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Competitiveness: How the United States Lost its Way

by Edward Alden
February 17, 2012

The March 2012 cover of the Harvard Business Review. The March 2012 cover of the Harvard Business Review.

While it’s only February, I feel safe in making the following prediction: the new issue of the Harvard Business Review contains the most important thinking on the issue of U.S. competitiveness that will be published this year. It should be read in every corporate boardroom, by every member of Congress, by every senior official in the Obama administration, and by every economic adviser to the Republican presidential candidates.

The debate over competitiveness is often muddied because the word is used in so many different and often incompatible ways. Economist Paul Krugman famously dismissed the notion entirely as a “dangerous obsession” in a 1994 Foreign Affairs piece, arguing that “the world’s leading nations are not, to any important degree, in economic competition with each other.” Krugman doesn’t appear to have changed his mind recently, but perhaps a careful reading of this issue will cause him to reconsider.

Michael Porter, who has led much of the Harvard Business School’s work on this issue, offers the best definition I have seen. He writes: “The United States is a competitive location to the extent that companies operating in the U.S. are able to compete successfully in the global economy while supporting high and rising living standards for the average American.” What this means is that “competitiveness” is not a synonym for “economic growth.” It refers only to the ability of the United States to succeed as a high-wage location for operations in internationally-traded sectors.

Competitiveness so defined is not an issue for much of the U.S. economy. Most jobs are still in non-tradable sectors (health care, retail trade, government) that do not face significant import competition. But the share of the U.S. economy exposed to international competition–not just in manufacturing but in service sectors as well–has grown immensely over the past several decades, and the pace will only accelerate. And these sectors really matter. As my colleagues on the recent CFR Independent Task Force on Trade and Investment Policy, Laura D’Andrea Tyson and Matthew Slaughter, point out in the issue, the 27 million U.S. employees of multinational companies are well-paid, with compensation 25 percent higher than average. Yet they write, building on the work of the Task Force, that U.S. employment in these companies has fallen sharply in the United States over the past decade even as it has grown abroad.

Porter and his colleague Jan Rivkin penned the key article in the issue, entitled “Choosing the United States.” Based on surveys of some 10,000 Harvard Business School alumni, it concludes that the United States is attracting a far smaller share than it should of high-value-adding activities. The reasons are varied, including corporate misperceptions of the gains that come from outsourcing, but two stand out: U.S. policymakers “are not addressing weakness in the national business environment and are doing little to fight economic distortions that disfavor location in the United States.”

And for those skeptical of the importance of manufacturing, like my CFR colleague Jagdish Bhagwati, I would recommend the article by Gary Pisano and Willy Shih that builds on their work showing that economies that do not make things also tend to lose the ability to innovate in manufacturing. While they are quite rightly opposed to targeted industrial policies, they recommend a big increase in government support for R & D in the manufacturing sciences, as well as tax, regulatory, and training policies that encourage investment in manufacturing.

Porter and Rivkin raise another important point. While the United States must do far more to attract and retain investment, our standard of living will fall if the primary means for doing so are wage cuts, a weaker dollar, or boosting productivity by firing workers and demanding more of those who remain. This is the “race to the bottom” that globalization skeptics have long feared, and there is some evidence that the otherwise encouraging recent uptick in manufacturing employment is in part the result of falling U.S. wages, coupled with rising wages in China and other offshore locations. Instead, the goal must be to make the United States a compelling investment location despite its relatively high costs compared with emerging markets.

Much of the rest of the issue is concerned with how best to do this, in areas such as education and skills training, finance, fiscal policy, entrepreneurship, and the green economy. There is too much here to summarize easily, and some of the ideas are better than others. Read it for yourself. Restoring American competitiveness, as Harvard Business School dean Nitin Nohria writes in the introduction, matters to all of us.

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