The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World

February 26, 2009

In this thought-provoking book, Amar Bhide challenges the "technonationalist" view that America's comparative advantage lies in technological leadership and the associated "alarmist" fears that, as research and development activity relocates to China and India, the US will lose its technological edge, thus eroding its prosperity.

Bhide argues that these fears reflect a misunderstanding of innovation's complexity and are based on misleading assumptions from Joseph Schumpeter about "Uberinnovators" precipitating swarms of imitators in a process of creative destruction.

Instead, Bhide conceives innovation as a process of "non-destructive creation". Value is created not from high-level innovation but from venturesomeness: the "willingness and ability ... to take a chance on and effectively use new knowhow and products": innovators are like "Hayekian chefs" experimenting with customers. Diverting resources away from ground and mid-level innovation in sales and marketing towards high-level R&D may reduce the consumer surplus generated by attracting venturesome consumers.

Bhide illustrates this with the contrasting examples of Xerox and the iPod. Xerox faltered from an excessive focus on high-level innovation by skilled scientists and engineers. In contrast, Apple's success with the iPod reflects not so much the many high-level innovations upon which it draws but clever approaches to sales and marketing.

The innovative process shifts advanced economies towards the service sector, creating and satisfying new wants, thereby stimulating not just demand for a tangible product but also demands for new services - for example, after-sales support in the PC industry.

Overall, in a modern version of the old comparative advantage argument, Bhide contends that, as China and India increase global supplies of high-level innovation, mid- and ground-level innovators in the US will thrive by developing new products using this raw (technological) material. It is not, therefore, a winner-take-all race.

Bhide's evidence focuses mainly on findings from surveys of chief executive officers from venture-capital-backed businesses (VCBBs). For VCBBs, novel circumstances are a necessary condition for commercial success.

Immeasurable uncertainty, as described by Frank Knight, plays a role, but VCBBs are the early settlers rather than the pioneers: they won't enter markets early but they will try to get in before maturing technologies shift the comparative advantage towards big business.

In analysing links between globalisation and innovation for VCBBs, Bhide argues that these businesses are limited in their global reach. Given a choice between a new product or a new geography, they will favour the former, waiting before "going global" incurs localisation and managerial costs. Local differences such as regulatory and language barriers and time differences constrain commercial success. Also, overseas tastes may not match the products produced: Cadbury's Dairy Milk bars cannot easily be sold in the US because Americans prefer Hershey bars.

Similarly, offshoring by VCCBs is limited because of communication, organisational and managerial costs. It complements US production and employment by lowering innovation costs, freeing often tight US labour markets and releasing domestic labour for more productive activities.

Offshoring is largely focused on quality assurance and testing, data entry and call centres because these activities are easier to partition and organise.

Immigrant labour has also played a complementary role, helping US firms to compete in international markets by ameliorating shortages of time and skill rather than pricing local-borns out of the labour market. Immigrant wage differentials are positive because immigrants are employed to fill episodic shortages when domestic labour markets are tight. Also, immigrants often create jobs by starting businesses.

Methodologically, Bhide adopts a "common-law trial" approach, arguing that the parsimonious models of mainstream economics cannot capture innovation's complexity. He argues that econometric evidence (for example, about correlations between immigration and lower wages; about faster growth in engineer and lawyer-laden economies) can be misleading. So it is important to use traditional econometrics advisedly and only as part of the evidence.

In policy terms, Bhide is concerned that the alarmism of the technonationalists will be used to justify neoprotectionism, historically a counterproductive strategy. For modern Organisation for Economic Co-operation and Development economies, technonationalist policies to boost high-level innovation are likely to impair the performance of other innovators. Service-sector growth will undermine strategies to support R&D and education in science and engineering.

Instead, Bhide advocates Friedrich Hayek's policy stance, arguing for limited intervention and a "do no harm" approach: policies shouldn't be tilted towards a subset of innovators. The US economy needs "moderately" trained staff, not science PhDs.

"Reckless" venturesome consumption undertaken by the young and impecunious shouldn't be discouraged. Subsidies and tax credits for R&D are ineffective and unbalanced: a tax credit to suit IBM won't suit Wal-Mart. Immigration policy shouldn't favour the highly qualified; patent protection should not favour the patent holders to the detriment of patent users.

Overall, The Venturesome Economy is a refreshing riposte to the doomsayers of recession and the bleak prognostications of the technonationalists. It is a compelling book and will have a wide audience; many will be interested in the numerous case studies, particularly of IT and biotech firms. The emphasis on relationships, connections and networks resonates well with modern literature on social capital and economic psychology.

It is a largely balanced account containing plenty of counter-examples; Bhide's methodological approach and associated assessments of the limitations of the standard empirical approach are compelling. His effective use of metaphor will help to illuminate the more esoteric issues for the non-expert reader.

But the book is not without its limitations, the main one being that Bhide's analysis is somewhat US-centric. John Maynard Keynes' ideas about uncertainty and entrepreneurship are not mentioned alongside Knight's. In many ways, Bhide's approach seems to be a sanguine version of John Kenneth Galbraith's, so it is surprising that he receives so little mention, except in a brief aside on Galbraith's critique of big business.

Finally, in many ways the two stories (one about VCBB and the other about innovation and globalisation) do not always mesh well. For example, the evidence focuses on VCBBs, but it is not always clear that they are representative of the average player in the innovation game.

Bhide concludes: "Today's conditions allow nations to gain from each other's advances, and our challenge lies in making the best of this good fortune." One wonders whether he would have moderated his optimism in response to recent events, but nonetheless this compelling, cogent and meticulously researched book is highly recommended.

The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World.

By Amar Bhide. Princeton University Press 520pp, £24.95. ISBN 9780691135175. Published 5 October 2008

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