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Masters of the Universe: Pumping Up To Take On America

May 3, 2010

Updated June 16,2011

Oh, how the world’s economy is changing. What took decades for the economies of such nations as the United States, Canada, Australia, Scandinavia, Great Britain and France to grow and develop into sophisticated entities, the new upstarts–emerging economies (or emerging markets as some call them)–are on fire. And who are they?

Besides the reflexive response of China, India and Brazil (I’m not a Goldman-Sachs fan of including Russia as a BRIC country), the upstarts include South Korea, Indonesia, the Philippines, South Africa, Taiwan, Singapore, Israel, Turkey and Poland. These countries are hungry–very hungry–to succeed, to get a piece of the action so that they can provide more to their citizens and so that they can improve their standard of living. Information technology has been a principal driver of change, enabling people around the world to gain a glimpse of how people in traditional Western countries live. As Oliver Twist expressed in Charles Dickens’ novel by the same title: “Please sir, may I have some more?”

America’s progress and wealth creation was built on people hungry to succeed, arriving from all over the world. Entrepreneurship flourished, innovation was never-ending and job-creation was mind-boggling. The country’s standard of living took off with booster rockets, accelerating through the 1940s and for the next 40-some years.

This hunger has now spread to dozens of other countries. One key distinguishing characteristic in contrast to America’s rise to prominence (including also the wealth creation in the Western countries noted in the opening paragraph) is the compressed timeframe in which change is happening.

An excellent example is South Korea, which was not too long ago a repressive dictatorship with a pathetic standard of living. Now a democracy, South Korea is an economic powerhouse, powering relentless innovation. Whether it’s Hyundai, LG or Samsung, for example, consumers around the world are quickly learning about the excellent quality of Korean products. Or consider its strategic energy investments in the Middle East. Or how about R&D, where South Korea spends a larger percentage of its GDP compared to the U.S., Germany or the U.K. South Korea’s rise to prominence is indeed impressive.

To illustrate my point about South Korea’s hunger I’ll share a personal example. My oldest daughter, as a new university grad, moved to a city near Seoul almost 10 years ago to teach English. Her students ranged in age, but her teaching began in late afternoon after they had completed their regular schooling. Her students learned English well into the evening in the hope of eventually attaining sufficient mastery to be able to be accepted into North American universities. That’s hunger, the willingness to sacrifice and endure exceedingly long days of learning in the hope of aspiring eventually to well-paid professional work.

Here’s a contrasting footnote to the South Korean example. As much as this country of incredible people has achieved so much in so short a timeframe, the desire to live in North America is still a powerful draw. To illustrate this, a few years ago one of my neighbors was a South Korean engineer who was on a one-year exchange program with the Government of Canada. He was an exceptionally polite and kind man, with a wife and two children. When it was time for him to return to Seoul, he gave me a gift and said how much he wished he could remain in Ottawa, Canada. What struck me was his comment “Jim, Canada is heaven.”

I don’t have to be convinced that Canada is indeed a wonderful country in which to live. However, I wonder how long people from emerging economies will hold onto such a belief. Already, we’re witnessing Chinese professionals returning to their homeland out of frustration with how North American companies conduct business, not to mention bureaucratic and repressive immigration legislation in the U.S. Foreign students have been deferring studying in America as a consequence, with Canada benefitting to some degree.

What we’re witnessing, and which hasn’t been adequately explained by the so-called globalization sages, is a steady redistribution of wealth around the world. This is good, ostensibly. Where the “lifting of all boats” concept falls apart is when one studies areas of America such as the upper Mid-West, parts of New England, or Appalachia. I don’t have to read BusinessWeek or The Economist to grasp how these regions have been decimated during the past 20 years–I’ve visited them. I’m most familiar with beautiful states such as Maine, Vermont and New Hampshire, which have had their traditional industries creamed by offshoring. I remember when in the early nineties I could buy made in New England shoes, shirts or pants. Not now. I recall travelling through Indiana and Ohio in May 2008, seeing abandoned factories and plenty of run-down houses.

By some estimates, emerging economies are expected to account for about 70% of the world’s economic growth over the next decade, with China and India being responsible for 40% of that increase. I have no doubt that we’re looking at growth on that scale. Of particular note are the scary numbers involving education. I’ve noted South Koreans’ propensity for learning; the Chinese and Indians are just as passionate. These countries are hugely into what we economists call human capital development. China pumps out some 75,000 graduates annually with engineering and computer science degrees, while India produces around 60,000.

The list of multinationals, many of whom have their home offices in the U.S., are increasingly embracing the offshoring of R&D activities, the lifeblood of corporate innovation, leading to productivity growth and eventually a country’s standard of living. Here are some startling numbers:

• A quarter of Accenture’s workforce is in India
• The healthcare division of GE invested over $50 million USD in Bangalore, India
• Cisco is spending more than $1billion USD on a second head office Bangalore
• Fortune 500 companies have almost 100 R&D locations in China, and over 60 in India

I recently read an excellent book by Amy Chua, entitled “Day of Empire” (2007). Chua traces the rise and fall of empires, starting with the Great Persian Empire, concluding with a commentary on China, India and the European Union in the 21st century. Her central thesis is based on tolerance for diversity and how a lack of it leads eventually to the downfall of empires. It was her final thoughts that caught my attention since I was writing this post at the time. Here’s an excerpt:

“If America can rediscover the path that has been the secret to its success since its founding and avoid the temptation of empire building, it could remain the world’s hyperpower in the years to come–not a hyperpower of coercion and military force, but a hyperpower of opportunity, dynamism, and moral force.” It’s the last part of Chua’s comment that struck home for me.

Finally, I wish to emphasize again that innovation drives wealth creation and prosperity. Given the rapid changes in where companies locate their operations, the hunger of emerging economies to succeed, the redistribution of wealth, and how technology and human capital development are helping drive these changes, the need for effective managerial leadership has never been greater. In the words of the late pre-eminent management thinker C.K. Prahalad (1941-2010):

Executives are constrained not by resources but by their imagination.

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