In 2006 China will manufacture 400 million mobile handset

1
In Chinas ShadowThe Crisis of American
Entrepreneurship
Reed Hundt
2
(No Transcript)
3
(No Transcript)
4
(No Transcript)
5
(No Transcript)
6
(No Transcript)
7
(No Transcript)
8
The challenge
9
(No Transcript)
10
China the worlds manufacturer

• Largest exporter of apparel
• In 2006 China will manufacture 400 million mobile
  handsets (more than 60 increase from 2005)
• China is the Number 1 producer of pork
• Global center of consumer electronics and telcom
  equipment
• China is producing three times as much as it did
  10 years ago losing manufacturing jobs as it
  increases manufacturing productivity

11
Technology innovation

• Mobile Internet (China Mobile, Tom Online, Super
  Girl)
• Online gaming (Netease)
• Comprehensive messaging (Tencent, Tom-Skype)
• Clicks plus bricks (Ctrip)
• Bridging old media and new media (Hunan Satellite
  TV)
• 3G (TD-SCDMA) (Datang, ZTE, TD Tech, Putian)
• IPTV (UTStarcom, ZTE)
• PC monitor manufacturing (TPV)

Source Morgan Stanley Research
12
Internet population

• No. 1 in mobile users
• No. 1 in Internet users under the age of 30 (70
  of Chinese Internet users under the age of 30)
• Urban areas have 5x more Internet users than
  rural areas
• 60 of them are the only children of family
• 30 of Chinese Internet users have college degrees

Source CNNIC World Bank Morgan Stanley
Research
13
Massive potential
Annual growth
Size

• Internet users
• Broadband users
• Mobile users
• Mobile services
• Online gaming
• Online brand advertising

111 million 64.3 million 393 million 963
million 570 million 281 million
18 50 17 24 46 28
Source CNNIC Morgan Stanley Research
14
Urban Chinese consumers will grow from 42 of the
total population today to more than 69 by 2025
Source McKinsey Global Institute
15

• Thats another 300 million urban Chinese
• largest migration in human history
• from poverty to the middle class

16
Today 77 of urban Chinese households live on
less than 3,000 a year. By 2025 only 10 will
By then, urban households in China will
be one of the largest consumer markets in the
world, spending almost as much as all Japanese
households spend today
Source McKinsey Global Institute
17
These working consumers will steadily climb the
income ladder, creating a new and massive middle
class who will redefine the Chinese market
Source McKinsey Global Institute
18

• Every business making goods and services that
  trade across national boundaries
• Will enter China
• They cannot afford not to
• They will make China the number one destination
  for foreign direct investment
• It already is

19
1 billion consumers1 commodities
purchaserEconomies of scale12 MM businesses
20

• But as American firms in trade look to China
• China is a hotbed of firm creation

21

• China has 12 million businesses against the
• 6 million American businesses

22
2.25 million companies in China intend to buy a
PC.
Source Intel
23

• And with a PC they will compete to win in China
  and the winners will compete in global markets
• Every American firm in trade will have a Chinese
  competitor
• Or many

24
The United States annually produces 137,437
engineers with at least a Bachelor Degree while
India produces 112,000 and China 351,537
Source Duke University Framing the Engineering
Outsourcing Debate
25
Even after 4 years of double-digit increases,
average hourly compensation for the overall
Chinese manufacturing sector amounted to just
0.57 in 2002 literally, 3 of the U.S. hourly
pay rate of 21.40 during that same year
Source Morgan Stanley
26
Chinas state-owned enterprise sector has reduced
headcount by over 60 million workers since 1997,
creating an enormous pool of unemployed workers
that are seeking gainful re-employment in Chinas
new economy
Source Morgan Stanley
27
And

• Chinas rural population of some 745 million is,
  by far, the largest pool of surplus labor in the
  world

28
Tapping into the bottomless reservoir of surplus
labor

• Foreign firms make goods and services in China
• Creating the pathways for Chinese firms
• to compete in global markets

29
Of Chinas high-tech exports, valued at 218.3
billion in 2005, nearly 90 was produced by
foreign-invested companies
Source Wall Street Journal
30
So inevitably American firms are

• While investing abroad, they are
• Investing less in the US of A

31
In the United States, nonresidential fixed
investment as a percentage of GDP fell to 11.56
in 2005 from 12.55 in 2000
Source New York Times
32
Tech rule 1
Increase is the game increasing returns,
increasing investment, increasing scale, faster
development, increasing advantage
33
Tech rule 2
Markets comprise the top dog and the underdogs
34
Tech rule 3
The Top Dog winsthe world(the winner takes
nearly all)
35
All big firms are technology firms in the 21st
century

• So All firms have to invest in China,
• Hire in China,
• Compete in China
• In order to go where the growth is,
• In order to survive,
• In order to thrive

36
To sleep is to die
37
The world is not flat
38
Who wrote that flat book?

• Its wrong
• Inequality, unequal results, big winners sudden
  losers, rapid shifts of power - these are the
  themes of the 21st century

39
We have so far barely seen the tip of the
off-shoring iceberg, the eventual dimensions of
which may be staggering.
Source New York Times
40
Looking backwards humanity barely survived
but

• The 20th Century was the American Century

41
1990 international dollars
United States
In fact, AmericanGDP per capitahas soaredfor
nearly 200years
China
Source Maddison (2001)
42
For 50 years, Americans

• Have made 20 of the worlds goods
• While
• Numbering only 5 of the worlds workforce
• Thats where Americas high relative standard of
  living comes from

43
Americans did especially well in the
90s Between the beginning of 1995 and the
semi-official NBER business cycle peak in March
2001, U.S. real GDP grew at a pace of 4.21 per
year
Source Brad DeLong
44
Those were golden years
45
At the end of the Golden 90s American growth
peaked from 1998 to 2003 United States provided
98 of global economic growth
46
Everythings fine in the USA?
47
And so what if the 21st century belonged to China?
48
Chinas growth need not be Americas loss

• The normal gains from trade mean that the world
  as a whole cannot lose from increases in
  productivity, and the United States and other
  industrial countries have benefited from
  comparable changes in the past.

49
But thats where free trading Britain was in the
mid 19th century

• When America was becoming the worlds largest
  consumption market
• As millions of workers came from Europe, driving
  wages down,
• And its firms drew massive foreign direct
  investment,
• Building global giants behind protective tariffs

50
For that matter

• As late as 1600 China was richer than Europe
• China came up with many inventions before Europe
• power-driving spinning, wheelbarrow, stirrup,
  rigid horse collar, compass, paper, printing,
  gunpowder
• But Chinese technology stopped progressing
• This could happen here
• (David Landes)

51
Theres a danger that

• The long decline
• Has already begun

52
For the 20 years before the golden 90s the USA
was not delivering productivity gains

• Output per person hour averaged a growth rate of
  only 1.30 per year from 1973 to 1995

53
The oil shocks and the Vietnam War marked the end
of the great post WW2 era of wealth creation for
Americans Measured output per person-hour
worked in non-farm business had averaged a growth
rate of 2.88 per year from 1947 to 1973
Source Brad DeLong
54
Before and after the Golden 90s
America has been dividing between haves and
have-nots
55

• What if theres no sense of being
• all in the middle class
• sharing the same dream
• of what America is like

56
Now, the rich get richer,again(Top decile
increaseincome share)
57
In 2003, according to the latest IRS figures,
fully 181,282 households admitted to making more
than 1 million a year, averaging 2,951,369
Source Andrew Hacker
58
Meanwhile the midpoint is falling ... median
household income (inflation-adjusted) has fallen
5 years in a row and was 4 lower in 2004 than in
1999
Source Larry Mishel and Ross Eisenbrey
59
Even over the 22 years between 1982 and 2004,
family median incomes grew only 23 in real
dollars And that growth came almost entirely
from more wives turning to full-time work and
contributing more the family total
Source Andrew Hacker
60
Between 1982 and 2004, median earnings of fully
employed men grew by only 2.7 about as close
to stagnation as one can get for a 22-year period
Source Andrew Hacker
61
As of 2004, more than 45 of American workers
were earning 13.25 an hour or less. The jobs
that the country has been growing the fastest
include those like janitor, hospital orderly, and
cashier
Source New York Times
62
Even the Top 10 arent doing so well Between
1972 and 2001 the wage and salary income of
Americans at the 90 percentile of the income
distribution rose only about 1 per year.
But income at the 99th percentile rose 87
income at the 99.9th percentile rose 181 and
income at the 99.99th percentile rose 497.
Source Paul Krugman
63
If the trends of 1968-2001 continue from 2001 to
2034

• Then
• The Top 20 in income will average 250,000 a
  year
• (inflation adjusted)
• The middle 20 in income will average 55,000 a
  year
• and the bottom 20 in income will average 15,000
  a year
• Stretching the income ladder as high beyond sight
• or reach by those at the bottom
• and pulling all the rungs so far apart
• people can fall
• But not pull themselves up

64
The widening of income gaps is accelerated by the
effect of income earned from investment

• Theres a shift in income from labor to capital
• From employee to employer
• From worker to shareholder

65
From 2001 to the fourth quarter of 2005,
corporate profits as a percentage of United
States GDP rose significantly, to 11.6 from
about 7
Source The New York Times
66
So

• the corporations make their owners rich
• But at least half of Americans make little or
  nothing from owning corporations
• Thats what it means for Americans to under-save
  and to borrow to spend

67
In 2003 the Top 1 of households owned 57.5 of
corporate wealth, up from 53.4 the year before
The top groups share of corporate wealth
has grown by half since 1991, when it was 38.7
Source The New York Times
68
The Top 0.01 income composition in the U.S.
earns more from capital instead of work than at
any time since 1931
69
A rentier class of oligarchs

• Is what immigrants came to America to escape

70
A person born into the Top fifth is over 5 times
as likely to end up at the top as a person born
into the bottom fifth
Source Jones and Olken
71
At an elite university, you are 25 times as
likely to run into a rich student as a poor one
Source The Economist
72
Offshoring may strain Americas sense of
community even more

• Economist Alan Blinder estimates that between 42
  and 56 million American service sector jobs may
  be susceptible to offshore competition
• According to Business Week, from 2001 to 2005,
  starting salaries in offshore sensitive work
  declined 12.7 percent down in computer science,
  12 per cent down in computer engineering, 10.2
  percent down in electrical engineering
• (Paul Craig Roberts)

73
For most Americans not even education

• Guarantees the American Dream
• Comes true

74
The real earnings of college graduates actually
fell more than 5 between 2000 and 2004
Source Paul Krugman
75
The purpose of any national economic policy
Is to create a high and rising standard of living
for that nations citizens (Michael Porter)
76
Doesnt that mean the standard of living

• Should rise
• For almost all the nations citizens?
• So that everybody would know
• If they work hard
• Study hard
• And play fair
• They will leave their children better off than
  their parents

77
Is the American Dream dying

• At the dawn of the 21st century?

78

• Dark and dangerous views
• Are threading through
• American culture

79
Over the past dozen years, the arrows have
started to point away from values as gender
parity and personal expression To illiberal
values such as sexism, fatalism, and a focus on
every man for himself.
Source Shellenberger and Nordhaus
80
Americans are increasingly authoritarian while
at the same time feeling evermore adrift,
isolated, and, nihilistic. at once more
libertine and more puritanical than in the past
In America solidarity among citizens is
deteriorating, and the progressive clock is
unwinding backward on broad questions of social
equity
Source Shellenberger and Nordhaus
81
Democracys choice

• Americans usually vote
• The ethics taught at home
• Either Were all in the same boat
• Or, Each of us is on their own

82
If we separate into classes

• Dont you expect
• The have-nots
• to elect their Robin Hood to office?

83
If we separate into classes

• Do you expect those at the top will lend a
  helping hand to the rest?
• Or just pull the ladder up higher?

84
If we separate into classes

• Will we make the wise decisions that benefit us
  all
• Or will we reap the bitter fruit of discord and
  deceit,
• The corruption of trust, and the inability to put
  things right

85
China started growing

• As the American Dream began to fade
• China didnt make Americas middle class begin to
  vanish
• But it may
• Accelerate the trends
• This is Americas challenge
• More than Chinas fault

86
What to do?
87
Accept the long decline?

• While singing songs of despair?

88
Everybody knows that the dice are
loadedEverybody rolls with their fingers crossed
Everybody knows the fight is fixedThe poor
stay poor, the rich get richThats how it
goesEverybody knows
Source Leonard Cohen
89
Or wake up and smell the coffee

• Before it is too late

90
Its not jingoistic or xenophobicto keep the
520 proportion goingfor another 50 years
91
The citizens of country need work at firms that
win in global markets
92
To put it in simplistic terms and rounding off to
the nearest whole truth

• Americans will be better off if the firms they
  work for
• Win
• In 6 or 7 out of every 10 global markets
• Gomoroy and baumol

93
The citizens of country need work at firms that
win in global markets
94
To put it in simplistic terms and rounding off to
the nearest whole truth

• Americans will be better off if the firms they
  work for
• Win
• In 6 or 7 out of every 10 global markets
• Gomoroy and baumol

95
The theory of creative destruction applied to
global competition

• For Americans to work in American firms that win
  in global competition
• Americans have to work in firms that overthrow
  the old order
• That win big
• As long as they can

96
Because it is the big winners

• That create
• Lot of new jobs

97
Employers (firms with payroll) 5,541,918
Employment
Firms
Employment size
Employer firms covered in Statistics of U.S.
Business
115,061,184
5,657,774
2,500 employees or more
3,634
43,877,243
Source U.S. Census Bureau
98
The big winners have to come from competition

• America is lucky to face the challenge of China
• The competition can make the world richer
• And our firms fitter
• And our citizens better off

99
If Americans rise to the challenge
and open the door to the creative destruction of
hierarchy, incumbents, and the status quo
100
Schumpeters Economic Development shows that no
one except the innovator makes a genuine
profit and the innovators profit is always
quite short-lived.
Source Peter Drucker
101
But innovation in Schumpeters famous phrase is
also creative destruction. It makes obsolete
yesterdays capital equipment and capital
investment.
Source Peter Drucker
102
long-run growth requires a process of creative
destruction, in which new corporate giants
continually rise up to overthrow old leviathans,
especially for developed countries. Growth
due to innovation by large established
businesses, as in Schumpeter (1942), appears less
generally important in recent decades
Source Fogel, Morck, Yeung
103
Economies with less persistently dominant large
businesses grow faster This reflects faster
productivity growth the waning of large old
private sector businesses drives the result.
Source Fogel, Morck, Yeung
104
Americans need to work in global winners that are
about to be born
105
Or in the case of existing firms

• About to be reborn

106
Thats where rising income will be found

• The big winners through creative destruction will
  be productivity gainersThat pay out the bigger
  bucks to their people

107
So you might have the guts of an entrepreneur

• Or the DNA
• But are you in a culture that encourages your
  proclivities
• Or are the values of your society conformity,
  hierarchical order, status quo perpetuation,
  hopelessness, obedience, continuity instead of
  change?
• It matters not just who you are but who you are
  with

108
The U.S. productivity miracle of the past 10
years is not explained by U.S. companies
being better at using computers and other
technology to drive productivity higher. The
detailed analysis confirmed that the big
productivity differences were in industries that
used IT.
Source Raffaella Sadun and John Van Reenen
109
And we know
And those advances came from entrepreneurs Who
created the productivity gains And made the
established firms race to keep up Or die
110
So we know the Golden 90s got their gold

• From advances in technology
• Introduced by entrepreneurs
• To attack the incumbents
• To prove the lesson of creative destruction

111
In the U.S., 10 of firms are born and 10 die
every year
112
In the 90s, births gt deaths by 1-2
113
AND not surprisingly

• In the Years Before the Golden 90s and
• The Years of the Distraught 00s
• Coincidentally the Bush Presidencies
• The death rate exceeds the birth rate

114
A positive birth rate is a measure of healthy
entrepreneurship
115
Where will the births and rebirths come
from? The culture of entrepreneurship
116
Have you got a better explanation?

• Does anyone believe the state can plan for
  entrepreneurship?
• Or select sunrise industries?
• Or that only existing big firms can create new
  markets, new goods, new services, new high paid
  jobs?

117
All big winners

• Once were small firms
• That got a chance
• Because markets were open
• Skills were available
• money was found
• and
• the societys beliefs and values supported their
  risk taking and reward seeking

118
The secret of entrepreneurship is culture
119
A culture

• Is a web of beliefs and values

120
(No Transcript)
121
(No Transcript)
122
(No Transcript)
123
(No Transcript)
124
(No Transcript)
125
Culture depends on architecture
126
Architecture of law
127
Architecture of technology
128
Architecture of leaders
129
Technology
Culture
Law
Leaders
130
Law can create a culture that favors
entrepreneurship e.g., law of finance,
corporations, antitrust, patents, contracts,
taxing, spending, bankruptcy, etc.
131
Technology can create a culture of
entrepreneurship access to open standards, open
networks, open knowledge, discovery,
experimentation, skills
132
Leaders can be entrepreneurs they can set goals
for societies They can stop icecap melting, do
gene therapy, end carbon dependence or choose
to impose democracy by military might
133
Leaders from above or below

• Can choose goals
• And tactics
• They can select a strategy for or against
  entrepreneurship

134
(No Transcript)
135
(No Transcript)
136
This isnt rocket science.It is psychology.
137
A brain-imaging study finds that the higher the
level of uncertainty, the more likely it is that
emotion and gut instinct, not logic, will rule.
Source Roger Highfield
138
So you might have the guts of an entrepreneur

• Or the DNA
• But are you in a culture that encourages your
  proclivities
• Or are the values of your society conformity,
  hierarchical order, status quo perpetuation,
  hopelessness, obedience, continuity instead of
  change?
• It matters not just who you are but who you are
  with

139

• Every generation of Americans can be the greatest
• Will our new Americans strengthen the culture of
  entrepreneurship
• Or the culture of haves and have-nots, status
  quo, hierarchies, and class warfare
• Its a choice

140
In response to Chinaand the risk to our Dream
the United States can renew its culture of
entrepreneurship By fixing its architectures of
culture
141
Create a web of beliefs that encourage
entrepreneurshipby everyone in every market

• Create universal Skills Provide universal
  Access to skills Focus on the individual
  For each, encourage Risk-Taking For each,
  Maximize Rewards

142
Rebuild the architecture of law to open markets
to new entrants
143
Make the architecture of law open old markets to
new entrants
144
Example Deregulate Internet in the 90s give
data easy access to the network let packet beat
circuit Future Open integrated energy
markets?Future Open health care markets to
innovation?
145
Net Neutrality

• Is really a battle to keep the Internet open to
  disruption

146
We should have antitrust law again

• Rewrite the Sherman and Clayton Acts
• Reward winners in competition, tolerating high
  market share,
• where there is,
• Divided technical leadership,
• Epochal (10x) change,
• Adjacent market entry
• Where necessary, open closed markets by force of
  law
• (share essential facilities among rivals)
• Deregulate retail pricing dont regulate quality
  of service
• Regulate environmental, labor and energy use more
  than economic impact
• Cite Tim Bresnahan

147

• Make laws that help everyone be an entrepreneur
  in their own life
• portable pension plans,
• guaranteed health care,
• free college education,
• individual savings accounts,
• wage insurance,
• power to get and send
• all information
• and all points of view
• all the time anywhere

148
Dont dwell on taxes dont trust macroeconomic
policy alone
Taxing rewards wont create public
goods Taxation wont open markets Taxation
wont open technologies Taxation doesnt set
cultural goals
149
Everyone should have the ability to invest in
their future

• About 40 of American households do not have
  enough savings to survive at the poverty level
  for more than 3 months they cant take risks in
  searching for work
• The United Kingdom sets up savings accounts for
  every person at birth, makes small deposits, uses
  magic of compound interest to build wealth across
  income classes

150
Make public goods

• Not a safety net
• But a trampoline

151
So that every American

• Bounces as high as they can
• From job to job

152
Employer-to-employer mobility rates are 40
higher in Silicon Valley than the U.S. average
Source The New York Times
153
Make every education suit every person

• Instead of making every person conform to the
  educators
• Why should you have to drop out of Harvard to get
  the education you need?

154
If you really dont want any child left behind

• Since no two are alike, give to each the teaching
  they need?
• Since all deserve equal opportunity, give to all
  the same quality of teaching
• Since science has discovered, lets test each
  individuals learning styles

155
The second architecture technology choices that
encourage entrepreneurship

• Open systems
• Open software
• Limited intellectual property rights
• Expanded individual liberty rights
• Collaborative production

156
The third architecture leaders who dont just
manage complexity butmanage to change We
need a generation of risk-taking, adventurous,
mistake-making, bungee jumping, barefoot, brash,
and bold leaders
157
And for that matter

• Where do you want your leaders to come from?

158
(No Transcript)
159

• OR

160
(No Transcript)
161
LEADERS CAN COME FROM

• POSTION POWER
• POWER OF MONEY

162
Or from

• Below outside where
• Associations and ideas matter

163
Wherever they come from above or below In
business, academe, government, and religion
leaders must take responsibility
164
And

• Those who would lead from below or outside
• Must take responsibility
• Culture is not imposed upon all of us it is
  woven by all of us across the architectures that
  we make

165
Our future is

• Suspended like a bird on the wire

166
Our culture in the future

• Will be stretched like skin
• Across
• The architectures
• Of law
• Technology
• And Leadership from above and below

167
The future of the American Dream

• That every generation will
• Be better off than the previous generation

168
Depends on

• The
• Web of beliefs and values that we spin anew
• Across the architectures of culture

169

• Americans can live the American Dream forever

170

• Or it can vanish in a generation
• As have so many dreams of so many cultures of the
  past

171

• The whole world can live the American Dream

172

• Ad astra per aspera

173
Chinese competition is like nothing American has
ever seen before

• But even if China did not exist
• Americans would be better off
• With a culture of entrepreneurship
• But because China does exist

174
Theres not a moment to lose
175
For Americans

• The future could be lived

176
(No Transcript)
177
Or

• In the sunny uplands
• Of a perpetual realization
• Of the American Dream
• For all our people
• And all the world

178

• CHOOSE
• Or
• LOSE