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A digression: Globalization, Science and Technology and the Economy

(or why is Adam Smith still very relevant…)

Manuel Trajtenberg

2005

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Outsourcing/offshoringWhat is it all about?

The phenomena, in recent years:

1. Steep increase in outsourcing/offshoring of activities in the High Tech/ICT sectors, in particular in ICT services, and software.

2. Increasing sophistication of activities outsourced.

These trends perceived as threat to the national economy, for Israel as much as for the

US…

So what are the facts? Why is this an issue?!

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Employment in High Tech manufacturing industries in the US (BLS)

Semiconductors & elec. components

Electronic instruments

Computers & peripherals

Communications eq.

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Employment changes in non-manufacturing sectors prone to outsourcing (BLS data)

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Attributes of “new wave” of jobs outsourced

• Telecommutable and Internet enabled

• High wage differential, low set up barriers

• No face-to-face customer servicing required

• Low “social networking” required

Location does Location does not matter muchnot matter much

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Annual Salaries of software programmers in various countries

Computerworld, April 28, 2003

USAUSA

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Still, why is this an issue?• Nothing qualitatively different in present wave of

globalization vis a vis previous expansions of international trade – from 500 BC Athens on..

• Different nature of “stuff” traded, outsourced: services that have become location neutral because of IT. But same economics as auto parts produced at maquilladoras in Mexico…

• Trade always evolves with the predominant technologies of the era, nature of production processes, loci of economies of scale in situ.

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Same with software…

Writing code: not used to think of it as a process that can be parceled out, and turned into a virtual activity independent of location, i.e. something that can be “globalized,” outsourced, much like sport shoes, textiles or TV sets.

But surely it can, guided by the same universal principles of comparative advantage, except that the traditional notions of transport costs are replaced by communication costs, availability of reliable IT infrastructure, etc.

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Voicing common concerns1. There are always winners and losers (those

displaced). The latter do not necessarily find alternative (good) jobs.

2. Activities outsourced increasingly sophisticated, feeling that the there are no further steps to climb up the technological/skills ladder…

3. Apprehension about the ability of the economy to generate enough upscale jobs.

1: real concern. 2 & 3: usually not founded, provided good S&T infrastructure

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So, does location (and hence e.g. outsourcing) matter for the economy?

• Matters for employment: but structural adjustment, overall econ activity; retraining and/or compensating those left behind.

• Want in situ activities that generate the most spillovers flowing inwards: those that involve creativity, cutting edge innovation, frontier science. Eventually may give rise to “the next big thing” (nano?).

• Where do the gains flow to? Ultimately to those that own/control the IP, hence care who they are, where they are located.

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The Globalization of

Science and Innovation (S&I)

trends,logic,

implications

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The Globalization of S&I: basic trends

• Advanced S&T spreading around the world, also in developing countries (e.g. India, ppp $2,900,

China, $5,000 versus US $37,800).

• Increased mobility of scientists and inventors (geographic, institutional)

• Larger, more diverse teams of inventors and scientists

• More international cooperation

• Decentralization of “big science”: e.g. the Genome project.

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Why globalization of S&I?

Some of the reasons:

• Globalization in trade, finance, IP, WTO, etc. bound to impact also S&I.

• Increased complexity, cross-disciplinary nature of frontier S&I (e.g. Genome, nano), increased specialization of researchers.

• Advances in ICT, ease of communication and transportation, lowering of barriers.

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Why do we care in the context of outsourcing of ICT, of software?

• The ICT sector breeds from the S&I infrastructure of the country.

• Outsourcing pushes us up the “tech ladder,” but to be able to climb up, need advances in S&T.

• Does globalization in S&I threaten those capabilities?

First, a close look at the trends…

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Trends in the global mobility of Science and Innovation (S&I)

players:

Inventors, Scientists, Students

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Front page of a patent (partial)Frohman-Bentchkowsky, et. al. May 13, 1980

Electrically programmable and erasable MOS floating gate memory device employing tunneling and method of fabricating same

Inventors: Frohman-Bentchkowsky; Dov (Haifa, IL); Mar; Jerry (Sunnyvale, CA); Perlegos; George (Cupertino, CA); Johnson; William S. (Palo Alto, CA).

Assignee: Intel Corporation (Santa Clara, CA).

Current U.S. Cl.: 365/185.29; 257/321; 326/37; 327/427; Field of Search: 365/185, 189; 307/238; 357/41, 45, 304 References Cited 3,500,142 Mar., 1970 Kahng 365/1854,051,464 Sept., 1977 Huang 365/185

Primary Examiner: Fears; Terrell W. 16 Claims, 14 Drawing Figures

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Number of patents per inventor (or how much “action” can we expect?)

Out of 1,565,780 inventors, those with,

• one patent: 911,943 (58%)

• 2 or more: 653,837 (42%)

• 5 or more: 203,302 (13%)

• 10 or more: 73,072 (5%)

These are These are driving driving innovation innovation worldwide!worldwide!

and we can trace them…and we can trace them…

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International Mobility of Patent Inventors number of cross-country moves per year 1975-1999

0

500

1000

1500

2000

2500

3000

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

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Flows of Inventors across countries

US Japan Germany UK Canada Other Total

US 0 808 657 1,602 1,096 3,109 7,272Japan 908 0 115 49 21 151 1,244

Germany 731 122 0 38 16 794 1,701UK 2,077 41 51 0 131 509 2,809

Canada 1,308 23 11 106 0 106 1,554Other 3,017 120 717 386 128 1,821 6,189Total 8,041 1,114 1,551 2,181 1,392 6,490 20,769

From To

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Flows of inventors across US statesNY NJ CA PA MA CT TX IL OH Other Total

NY 0 795 809 399 353 447 353 184 279 2,450 6069NJ 594 0 552 599 266 231 273 187 151 1,661 4514CA 517 360 0 323 377 199 777 333 267 4,317 7470PA 312 483 457 0 175 107 199 185 248 1,868 4034MA 267 190 539 175 0 153 145 114 111 1,536 3230CT 304 185 280 123 188 0 113 103 98 838 2232TX 199 142 745 143 108 89 0 159 166 1,897 3648IL 167 199 530 165 128 103 219 0 198 2,112 3821

OH 256 151 357 246 121 95 236 192 0 2,112 3766Other1456 1040 3774 1552 1060 606 2307 1439 1465 29,227Total 4072 3545 8043 3725 2776 2030 4622 2896 2983 33,319 68,011

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Net flows of inventors across states ,

 Move

inMove

outNet flow

NY4072 6069-1,997

NJ35454514-969

CA80437470573

PA37254034-309

MA27763230-454

CT20302232-202

TX46223648974

IL28963821-925

OH29833766-783

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Further facts about globalization of S&I

• Larger teams of researchers per unit of S&I output (papers, patents, etc.)

• More international and institutional cooperation and diversity

• More geographic dispersion of researchers

• Large fraction of foreign PhD students

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Mean Number of Authors per Scientific Paper

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Size of R&D Teams:Average Number of Inventors per Patent

1.4

1.6

1.8

2.0

2.2

2.4

Grant Year

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Institutional collaborations:Mean number of universities per scientific paper

1981-1999

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%of US scientific papers joint with foreign co-authors

w/foreign universities

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International Diversity of Teams of Patent Inventors (1 – Herfindahl index on countries of inventors)

0

0.02

0.04

0.06

0.08

0.1

Grant Year

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Geographic diversity of inventors in the US(1 – Herfindahl index on states of inventors)

0.04

0.08

0.12

0.16

0.20

Grant Year

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International mobility of Ph.D. Students:Foreign Students as % of total PhD enrollment 2000

25%

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S&E doctoral degrees earned by foreign students – 2001 (NSF)

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How does a nation benefit from the globalization of S&I?

Presumably, as with trade, it is win-win; still some countries benefit more than others. In order to benefit the most, strive to

become a S&I HUB, i.e, a place through which lots of scientists and inventors come and go, interact with the local players and with each other.

True for countries, for regions, for universities, and to some extent also for industrial labs.

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Why a “hub?”

• Creativity in S&I nurtures from exchange of ideas, from exposure to diverging points of view;

• Much of S&I progress consists of recombination of existing ideas, principles, tools;

• The important point is the comings and goings, the interaction, which allows for all the above.

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Regional hubs of cutting-edge S&I

• Silicon Valley (around Stanford)

• Boston area (around MIT, Harvard)

• Cambridge UK (e.g. biotech)

• Israel “Waddi”

Contradicts globalization? not quite: creativity/ innovation requires close interaction, highly specialized inputs, personal contacts, etc.

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Silicon Valley as a Hub

44,805 inventors “related” to Silicon Valley, involved in 160,000 patents.

• 3.6 patents per inventor (US mean of 2.7)

• corporate movers: 45% (all inventors: 33%)

• state movers: 16% (US inventors: 7%)

• country movers: 3.7% (all inventors: 1.9%)

(all percentages out of inventors with > 1 patent)

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International flows of inventors: turnover

Country Moves in Moves out Net Turnover

Canada 1392 1554 -162 2,946 Switzerland 702 693 9 1,395 Germany 1551 1701 -150 3,252 France 665 665 0 1,330 UK 2181 2809 -628 4,990 Israel 248 219 29 467 Italy 205 186 19 391 Japan 1114 1244 -130 2,358 Korea 371 270 101 641 Netherlands 453 527 -74 980 Taiwan 275 176 99 451 US 8041 7272 769 15,313

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What does it take to be a S&I hub?Easy said…

• First-rate Universities and R&D labs

• Critical mass of research in cutting edge fields

• Appropriate S&I infrastructure (C&C, scientific instrumentation, broadband, etc.)

• Easy access, openness (see difficulties now in the US).

And also…

• Standard of living, wider opportunities

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Can Israel be a major S&I hub?Maybe…Good starting point: • Excellent research universities (for now…),

vibrant High Tech sector;• Extensive network of scientific and tech

international collaborations• Outward orientationBut,• Security concerns• Reduced funding for Universities

Still, this is Israel’s (only?) comparative advantage, no choice but to strive for it