai Jie Tong Top 500 World Universities listing--which looks at things other than reearch productivity such as the number of Nobel Prize winners affiliated with each school.