Catherine L. Mann, Ph.D.
Senior Fellow, Peterson Institute for International Economics;
Professor
of International Economics and Finance, Brandeis University
Catherine Mann has conducted considerable research on the role of
globalization in the information technology sector. A Kauffman Foundation grant
to the Peterson Institute for International Economics in 2004 supported her work
on the impact of offshoring on the dynamics of information technology start-ups.
The adage goes, "Necessity is the mother of invention." Research by Nobel
Prize winner Robert Solow established innovation as the cornerstone of economic
growth. This juxtaposition of plain speak and econometrics implies that
entrepreneurs see a need and innovate, resulting in improved economic
well-being. Is it that simple? And today, with information technology allowing
the fragmentation of the innovation process, how might globalization affect
innovation, entrepreneurship, and their translation into economic
well-being?
The first question is, how does innovation translate into economic
well-being? There are two types of innovations: blue-sky, radical
innovations, and integrative and transformative
innovations.
Blue-sky innovations push out the economy's frontier—its capacity to produce
more goods and services with the same existing resources. Integrative and
transformative innovations create new products, business strategies, and
workplace practices that are needed before the economy actually can reach the
new frontier. Linking innovation to growth requires several key factors:
- Educated customers (consumers and businesses) to demand and buy the new
products;
- a financial sector willing to take risks on new ideas;
- a business climate and managers desirous of using new methods; and
- workers able to complement the innovations in the workplace.
Entrepreneurs play a key role in both types of innovations, in combination
with other participants in the innovation ecosystem. The distinction between the
two types, however, may have implications for policy. Blue-sky, radical
innovation may be more basic research-oriented, and therefore may be more driven
by government funding, intellectual spirits, and university laboratories.
Integrative and transformative innovations, on the other hand, may be driven
more by the ability of new and current businesses to create products and
processes that meet new interpretations of market needs. The latter is highly a
function of the entrepreneurial spirit and of the business and policy
environments.
Global Innovation and United States
What of the global economy? Before innovation was fragmented, the United
States clearly gained from innovations abroad. U.S. productivity growth is about
one-third higher in industry sectors where there is inward foreign investment
and high research intensity, suggesting positive spillovers between global and
domestic technological innovations. These international spillovers have their
greatest impact on domestic economic well-being when domestic competition works
to ensure that innovations are taken up by firms. Global innovations have thus
had positive domestic outcomes, especially when the U.S. economic environment
has been demanding.
Today, information technology enables the fragmentation of the innovative
process. Does this new globalization affect entrepreneurship and economic
well-being in a different way? With regard to blue-sky innovation, on the plus
side, access to these radical innovations reached in laboratories abroad can
help push out the U.S. frontier. On the other hand, some other countries have
different rules, larger budgets, and more scientists, raising the potential for
more innovative ideas, but also creating incentives for American entrepreneurs
to go abroad to work with these facilities. Failing to retain research and
entrepreneurial talent and development facilities in the United States may yield
fewer innovations tailored to our domestic needs and local demand. Moreover,
given intellectual property rules, applying foreign innovations in the U.S.
marketplace may come at a cost of payments going abroad.
Fragmenting Innovation
With regard to transformative innovations, again on the plus side,
fragmenting the innovation process through engaging less expensive workers
abroad can mean a cheaper price tag for integrative innovations that will propel
the U.S. economy closer to its frontier. On the other hand, bringing some new
ideas to fruition might require close and active participation, iteration, and
collaboration among the members of the design, development, marketing, and
management team. Fragmenting this process could discourage needed collaboration,
undermine product vision, and lead to business (and idea) failure.
Fragmenting the design and development process could also undermine the next
generation of U.S. entrepreneurs who learn from personal experience at
start-ups. It is not likely that fragmentation yields a "zero-sum" number of
entrepreneurs—that is, more being created abroad means fewer at home. But, to
the extent that innovation tailored to domestic needs is a key source of
productivity growth ("necessity is the mother of invention"), undermining
domestic entrepreneurs will have long-term consequences for the economic
well-being of the United States.
There is a final dimension relating globalization, innovation, and
entrepreneurship. There are countries with an entrepreneurial culture and a
tradition of research (India and China, for example), which heretofore have had
a financial, business, and policy environment not supportive of the
entrepreneur. In these countries, reforms to the economic environment have
started to release the entrepreneurial spirit. The most significant reforms,
however, have focused on serving the external marketplace, rather than training
the entrepreneur's vision on local market demands. In part, this is because
local customer demand is not yet the guide for the local entrepreneur. Clearly
it takes both entrepreneurial spirit and economic environment to generate the
highest rewards; so further progress to domestic reforms in support of local
entrepreneurship is key to a broad-based increase in economic well-being
abroad.
All told, analyzing the globalization of innovation and entrepreneurship
requires gauging and balancing the gains to the United States from more and
cheaper innovations obtained through foreign sourcing of entrepreneurial talent
against the potential threat of losing entrepreneurs, their spirit and ideas,
and the technological edge by failing to provide domestic mentors, adequate
education and funding, a conducive environment of regulation and policy, and a
demanding customer base.
This essay is an excerpt from the
Kauffman Thoughtbook 2007. To view a table of contents for the 2009 edition, or to order a printed copy of the publication,
please visit our 2009 Thoughtbook page 
