The sign of trouble is well known: the US trade balance in high-tech products began to decrease since 2000. By 2002, it turned negative for the first time and continued to decline trough 2007 (the last official numbers known). Pisano and Shih posted a kind of manifesto: “Only by rejuvenating its high-tech sector can the US hope to return to the path of sustained growth needed to pay down its huge deficits and raise its citizens’ standard of living.”

Gary P. Pisano is the Harry E. Figgie, Jr. Professor of Business Administration at the Harvard Business School, Boston, US. He joined the Harvard faculty in 1988. His research focused on technology strategy, management of innovation, organizational learning, outsourcing and management of intellectual property.

Recently, with Willy C. Shih, he co-authored ‘Restoring America Competitiveness’ published at Harvard Business Review (July-August, 2009) proposing to “rebuild the industrial commons” of America. By “industrial commons” Pisano and Shih refers to the collective capabilities of clusters that have been damaged by the outsourcing and off-shoring movements of last decades. “Sacrificing such a commons for short-term cost benefits is a risky proposition”, says the authors. The rent-seeking financial system that dominates American economy for the last 20 years had as a consequence the erosion of the industrial commons in America (and elsewhere in some regions of the so-called developed West).

America, again, has a competitive problem. Something we have heard in 1989 through the famous Made in America: regaining productive edge Report from the MIT Commission on Industrial Productivity. In 1990, Harvard Professor Michael Porter proposed a new paradigm to think optimistically of national economic power in the geo-economics arena, with his book The Competitive Advantage of Nations. “It is the creation of knowledge and the capacity to act which are the result of a process that is highly localized that determines competitive success” said Porter and he added: “Globalization makes nations more, not less, important.”

As Pisano and Shih pointed out in the article, “when it comes to knowledge, distance does matter.” Proximity is crucial: “being geographically close to the [industrial] commons is a source of competitive advantage.” That’s why companies continue to cluster in particular regions. Rejuvenating these spaces in America is the challenge of today for the Obama Administration and for entrepreneurial America. For achieving that goal America needs the visible hand of the Government and of the businesses, including the foreign companies. One of the urgent needs is to change the paradigm: recognizing the limits of financial tools and marketing art, two Olympic gods of the last twenty years. Another one is a strong investment in basic and applied research.

INTERVIEW

QUESTION: ‘Made in America’, the famous MIT report of 1989 in order to boost the US productivity, seems today an irrelevant initiative. Truly the last 20 years of American growth was fueled by financial bubbles and pro-active policies of money management. American competitiveness was more a fictitious financial reality than a sound economy. Why do you think the US has today a window of opportunity to change this engrained course?
ANSWER: First, let’s not go overboard. I am as critical as anyone about the financial bubble. And, as we point out in the article, the past decade of growth masked a deeper problem of slipping competitiveness. However, not sure I would go as far to say that all American economic growth in the past 20 years was fueled by financial bubbles and money management. That’s too strong. There was a lot going on in the US economy in the past 20 years. Some things were not so good, like rising debt and the housing bubble. But, we also had a lot of growth from service industries, health care, and education. So, first off, we should maintain a balanced view of the past 20 years. Not all bad. Not all good.

QUESTION: But America have a real problem with competitiveness?
ANSWER: I have a big concern with the erosion of the industrial and technology base. How engrained is this course? I am actually optimistic. The US economy has a tendency to be very dynamic. Historically, it changes course pretty fast. We make adjustments pretty well. That’s a good thing. Today, we have a great opportunity in the US because we still have a VERY strong science base. Our universities are still among the best in the world. And, government policy looks like it is re-emphasizing investment in science again. So, that is a great resource to build on.

QUESTION: You refer that the United States have been the most “Darwinian” (if we can say so) economy of the world, the fast to adapt to changes and crises, the fittest so far. Based in which technological lead industrial sectors, in which industrial commons, do you think the recovery and the new growth cycle of the 2010-2020s will be based upon? The follow up of the web diffusion, biotech and pharma, cleantech, space race or else?
ANSWER: Not sure I used the term “Darwinian” but I would say the US economy is intensely competitive. Hard to make predictions, but I would say the pharmaceutical/biotech/life sciences arena is still an area where US has huge advantage in science base and attracts quite a bit of foreign direct investment. Boston, San Diego, San Francisco Bay Area are still the hot spots for this segment. I am less certain about clean tech. We are behind in battery technology and in the underlying technologies for PV solar cells. On the other hand, we have a lot going on in bio-fuels.

PISANO: “I would not want to see the US lose its competitiveness in financial services”

QUESTION: So far, it seems financial rent-seeking has been more attractive for politicians and investors than rebuild the American industry. The US has specialized in these financial capabilities in the last 20 years. We can probably say that the Wall Street has the largest and most productive knowledge pool in the world, a truly “industrial commons” in this field. If the US down-grade this area, probably talent and businesses will go offshore and Singapore or Shanghai or Hong Kong or Dubai will peak parts of the financial value-chain. It’s quite a strategic dilemma or not?
ANSWER: Not sure I agree with your premise that financial rent seeking is more attractive for industry, politicians or investors. Politicians from outside the main financial centers in the US actually tend to be pretty hostile to Wall Street. And, most business leaders come from outside of Wall Street. But, you are correct to say that Wall Street is an industrial commons. And, you are correct that it creates a bit of dilemma. There are multiple competing financial centers in the world. I personally believe that a strong and vibrant financial sector is vitally important for the US. It’s become popular to criticize Wall Street today, but let’s not lose sight of the fact that a healthy financial sector has always been vital to the growth of economics going back to at least Rennaisance Italy. So, I would not want to see the US lose its competitiveness in financial services.

QUESTION: Part of the US industrial commons of the last 30 years were fueled by foreign talent, researchers and entrepreneurs. With the reverse brain drain we are assisting since the last Bush Administration – particularly for India, China and even Europe – do you think the US have time and resources to rebuild the knowledge core of its famous high tech clusters?
ANSWER: Foreign talent has played a huge role in US economic growth. That’s again, a critical part of the dynamism of the US economy. And yes, immigration and visa issues have complicated things, but let’s not overstate the facts. It is true that more foreign researchers are returning to their home countries after finishing their PhDs or post-docs, but the vast majority still stay. And, it’s not clear how much of those leaving are leaving due to immigration/visa complications or are simply seeing new opportunities in their home countries. Chinese scientists, for instance, see more opportunities today in China than they would have 15 years ago. So, yes, it’s a bit of brain drain, or perhaps described as a brain leak. Still, the US continues to attract huge numbers of very talented foreign talent to its universities and industries. That’s a good thing, but we can’t take it for granted. The US needs to continue to be an attractive place to work, do research, and start businesses. The right kind of immigration policies are very important in that regard.

Pisano: “we need to start to change the mentality of senior business leadership in the US. They need to think and act longer term”

QUESTION: The outsourcing and off shoring policies went mainstream in the last 20 years. As you mentioned CEO, managers and politicians believed in the myth of “going up and up in the value-chain” abandoning the rest to foreign businesses. The logic has been taken to an extreme. How we reverse this trend?
ANSWER: I am hoping the article Willy Shih and I wrote helps! Seriously, we need to start to change the mentality of senior business leadership in the US. They need to think and act longer term; they need to think beyond just narrow shareholder interests but to broader stakeholder interests (employees, partners, suppliers, etc.). These perspectives are often described as diametrically opposed. I could not disagree more! The best to take care of your shareholders longer term is to take care of all the stakeholders.

QUESTION: The “battle” against the short term vision in American’s corporation management has been a constant since the 1980s. Neither the late Peter Drucker nor Porter’s competitive advantage nor other management gurus efforts were sufficient to “convince” managers and CEOs of that rationale – management people preferred to work for the quarter results and in a lot of cases they preferred to follow a rent-seeking strategy than a consolidation of the core competencies. For instance, in several cases, the auto industry was more a financial business than a truly industry…
ANSWER: Great question, and I do not really know the answer. I guess I would say, I HOPE so. But, this takes a generation of managers who think differently. That takes time. And, that has to start with the way we train managers to think in business schools.

Pisano: “No other single country has that investment capacity in Science”.

QUESTION: American entrepreneurialism has lobby capacity to convince the Obama Administration, Congress and Senate of that urgent needed policy reversal?
ANSWER: I don’t know. This is more of a question for a political scientist. I think already the Obama Administration is pretty actually engaged in the economy. The key though will be to make sure the new activism of government does not crush the dynamic aspects of the economy. It’s about balance.

QUESTION: Even if America shifts the course, the times are now very different from 20 years ago. Countries like China or India or even Brazil in certain areas, some of the small tigers like Singapore or some hot locations in Europe have R&D and innovation capabilities, have also industrial commons of high quality. The race will be hard. What US has as unique that the others do not have?
ANSWER: Science. Our science base is extremely strong and has been built up over decades of massive government investment in basic scientific research. The National Institute of Health spends about $30 billion per year on research. And that’s just one government agency. No other single country has that investment capacity. The European Union (EU) has been trying to invest more collectively and that’s a great thing for the EU. Still, it takes a long time to build up the kind of scientific infrastructure we have in the US. And, we have world class universities: Harvard, MIT, University of California at Berkeley, Stanford, Cal Tech–the list goes on and on. I am not saying that there are not world-class universities outside the US–there absolutely are–but no other country or region has the magnitude of top universities as the US. And, the US university system is relatively dynamic because it is so competitive. Universities actively compete for the best talent, they compete for the best students, and they compete for money. This is true for both public and private institutions. Competition is what makes the US university system so strong. Finally, culturally, the US is pretty dynamic. We have a strong entrepreneurial culture. We start lots of new businesses. We are not afraid to fail. Those are pretty strong pillars!