Yeah the U.S. is Losing but Why Exactly?

As American citizens are set to take to the polls on November 6th, 2012 for the 57th Presidential Election, the policies of both parties are still clear as mud and equally polarizing as ever. However, if you can look past the political rhetoric and character assassination, it is quite evident that U.S. is in decline. Prior to the second presidential debate, I was given two different Harvard Business Review article written by Michael E. Porter and Jan W. Virkin as part of the preparation for my International Business: Advanced Topics class midterm. Many people assume that U.S. has been in decline since the Great Recession, circa 2008. However, lot of the causes of the structural problems that U.S. faces has been brewing for over two decades now. I knew that U.S. economy was doing bad with high unemployment, high debt levels and other symptoms but now I think I have a much better understanding of the forces at play that has led to the loss of prestige by U.S.A.

First of all, the authors of the article Micahel E. Porter and Jan W. Rivkin are very credible sources that have made monumental contributions to the study of business. One example being “Porter’s FIve Forces”.

Secondly, Reading through these two articles brings a terrific scene from a riveting television series that I have been watching to the forefront of my mind. In the HBO show, The Newsroom, character of Will McAvoy, a proud Republican news anchor played by Jeff Daniels is asked to answer the question, “why would you consider America to be the greatest country on Earth?”

His response to the question was:

Ever since the conclusion of the second World War, America has been the de facto superpower in the world. The influence and supremacy of U.S. was constituted by much more than just its military might through its leadership in science, technology and it’s economy.  However, lot of things have changed since then. As the authors coined it, “the rise of the rest” have changed the business environment of the world. Now the position of U.S. as the superpower is under attack as the rest of the world is starting to catch up with U.S.A. With that being said, U.S. now faces a fundamental challenges of addressing it’s structural problems to increase it’s competitiveness in the global business environment.

Essentially, the authors theorize that due to variety of different factors like complexity of the tax code, ineffectiveness of the politicians and policy makers, weak public education, poor macroeconomic policies as well as deteriorating infrastructure and decreasingly skilled labour force that have contributed to the current position that U.S. is in. Lot of this has to do with the “culture of outsourcing” that have become a common business activity for managers within the last two decade.

For companies around the globe, the location decision is one of the most vital one. Location decision can have the potential of creating more jobs, more investment, more tax revenues and have immense implications for economic development of the region. Before companies used to ask themselves the question “Where should we locate?” However, now due to advancement in technology and communication infrastructure, business have become increasingly mobile. Moreover, back in the day a dilemma for companies was “Which countries do we want to serve?”. Thanks to technological advancements, now the question is “Where to locate each value chain?”. Because of this, the culture of relocation and outsourcing have become prominent in the minds of many policy makers and managers. That is not to say, outsourcing is a bad business decision because in lot instances moving certain low-end, labour intensive jobs to countries with cheap labour is actually the most economical decision. However, what is going to happen to the people who have lost their jobs to these relocation decisions? Well, the reading suggest that U.S. must create high-end jobs that raise the living standards of its citizens. However, in the meantime, as countries around the world develop and progress, they can vie for high-end activities from the U.S. and not just the low-end activities that offer cheap labour. It is these transfer of high-end business activities to overseas that is hurting the competitiveness of U.S. High-end business activities like research and development, sophisticated manufacturing and skill intensive are important to a countries economy because these activities bring the highest value per worker. Moreover these activities lead to more follow-on investments and technology and skill spillover for rest of the economy.

According to the authors, lot of businesses are relocating outside of the U.S. because of two main reason. Firstly, poor policies that don’t tackle innate and unnecessary weaknesses in the American business environment is driving lot of businesses out of U.S. Secondly, lot of companies are overlooking the current and latent advantages that U.S business environment. They see the situation in U.S. as more or less “fixed” and cannot be improved upon. Moreover, they underestimate the hidden costs of relocating.

In any business environment, the profitability of operation is dictated by several important factors like wage levels, skill availability, utility rates, taxes, shipping costs, subsidies, local productivity and supervision costs. However, as the rest of the world progress many emerging economies around the world are starting to see rising wages, increasing transportation and logistical costs and shortening product lifecycle. So in essence the characteristics that made China attractive in the past are starting to deteriorate. This presents a opportunity for U.S. to attract and retain high-end business activities back to America. According to study conducted by Deloitte in 2011, “83% percent of all R&D sites opened in China or India from 2004 to 2007.” The multinationals that were surveyed above cited that they made these decisions based on better availability of skilled labour, strong government support instead of more obvious reason of lower cost.When the authors surveyed Harvard Business School Alumni about their experiences with location decisions, they indicated that most commonly considered alternatives were China, India, Brazil, Mexico and Singapore as well other less obvious choices like Turkmenistan and Suriname. They cited that the most common reason for these location decision was low wages.

However, lot of these companies have underestimated the hidden costs of offshoring. In fact, according to research done by AMR Research, “56% of companies experienced increase in total landed costs.” The above statistic make sense as common savings like lower wages, lower benefits and lower energy costs are immediately visible. However, other hidden costs that is associated with lower skilled labor force such need for more supervision, higher scrap rate or lower productivity will not be immediately visible during operation. Moreover, other factors like obsolescence cost affect the company’s ability to react to changing trends in the business environment. And especially for a country built on entrepreneurial culture like U.S. protection of intellectual property presents a tough challenge for companies outsourcing activities overseas.

So how can U.S fix this situation? Well, the first step is realizing that there is a problem in the first place. Lot of multinationals that shift locations often overlook the fact as the authors succinctly puts it “Productivity improvements are often rooted in investments in individuals, innovation teams and infrastructure as well as in long term relationships with local suppliers and supporting institutions.” In essence as companies have become more global, their connection to the local communities have weakened over time. Therefore, in an effort to address this managers and policy makers must take proactive roles in finding solution.

Fact of the matter is is that U.S. is still the world’s most productive large economy and it’s largest market for sophisticated goods and services, which stimulates innovation and  acts as a magnet for investment all across the globe. To maintain its position of a leader in the world, U.S. must firstly address its weaknesses in the business environment. Complexities like U.S.’s overtly complicated tax code and lack of cooperation between government and business raise the cost of doing business in America significantly. Secondly, U.S must protect its core strengths like the entrepreneurial culture of creation and commercialization of new ideas by streamlining regulations that hold up innovation. Thirdly, policy makers and managers must address and eliminate trade and investment distortions that disadvantage U.S. And lastly, government and businesses must work collaboratively to enhance it’s competitiveness by offering compelling value proposition of talent, tech-know-how, and supporting institutions. In the long run, decreasing influence of U.S will hurt the world economy. Therefore, politicians must drop the political rhetoric and get things done instead of just being concerned with their next election.

So do I believe America is still the greatest nation in the world? Yes because I still believe it is the land of opportunity and diversity but then again I am an optimist just like Michael E. Porter and Jan W. Rivkin.

 Works Cited:

Sorkin, A. [HBO: Newsroom]. (2012, June 24). Newsroom [Video file]. Retrieved from      http://www.youtube.com/watch?feature=player_embedded&v=YI7Oq8y-jXA

Porter, M. & Rivkin, J. (2012) Choosing the United States: In contests to attract high-value business activities, the U.S. is losing out more than it should. Harvard Business Review. http://hbr.org/2012/03/choosing-the-united-states

Porter, M. & Rivkin, J. (2012) The Looming Challenges to U.S. Competitiveness. Harvard Business Review. http://hbr.org/2012/03/the-looming-challenge-to-us-competitiveness

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