Fixing Progressive Decline in U.S. Competitiveness: Porter Speaks Out

Michael Porter at HBS

I tune in to “Morning Joe” on MSNBC most mornings and so a couple of weeks ago one of the guests was Michael Porter, the well known guru on corporate strategy at the Harvard Business School. The subject was a survey conducted by HBS, published last January, which asked over 10,000 HBS alumni a number of questions about U.S. competitiveness.  About 1700 respondents were directly involved in decisions on whether to move existing businesses overseas or whether to place new businesses in the U.S. or abroad. This is obviously a subject of deep interest, with relevance also to the dialogue between our presidential candidates.

I have previously posted some articles about the American renaissance in manufacturing as related to the energy and chemical industries and about studies by Booz and BCG about jobs coming back to the US. But the results of the HBS survey are clearly discouraging and should, in a perfect world, be a springboard for changes in some government policies amd regulations and in actions by firms themselves.

Competitiveness is linked to a number of attributes directly or indirectly related to businesss activities. Porter defines competitiveness broadly as ” the extent to which firms operating in the U.S. are able to compete successfully in the global economy while supporting high and rising living standards for Americans.” If wages were lowered and living standards in the U.S. fell, this would indicate that the U.S. as a business location is, according to Porter, becoming less competitive.  Both the BCG and Booz studies concluded that the U.S. is becoming more competitive because U.S. workers’ compensation has fallen considerably relative to Chinese workers, whose wages have increased substantially, causing more companies to locate businesses here. Porter would say that this does not tell the whole story and does not meet his standard for competitiveness.

I actually find Porter’s definition somewhat unrealistic: In a number of industries (notably automobiles), the salaries and benefits of workers became so high that the companies became “uncompetitive” relative even to domestic competitors operating in “right to work” states. That situation has already changed, even in strong union states. More generally, the income of Middle Class Americans has stagnated for several decades. The standard of living for Americans has already started to go down and will only start rising again when our economy starts booming and our workforce becomes retrained to carry out more high tech jobs. Moreover, if our wage structure comes closer to that of our global competitors we will have to live with that, while still enjoying the tremendous benefits of vast natural resources, cheap energy, a huge domestic market, and clusters of industries that Porter lauded in his landmark book The Competitive Advantage of Nations.

Respondents to the survey were quite pessimistic about America’s ability to maintain their current edge in many fields. Of the 1,767 decisions recently made by participants, 1005 decided to move existing activities offshore, 154 to move offshore activities back to the U.S. and 608 decided to site new activities in the U.S. Respondents believed that America is falling behind its global (particularly emerging nation) competitors, highlighting particularly our domestic weaknesses in tax code, political system, k-12 education system, macroeconomic policies, lgeal framework, regulations, infrastructure and workforce skills – a pretty damning indictment.

The HBS survey concludes that the roots of our loss of competitiveness are numerous amd that a number of steps must be taken to fix the problem. Among other important steps, the government should simplify and reform the tax code, should reform immigration policies, including letting talented foreigners receive visas to remain here after they graduate or to come here where their skills are needed (100,000 high-tech jobs are currently going unfulfilled due to lack of domestic talent) and should spend more money on infrastructure amd on education in STEM subjects. Business, however, is also to blame, because corporate leaders have “relentlessly pushed” for loopholes amd subsidies that serve their narrow interests and for not taking active roles in their communities by supporting educational instututions, investing in workforce skills, etc.

The HBS article neatly illustrates the problem we are facing.

Source: Harvard Business School

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