Last week I wrote about Cloud, Services and the Transformation of Production, based on Part I of Escape from the Commodity Trap: Will the Production Transformation Sustain Productivity, Growth and Jobs?, a paper by UC Berkeley professor John Zysman. Part II of the paper deals with the economic and policy implication of this ICT-based production transformation.
“For the advanced industrial democracies to expand the real income of the citizens and sustain growth in employment and productivity, their economies will have to escape from the commodity trap,” writes Zysman in the paper’s abstract. “The commodity trap is the price-based competition throughout markets for standard goods and services, which puts pressure on wages and profit margins alike. Clearly, the way out of this trap is to create distinctive high value added products - both goods and services. The emerging transformation of the production of goods and services is dramatically altering what is produced, where, how, and who captures the value. It creates opportunities and challenges.”
Early in the Industrial Revolution , the so-called Luddites smashed the new textile machines that were threatening their jobs. Zysman reminds us that while many of the Luddites lost their jobs, the overall English economy prospered and the average standard of living went up. “It is easier to identify the jobs that are destroyed,. . . than to imagine the ways new jobs will be created. Of course, the character and location of those jobs may advantage some communities and disadvantage others.”
Disruptive innovations, - like the power looms allegedly smashed by protesting Luddites, - have been displacing human labor for the past two centuries. These periods of creative destruction, - when new technology-based innovations led to painful transitions in once-dominant companies and jobs, - eventually worked themselves out. Over time, these same disruptive innovations rejuvenated the economy, and led to the creation of new industries and jobs.
We truly don't know if this will once more be the case in our digital economy. Nor do we know what kinds of jobs and industries will now be created to make up for those that are going away. Hopefully, this will all come to pass after a period of adjustment. Different regions around the world are competing to become innovation hubs, attract talented people, and help create the new industries and jobs of the digital economy.
For the past few decades, Silicon Valley and the Boston area have been the most prominent such digital innovation hubs in the world. Their leading positions as high-tech innovation centers have proved difficult to replicate. Others have tried to become the Next Silicon Valley. While a few of these efforts achieved modest success, most have fallen short of their goals.
Why is it so difficult? The reasons are varied. The prominence of Silicon Valley and the Boston area is closely related to the great engineering universities in their midst – Stanford and UC Berkeley, and MIT, respectively. It clearly takes a long time to build such world class universities. Their entrepreneurial culture is even harder to replicate. They strive to bring innovations to market by partnering with the private sector, including VCs to help them start new companies and established enterprises to jointly develop and commercialize new ideas.
These regions, and others like them, have worked long and hard to establish their entrepreneurial culture. Their innovation efforts have achieved remarkable network effects over the years that give them advantages in scale that cannot be easily replicated. They have managed to bring together a large and fluid community of technologists, entrepreneurs and VCs who share ideas as they move from company to company - as founders, employees, managers, board members or investors.
The high tech innovation model is based on mastering the underlying digital technologies, platforms and tools and then turning them into practical applications. But, are there other kind of innovation models? Can you become an innovation hub if you are not a high-tech center?
In years past, that would have been very difficult, because so much innovation was related to the digital technologies themselves. But as these technologies become increasingly standardized, commoditized, and ubiquitous, their key value is no longer found in creating the technologies, but in their applications and transformational impact on industry after industry. As was the case with electricity 100 years ago, IT is now going through a transition from an end in itself to an enabler of innovation for those industries and companies that use it extensively and wisely.
New York and London, for example, are unlikely to become high-tech innovation hubs, but they are well positioned to be major centers of private and public sector innovations in activities that involve people as providers or consumers of services. Some of the greatest opportunities for innovation, productivity, job creation and economic growth can now be found as we apply digital technologies to problems in the marketplace and society at large, in industry after industry, including healthcare, education, finance, distribution, entertainment and media.
Smart cities, - the application of digital technologies and information-based services to improve the quality of life in cities, - has emerged as another exciting and important innovation area. These are all innovations that are particularly suitable for NY, London, and a number of other cities around the world, given their considerable talent, management expertise, and market power.
Another model for becoming an innovation hub comes from those with expertise in industrial applications and processes, who then reach into the pool of emerging technologies to transform the products, services and means of production in their particular industry. Germany, for example, is prominent in such industrial process innovation. So are a number of other regions and countries around the world, including Japan, Italy and Denmark.
Zysman writes about the work of University of Toronto professor Dan Breznitz, who has investigated how countries like Israel, Taiwan and Ireland, became innovation hubs by using different business models and carving out unique positions in the global production ecosystem.
Production is being restructured and decomposed into discrete phases, each phase requiring a distinct set of capabilities and competencies. Different regions can become innovation hubs by specializing in becoming leaders in a particular phase of production. Innovation, job creation, and productivity growth are possible in each phase. Zysman lists some these phases of production and the competencies each requires.
- Product creation. “This is really a set of competencies beginning with conception, definition, and design. We emphasize that there is a major difference between the ability to come up with a new product altogether and the ability to define it and design it.”
- Production engineering, “including manufacturing, the integration of production activities, distribution, and logistics. There is clearly not a single expertise in this domain, and companies and places do differentiate within it. There is a radical difference between the lean production model of Japan or the volume models of Korea and the high quality low volume expertise noted in Denmark.”
- Innovation in the underlying components and constituent elements of products, “that is, integrating science and technology advances. This may be innovation in screen technology or micro processor design, or the production technology for semi-conductors. Each module, each unbundled process, is a marketplace target for innovation.”
- Integrated production, which is called for “if a radical new production systems begins to unfold.”
- Branding or product design and layout.
What can a region do to become a local cluster of innovation in a particular phase of production? “Strategy choices, . . . emerge from two complementary perspectives,” writes Zysman. “One perspective, building from the past, asks how existing community resources can be deployed and redeployed in new market and technology circumstances. A second perspective, imagining the future, seeks to envision and generate radical new trajectories of growth. . . [T]his strategy does not build from a completely blank slate, new directions certainly require generating new competencies and establishing new infrastructural capabilities.”
In the end, we are left with complex questions with no simple answers. Will there be enough new jobs to offset those lost to automation? Where will those jobs be located? “Will the 21st Century world of production and the economy in which it is embedded be an evolutionary extension of what we know, or a radically new era? For what world must policymakers prepare?”
“We can tell rival stories, but for now they are just that: stories about utopias and dystopias. The outcomes, both the character and the consequences of the evolving or revolutionary production system that emerge. . . will turn on policy choices of government and strategic decisions of firms.”