16 July 2009

Neo Protectionism: The World is not Flat

Sometime between the years 275 and 195 BC, Eratosthenes of Cyrene found out a reasonably accurate diameter of the earth. As a corollary, we can assume that human beings from that time knew that the earth is round.

Till Mr Thomas Friedman intervened and said, “No, the world is flat”.

Looks like we have come a full circle (or a full square, if you are in Mr Friedman’s camp). The denizens of the first world are now saying that the world is not flat; that some pockets are more equal than others.

When Mr Friedman said that the earth is flat he was talking about democratization of knowledge. He said that the world was moving towards an open source era. Through the optical fibers beneath the oceans knowledge was pouring into the third world. The first world was letting go of their knowledge not because of altruistic reasons but because it made economic sense. Outsource and get a cost advantage.

The pundits at Harvard Business Review are now saying that Americans had got it wrong. Outsourcing in the long run does not give cost advantage. For outsourcing not only ships out jobs it also ships out knowledge. And in the latter case, fear the pundits, it does not return either. The first world (read United States) is slowly becoming bereft of real knowledge. Look at the bizarre justification of the first world pundits for holding on to knowledge, for autocratization of knowledge. Gary P. Pisano and Willy C. Shih have a theory of ‘geographically rooted commons’. In their article titled ‘Restoring American Competitiveness’ in July 09 issue of Harvard Business Review, Mr Pisano and Mr Shih write and I quote:

The World Is Not Flat
Centuries ago, “the commons” referred to the land where animals belonging to people in the community would graze. As the name implies, the commons did not belong to any one farmer. All were better off for having access to it. Industries also have commons. A foundation for innovation and competitiveness, a commons can include R&D know-how, advanced process development and engineering skills, and manufacturing competencies related to a specific technology.
More often than not, a particular industrial commons will be geographically rooted.
What about the popular notion that distance and location no longer matter, or, as Thomas Friedman put it, “The world is flat”? While we agree with the general idea that geographic boundaries to trade are falling and that the global economy is more intertwined than ever, the evidence suggests that when it comes to knowledge, distance does matter. Detailed empirical work on knowledge flows among inventors by our HBS colleague Lee Fleming shows that proximity is crucial. An engineer in Silicon Valley, for instance, is more likely to exchange ideas with other engineers in Silicon Valley than with engineers in Boston. When you think about it, this is not surprising, given that much technical knowledge, even in hard sciences, is highly tacit and therefore far more effectively transmitted face-to-face. Other studies show that the main way knowledge spreads from company to company is when people switch jobs. And even in America’s relatively mobile society, it turns out that the vast majority of job hopping is local.

Can there be a more twisted argument than this? Research can prove anything, it seems. For example, take face-to-face knowledge transition itself. A recent research done on behalf of the Government of United States says that there is compelling evidence to prove that online learning is better than face-to-face learning. So, where does this theory of ‘geographically rooted commons’ go? Out of the window, I would say. The actual motivation of this article comes later when the authors talk about how the outsourcing did not stop at low end activity. Initially printed circuit boards were outsourced by the PC industry in the United States but gradually the Asian original design manufacturers ‘ended up designing and manufacturing virtually all Windows notebook PCs’. And that hurt!

Democratization of knowledge is hurting the United States. A shrill chorus is already building up there to ensure that the world isn’t flattened anymore.

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