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Innovation, Job Creation arid Competitiveness RUBEN F. METTLER , The difference between economic winners and losers in world markets lies essentially in mahzr~g a clear national commitment to growth and competitivenessa commitment the United States has yet to make. The winners are those whose nationalpolicies emphasize savings, investment, technology, competitiveness, and work, to sup- port growth. The losers are those who emphasize current consump- tiorz over investment or turn to government intervention arid control as substitutes for market forces. Slowly but surely in recent decades the economic policies of the United States have been moving to the side that is losing. My puIpose in this chapter is to bridge the discussions (in this volume) of innovation and entrepreneurship and the discussions that focus on industrial competitiveness and the related issue of creating new jobs and expanding employment. In so doing, I look at several issues: how innovative activities differ among major industries, what role large companies have in job creation, and what major changes in public policy could improve the growth and competitiveness of the U.S. economy. And, I do so from the perspective of a large company. I must confess that I am somewhat ambivalent about being a spokesman for large companies, since I deliberately left a good job in a large company in the early 1950s to cast my lot with a small venture company, called Ramo- Wooldridge, not anticipating that a few years later the company would be acquired and would then grow to be a large company. A modest investment in 1953, in the newly formed Ramo-Wooldridge (RW) company, by Cleve- land-based Thompson Products, now the "T" of TRW, led to the acquisition of RW by Thompson in 1958 and the establishment of "a company called TRW." In 1984 about $3.5 billion of TRW's $6.0 billion of sales came directly from the growth of that initial small venture investment. Not too shabby, ever by Silicon Valley standards! 517

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518 RUBEN F. ME7TLER INNOVATIVE ACTIVITY IN DiFFE;RENT INDUSTRIES Let me begin by commenting on how innovative activity differs among industries, and in large companies as compared with small. We start with much confusion about the nature of different industries because of a tendency to talk and to write about simplifications that do not exist. For example, putting whole industries into neat compartments like "smokestack," ''high- tech," "manufacturing," or "service" does not help our understanding The statistics and projections of growth and decline of these supposedly separate categories can be highly misleading A few examples may highlight the point. Automotive plants use advanced sensors, microprocessors, computer controls, and robotics to produce vehi- cles that are designed by advanced computer simulation and that literally teem with electronic controls and sophisticated metallurgy. After the auto- mobiles are sold, one of the world's most sophisticated distribution networks supplies and services the aftermarket using on-line computers and worldwide communication networks. The automotive industry may safely be described as "high-tech." In another dimension, "manufactunng" and ''service" are inseparably interwoven and are not two separate sets of industries, as often portrayed. We are not becoming a "service economy." We are instead a "salami economy" with alternating slices of "manufacturing" and "services,'' from product conception to final use. We must be competitive in both manufac- turing and services if we are to grow and prosper. Manufacturing is a core capability the root, trunk, and branches that bear the leaves and fruit of service industries and new technologies. Global competition compels all industries to improve their perfo~ance. The margin that makes for success is very thin. Even a small competitive edge can make a big difference, but large and aggressive steps may be necessary to achieve even a small competitive edge. Improvements that only equal those of competitors yield no net gain. The challenge is to integrate into all of our industries, in innovative ways, the most advanced technologies in communications, metallurgy and new materials, microelectronics and process control, computer-aided design and manufactunng, expert systems, and more, in a market-dnven and cost- effective way. And of course, that includes using advanced technology in managing an ente~pnse large or small. The challenge for managers of large and small companies is to learn how to develop (or buy) technology that is best for their specific purposes, how to control the cost of using it, and how to finance it, all while earning enough profit to continue to invest and compete and grow in world markets on a sustained basis. Ln short, the challenge is to be an entrepreneur. Large, established companies became so because they were entrepreneu-

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INNOVATION, JOB CREATION, kD COMPETITIVENESS 519 rial. And if they lose their innovative, risk-taking spirit, they will eventually decline, and surely will not make a full contribution to their nation's pros- penty and growth. Indeed, I believe a close and necessary relationship exists between large and small companies if both are to develop and maintain an entrepreneurial Must. In sum, what is common to all industries and companies of all sizes, new and old, is the need for entrepreneurship and innovation. As the chief ex- ecutive officer of a large, diversified company in electronics, space, auto- motive, industrial, and energy markets, ~ see little difference in the fundamentals of innovative activity across industries. Small companies must be entrepre- neurial and innovative to establish an initial market niche; Men they must begin to think about diversification and sustainable growth, and that will require more innovation, but in different dimensions and increasingly on a larger scale. When they get to be large and diversified, they will still need the same fundamental entrepreneurial drive to maintain the capacity and willingness to change their business mix and adapt to new competitive con- . . .ltlons. JOB CREATION Let us move now to the second issue. Since the number and quality of jobs can serve as one proxy for a healthy economy, how are jobs created and employment expanded, and what role do large companies play in that process? In 1980 David L. Birch of MA published a study Mat concluded that about 70 percent of new jobs in the United States are created by businesses employing fewer then 100 people. Several related studies have also been made by the Brookings ~sutution and over organi7~aons. Birch's study was highly influential. Many policies and programs were af- fected by it. In my view, his study was interpreted much too narrowly. Not enough attention was given to Be linkage Mat exists between large companues and small or to Be effect of this linkage on Me job creation process. Let me take my company as an example. We currently employ about 95,000 people, only about 5,000 more Man a decade ago, despite large increases In assets, sales, and profits. Does this mean that we have made little contribution to the creation of new jobs? By no means. Dunng Me same period our outside purchases more Man quadrupled, increasing from under $500 million to well over $2 billion a year. We have played an active part in helping a number of smaller companies get started, and thus in providing David L. Birch, The Role of High Technology Firms in Job Creation, Working Paper of Me MIT Program on Neighborhood and Regional Change (Cambridge: Massachusetts Institute of Tech- nology, 1984).

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520 RUBEN F. MEI~R some new jobs. We have helped them grow and develop and find their first niche in the market sometimes by an equity investment or by providing direct funding for research and development, sometimes by being one of their first major customers. Often our purchases have helped to ensure their grown beyond the start-up phases, creating more new jobs. Our best estimate is that the growth in our outside purchasing has created from 25,000 to 30,000 jobs during the past decade, beyond our own direct employment. A similar contribution by hundreds of other large companies adds up to millions of jobs. Even the role of corporate pension funds in job formation should not be overlooked. In our company, for example, pension funds have also increased more Tan fourfold during the last decade, from under $300 million to over $1.3 billion. These funds serve as vehicles for capital formation and, thus, as sources of job formation. So there is a symbiotic relationship between large business and small. It is necessary to look at an entire system, not at isolated components, to understand the dynamics of job creation. With respect to public policies aimed at creating new jobs and increasing employment, we should be cautious about intervention that distorts market relationships and that introduces rigidities affecting large or small companies. To the greatest extent possible, job creation should be left to market forces, because in the end that will mean healthier economies, more entrepreneurs large and small and more and better jobs. Also, in thinking about economic growth and job creation, it is important to keep in mind the mass and aggregate scale of large companies taken as a group. For example, although comprehensive statistics organized by com- pany size are difficult to find, reasonable estimates suggest that our 500 largest companies (out of a total of millions of companies) account for almost 30 percent of our gross national product, perform about 90 percent of privately financed research and development, perform over 90 percent of the govern- ment-sponsored research and development that is not done in government laboratories, employ about 80 percent of We scientists and engineers who work in industry, and spend about $20 billion annually in private skill-training programs. Two additional points: Me 1,000 largest U.S. manufacturers boosted their capital appropriations in 1984 by about one-third, about double the national average, and about 18 percent of U.S. exports are made by a mere 50 companies. Thus, large companies taken as a group have a dominant role in the creation of our national wealth aIld in our technolo ,ical competitiveness. They provide a stability and strength that are essential to companies of all sizes, especially in the context of intense competition in world markets, often against very large foreign companies, both pnvate companies and those that are state supported.

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INNOVATION, JOB CREATION, AND COMPETITIVENESS MAJOR CHANGES IN PUBLIC POLICY 521 What major changes in public policy are needed to improve the growth and competitiveness of our economy? First, we should recognize the fact that many leading spokesmen and policymakers and many of the general public believe our economy is doing rather well and do not see competi- tiveness as a burning issue. They are thus not highly motivated to take steps that might rock the boat. They say: "Aren't we winning again, now, at long last? Isn't our economy recovering? Aren't industry profits up, inflation down, and our productivity improving? Isn't unemployment down, and em- ployment up? Hasn't the American economy done a tremendous job of ex- pandin~ job opportunities enabling us to absorb a vast, unexpected influx of women into the work force?" Yes, all these things are true. And they show significant economic progress. Yet, when we look beyond the rising corporate profits and economic indicators, there is a sense of concern about the long-term future of our economy and society. There is concern that unless strong new steps are taken, we may be facing a slow decline in our real living standards. In broad terms, we see huge trade deficits, grossly unbalanced federal budgets, and rapidly rising domestic and international debt, and perhaps not surprisingly, an anxious financial community and a nervous stock market. Our alarming twin deficitsfiscal and trade suggest that we can no longer pay the combined costs of our social welfare commitments, military defense, foreign aid, and environmental protection, let alone maintain the vast private and public infrastructure on which our economy depends Either we have overcommitted our resources or our economy is failing to perform as it should. Which is it? In my view, it is both. That means we must both restrain the demands on our economy and improve its perfor- mance. A major cause of the concern about the long-range performance of our economy comes down to a not very electrifying phrase: competitive decline. If the phrase is abstract, its consequences are not. The erosion of our com- petitive position in world markets has been well documented, and is discussed by other contributors to this volume, including John A. Young, who discusses the report of the President's Commission on Industrial Competitiveness, on which he served as chairman. We are presented wad a clear choice. We can do what is necessary to restore our competitive primacy and build our economy to meet our society's multiple objectives, or we can settle for a less ambitious future, and cut our cloth to fit it. American jobs, economic security, and living standards, Amer- ican social goals and dreams, America's place in the world all are at stake in He decision we make. If we want to maintain an open, benevolent, and humanly productive society; improve the quality of education; restore our

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522 RUBEN F. MFITLER private and public capital resources; pay our debts; defend our national in- terests; and continue to be a leader in world affairs, then we must also want a competitive economy. In order to achieve these goals, we must grow. And in order to grow, we must compete. And today, as never before, we must act in a worldwide context. The world's problems are partly our problems. We cannot turn our backs on them. We cannot hide from them. We cannot wish them away. We must deal with them because our domestic economic health and vigor have become dependent on world markets. Our economy is only a part a big and important part, but only a part of something biggeran integrated world economy. We have to undersold it. And we have to deal with it. The question is, How? We can begin by asking, Why is our society falling behind in worldwide competition? We are the world's strongest industrial nation, so what is our problem? The answer is, in part, that our historical focus on our domestic market led to inefficiencies and to a kind of competitive myopia. We failed to recognize that others, particularly the countries of the Far East, were gaining on us, by building their own comparative advantages. In part, the problem is a matter of unfocused U.S. economic policies Mat fail to grasp and meet the needs of competitiveness in a global market. We simply have not put high priority on the need and the means to be competitive. We have not made competitiveness a central criterion by which to judge our private actions and our public policies. We can learn much by looking around the world at other economies. The difference between economic winners and losers in world markets lies es- sentially in making a clear national commitment to growth and competitive- nessa commitment the United States has yet to make. The winners are those whose national policies emphasize savings, investment, technology, competitiveness, and work, to support growth. The losers are Pose who emphasize current consumption over investment or turn to government in- tervention and control as substitutes for market forces. Slowly but surely in recent decades the economic policies of the United States have been moving to the side that is losing. Staying competitive is a total package. It is not fixing just one deficiency. It is not just employment costs, or trade negotiations, or technology, or productivity, or currency exchange rates, or the cost of capital, or marketing, or any one of many very important factors. It is a commitment by all com- panies and all groups and institutions tied to them to develop strategies and pronouns as needed to stay ahead of specific competitors for specific products in specific markets. And it is government policies that put high priority on building and maintaining our competitive strength.

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INNOVATION, JOB CREATION. AND COMPETITIVENESS IS THERE A WINNING GAME PLAN? 523 Turning now to government policies, the changes that are needed to bring about a competitive society can be conveniently put into three groups: 1. Macroeconomic policies fiscal and monetary Mat encourage grown, competitiveness, savings, investment, and international made, without Dying to mastermind the process through government intervention in particular . . nc ustnes; 2. Genenc policies applicable to all industries, covering such national competitiveness issues as stimulating research and development, upgrading general and scientific and technological education, upgrading work skills in the population, reducing hard-core unemployment, encouraging labor mo- bility, and prudently managing the public infrastructure;2 and 3. Communication policies between managers and employees that grad- ually shift emphasis from the traditional adversary relationships to cooper- ation and commitment to the task of improving productivity, quality, and competitiveness, with all parties committing to longer-range outlooks and a new concept of mutual interest. Of these three groups of policies, I will say a few words about only the first, competitive macroeconomic policies. Competinve Macroeconomic Policies In order to have competitive macroeconomic policies, we must first understand that many of our existing policies seriously erode our com- petitiveness, and then we must make competitiveness a central standard against which to judge our policies and programs both old and new. To begin, we need to spread the burden of maintaining a sound economy more evenhandedly between fiscal and monetary constraints. At present, our fiscal policies and monetary policies are at loggerheads, and we see heavy strains on the economy, including high real interest rates, an ov- ervalued dollar, enormous budget and trade deficits, and a much higher cost of capital for U.S. companies than for their most important foreign competitors. We need to set the objective of a competitive cost of capital, an essential requirement for competitiveness, and then develop the steps needed to achieve it. We need a mighty effort, above and beyond We adminis~ation's current proposals and those being discussed in He Congress, to gain control of 2The new Decade III program of the National Academy of Engineenng is a good example of an institutional program to help build a technologically competitive economy.

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524 RUBEN F. METIl OR government spending and to wipe out our enormous deficits and the rapid growth in national debt and debt-service costs. This year, 1985, is a truly critical time for action. If it turns out that the large cuts needed in spending can only be achieved In a compromise that includes new revenues, it will be very important that competitiveness be a high-pnonty criterion in deciding how to raise revenue. We need to eliminate disincentives and develop new incentives for indi- viduals and companies to work and save and invest. Despite all the talk of supply-side economics, we still have economic policies that are heavily biased toward current consumption and dividing up what we produce now. We have an "industrial policy" and its name is "consumer spending.'' We need to reconcile our domestic antitrust enforcement with the reality of worldwide markets, not with the purpose of reducing competition, but to encourage it on a fair and effective basis. This recognition should allow, under appropriate circumstances, the pooling of resources and information among those in a single industry and amon:, our industry groups, particularly in competing overseas. We need an aggressive trade policy that demands and enforces fair and equal competition in world markets, including access to the markets of other countries equal to the access they are granted by us, and a related policy that encourages those industries that by their nature must compete in world markets. Currently, our fiscal policies often do the opposite; they favor those industries that are largely inherently domestic and not significantly exposed to foreign competition. We should understand that financial and trade matters (both domestic and international) are inextricably tied together. Policies and negotiations on both must be tightly coordinated. CONCLUSION To take all the steps referred to above will require a change in our outlook and in our political economy as sweeping as those that brought about the New Deal legislation in the 1930s, though in quite a different direction. I am not talking revolution. But I am talking about basic changes that will tilt the balance of governmental incentives away from consumption-first, distnbution-oriented policies the kind the world's losers are following to pro-work, pro-savings, pro-investment, pro-grow~, pro-competition pol- icies: the kind the winners are following. It is a big order, and a big change for Amencans. Yet this is the policy Amenca really needs not a solution related to jUSt one part of the problem, or one interest ~,rollp, but a good, strong "competitiveness policy." That is what it will take to restore the kind of America we all want: a strong leader

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~j in Me Todd; a sang competitor ~ home and in global markets; a sang co-~sion~ helper ~ Pose who cam provide for themselves; a count once man, of dsing hopes ad rising living sodas for ~1 our people. Mat is IBM being compedUve mews! Leas Member ~~ hippos . . . . ~ gunmen by winners

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