The Technology Revolution and the Restructuring of the Global Economy
THE WORLD IS IN THE THROES OF A TECHNOLOGICAL REVOLUTION that differs from the periodic waves of technical change that have marked the progress of industrial society since its origins 200 years ago. A shift is occurring in the sociotechnological paradigm that underlies our current sophisticated industrial structure. This old paradigm consists of the mass production of essentially standardized goods in ever-larger units; an emphasis on quantitative goals for production, requiring ever higher inputs of capital, energy, and raw materials to produce more and more; and little attention to environmental impact, resource use, and conservation issues. In contrast, the new paradigm taking shape is identified with an emphasis on quality and diversification of products and processes, diffusion of small but highly productive units that rely on new technologies and are linked to a process of decentralization of production, adoption of process and product choices requiring far less energy and materials input per unit of output, and a greater awareness of the need to preserve the quality of local and global environments.
Thus, we are in a period of transition between two epochs, a time comparable to the industrial revolution, when the steam engine was introduced and coal was the emerging energy source. Then, as now, there was widespread fear of the future, a fear derived from the difficulty of even imagining the range of opportunities that an ongoing revolution brings in terms of new activities and related jobs.
During a transition of this magnitude, past equilibria are disrupted and conditions of mismatch occur in labor markets. The demand for new jobs and skills increases, and old activities disappear or lose their importance in the marketplace. These changes are visible; their impact is almost immediate. It is now clear that the paper-free office is going to be widespread in a few
decades, and in fact, we can see its beginnings with increased office automation, the spread of word processors, and the adoption of integrated workstations. The human-free factory is also in sight. With increasing automation and robotization, it is not only blue-collar jobs that will be eliminated. The change is more profound. We are witnessing the sharpened decline of the factory as the primary function and chief labor-absorber in industry. Research and development (R&D), marketing, finance, corporate strategy, legal affairs—functions that previously were to a certain extent ancillary to production—are assuming the center of the stage. Now manufacturing itself becomes ancillary and often even a candidate for contracting out.
This does not mean, however, that manufacturing technologies are becoming secondary in importance. The contrary is true, and here, too, history offers a parallel. Today’s situation presents an analogy with the position of agriculture after the industrial revolution. All through the history of industrial society, agriculture improved its output and productivity enormously, although it no longer dominated the economy and was not the main source of jobs as it once had been. Industry will repeat this pattern, as the transition to a postindustrial, service-oriented society is completed.
The present era of change is being brought about by a whole cluster of technologies, some of which have an exceptional capacity for horizontal diffusion in all sectors of the economy and society and an equally exceptional capacity for cross-fertilization. Key technologies in this category include the microelectronics-information technologies complex, the biotechnologies, and the new materials science.
This process of technological change spurs structural changes in the economy and society. Mature sectors (such as machine tools and textiles) can be rejuvenated by grafting new technologies onto their processes and products. When this rejuvenation occurs in industrialized countries, these traditional sectors take the lead in international competition. Italy is a case in point, since Italian prosperity is in no small measure due to the restored competitiveness of such sectors. These sectors demonstrate a highly flexible approach to production, making possible less standardized products specifically designed to satisfy the tastes and needs of customers. They also demonstrate considerable creativity through attention to design factors and closer links to the market and its fluctuations, attentiveness to moods and fashions with highly imaginative marketing, and a capacity to absorb new technology and indeed to interact with it to generate improvements and adaptations.
The fact that in Italy these sectors tend to consist of dynamic, small- to medium-size firms organized in industrial districts is extremely important. Such districts operate as coalitions of competitors, interdependent yet united by a common goal. This pattern encourages the diffusion of technology through all firms in the district. This is in marked contrast to experience elsewhere when competing firms tend to keep technological advances closely
to themselves in the hope of retaining competitive advantage. Ideally, rejuvenation of mature sectors is a “bottom up” process, though in Italy, for example, the European Nuclear Energy Agency offers a significant “top down” contribution in terms of information, expertise, support research and development, and project management.
Mature sectors that undergo such technological renewal and then strive continually to keep abreast of technological developments and market trends can retain competitiveness even in the face of increasing international competition. This pattern is one of the elements suggesting that long-established concepts of comparative advantage and ensuing international division of labor must be challenged. In today’s new economic environment, the availability of abundant, low-cost raw materials and a pool of cheap labor is no longer enough to ensure market advantage to developing countries. But the emerging technologies are not the exclusive domain of advanced countries, and their intelligent application in developing countries may speed up their economic growth and open possibilities for decentralized patterns of development.
Until recently in the advanced countries, the main technological innovations in production have involved mass production and standardization. The emerging technologies make it possible to give an effective answer to the demand for diversification, product customization, and personalization. Thus, the structure of supply is becoming more flexible and innovative. In other words, it is now possible to combine small-scale production units with high productivity and high quality efficiently at increasingly accessible prices. We may therefore say that small becomes beautiful again, although not in the sense that E.F.Schumacher used this phrase in the early 1970s.
The pace of innovation is extremely rapid. No individual firm or country can hope to gain or retain technological and market superiority in any given area for long. The pressure of competition and the rapid spread of production capabilities, innovative ideas, and new patterns of demand compel companies to measure themselves against rival firms at home and abroad early in the production cycle, and then rapidly exploit, in the widest possible market, any competitive advantages that arise from a lead in innovation.
We are witnessing a compression of the time scale by which new technology is introduced, with ever-shorter intervals between discovery and application. This compression is especially apparent in microelectronics and the information technologies, sectors in which international competition and academic and industrial research activities are intense. This phenomenon is widely visible though not universal. In some sectors (specifically, though not exclusively, those involving the life sciences) longer periods are imposed by the need for testing to satisfy regulatory criteria. Examples here come from the pharmaceutical and agrochemical industries.
Simultaneously, firms acquire more strategic space in which to operate. In the past, the smaller the firm, the narrower its natural geographic horizon.
Today it is possible for both large and small firms to think in global terms. This new perspective implies the need for all interests, large and small, to seek arrangements such as transnational mergers, joint venture agreements, consortia, and shared production and licensing agreements with other companies. The partners often bring complementary assets: investment capital, market shares in different geographic areas, technological capabilities in adjacent domains, and different strategic approaches to advance innovation. In this way returns in different countries can be maximized rapidly. This worldwide change is being spearheaded by the industrial democracies—the countries that possess major resources in science and technology, innovative capability, and investment capital.
Today’s technology is becoming more and more scientific. Not only is it created and developed on scientific bases, but it also generates fundamental scientific knowledge. The discovery of new superconducting materials, for example, is simultaneously a great scientific achievement that implies fundamental advances in our understanding of the behavior of matter in the solid state and a technological invention that is immediately open to extraordinary applications in many fields, from energy transmission to computers and from high-field magnets to nuclear fusion. The development of artificial intelligence is another example of the increasingly scientific nature of technology; this effort requires the cooperation of the most disparate disciplines and in turn holds the potential for application in a wide variety of fields. These examples illustrate how the narrow, specialized, compartmentalized ways in which problems typically were approached in the past are giving way to a more global approach that breaks down the barriers of single disciplines to obtain a unified, cross-disciplinary vision.
Another unique aspect of the present technological revolution is that it brings about a dematerialization of society. In a sense, dematerialization is the logical outcome of an advanced economy in which material needs are substantially saturated. Throughout history there has been a direct correlation between increases in gross domestic product and consumption of raw materials and energy. This is no longer automatically the case. In today’s advanced and affluent societies, each successive increment in per capita income is linked to an ever-smaller rise in quantities of raw materials and energy used. According to estimates by the International Monetary Fund, the amount of industrial raw materials needed for one unit of industrial production is now no more than two-fifths of what it was in 1900, and this decline is accelerating. Thus, Japan, for example, in 1984 consumed only 60 percent of the raw materials required for the same volume of industrial output in 1973.
The reason for this phenomenon is basically twofold. Increases in consumption tend to be concentrated on goods that have a high degree of value added, goods that contain a great deal of technology and design rather than
raw materials, and nonmaterial goods such as tourism, leisure activities, and financial services. In addition, today’s technology is developing products whose performance in fulfilling desired functions is reaching unprecedented levels. For example, it is now possible to invent new energy sources that have energy densities far exceeding those of raw materials. One kilogram of uranium can produce the same amount of energy as 13 U.S. tons of oil or 19 U.S. tons of coal, and in telecommunications 1 ton of copper wire can now be replaced by a mere 25 or so kilograms of fiberglass cable, which can be produced with only 5 percent of the energy needed to produce the copper wire it replaces. Decoupling of the amount of raw material needed for a given unit of economic output, income generation, and consumption of raw materials and energy is an essential element in the dematerialization process.
But present trends go beyond this. Dematerialization also includes the emergence of what has been called an “information society.” The speed of information flow and its impact on the rate of innovation and diffusion and the capacity to overcome barriers have enormous implications.
World society is becoming more open; interdependence is increasing. World trade in goods and services has reached $3 trillion. This is certainly a high figure, but surprisingly, it is more than an order of magnitude lower than the volume of foreign currency transactions ($35 trillion) and of the estimated annual turnover of the London financial market alone ($75 trillion, or 25 times greater than the entire world’s visible trade). This is part of what is increasingly being termed the globalization of business and finance.
The comparison between the various forms of trade and transactions is, however, a matter of concern. It might be an indication that conditions for profit increasingly are more favorable in financial speculation than in capital investment in a world that still greatly needs economic growth and opportunities for employment. The alarming indebtedness of developing countries and the massive transfer of resources to advanced economies in interest payments are another facet of this problem.
But globalization affects all sectors of the economy. As noted earlier, the present wave of innovation, technological and otherwise, is spearheaded by the industrial democracies: the countries of North America, Western Europe, and Japan. Kenichi Ohmae (1985) refers to this as the emergence of the “triad,” and advocates a strategy of cross-cultural alliances in the industrial and business communities that will allow innovative companies from the three corners of the triad to become real powers, thus shaping a new pattern of global competition.
In this context, protectionism and defensive attitudes are losing bets. It is not by chance that even a superpower—the USSR—that had built barriers around itself and was striving to compete and advance by planning its economy in isolation is now being forced to come to terms with this new reality
and open up to the opportunities afforded by technological change. The implications of Gorbachev’s new course for the organization of Soviet society are immense, and the bureaucratic resistance to change is likely to be tough. In the largest developing country—the People’s Republic of China—a similar process is taking place, demonstrating that the new advances present immediate opportunities not only for already industrialized countries but for all nations.
In considering the triad, it is important to note that each of its three cornerstones faces problems. The United States retains its lead in the creation and development of the more important emergent technologies, and signs are that it will continue to do so for some time. But the size of the federal budget deficit and the size of the trade deficit, as well as the process of deindustrialization in many traditional sectors that were once the powerhouse of the U.S. economy, are surely causes for concern.
Japan is exceptionally good at exploiting the new technologies and creating large-scale applications for diverse markets. Yet the Japanese, too, are seriously worried, as can be deduced from Japanese reports calling for improved economic and scientific strategies. There are several reasons for their apprehension. Their economic success has been built on an excessive dependence on exports. Profits have been reinvested in industry at home, and the resulting overcapacity has spurred in a vicious circle the need for an even better performance abroad. Given the Japanese people’s high propensity to save, the domestic economy is finding it increasingly difficult to consume the income they generate. Meanwhile, the Japanese government’s inability to redress the country’s chronic balance of payments surplus leads to recurrent threats of retaliation from exasperated, less competitive trading partners.
The yen/dollar exchange rate implies that Japan has the highest per capita income in the world, yet few would deny that the living standards of ordinary people do not reflect this fact. Part of the production capacity devoted to promotion of exports needs to be switched to expansion of social infrastructures and improvement in the quality of life. The housing stock, the environment, and infrastructures in the less favored regions are all in need of upgrading.
With an economy long oriented toward “creative copying” and finding applications for advances achieved elsewhere, Japan admits a lack of individual creativity among its people, especially in the basic sciences. This is a by-product of a culture and an education system that instill virtues of obedience and teamwork rather than initiative and individualism. The future of Japanese technology must be based on independent effort in fundamental research and not on the import of technology from more advanced countries, as during the century-long process of catching up that began with the Meiji Restoration. Savings and consumption patterns will have to alter. All this is likely to mean major changes in the education system, a new role for the
young in what has been a traditionally hierarchical society, and wider opportunities for women (still a significantly smaller part of the labor force in Japan than in any other industrialized country).
Western Europe, on the other hand, appears less oriented toward the future. On the whole, the economies of Western European countries are less concentrated on advanced sectors and are more balanced in their strengths. High-tech sectors are not the most aggressive elements in their economies, even though some of these sectors constitute areas of strength—nuclear energy, aerospace, and robotics. Overall, Europe is too weak in certain critical areas of microelectronics and information technology—for example, in basic electronic components, very-large-scale integration technology, and supercomputers. The most negative aspects of the situation in Europe are a lack of cohesion in many emergent sectors, inadequate infrastructures, and a dispersed and fragmented market.
Europe’s cultural heritage, its deep-rooted traditions in the arts and craftsmanship, and the availability of welfare provisions—care and assistance for the individual citizen, typical of the “welfare state”—are equally distinctive characteristics. They give European nations an edge over the United States and Japan in applying new technologies to traditional industrial and services sectors and in creating diversified, personalized products in response to market needs. Productivity of labor has risen in Europe, although to the detriment of full employment, and so has product and process flexibility. Europe’s reputation for quality products is being maintained increasingly through the adoption and adaptation of new technologies in their production.
Globalization is moving faster than the long-heralded political and economic unification of Europe. Global competition came about suddenly, and it caught Europe off guard. These two unifying processes—on the one hand, the European Economic Community (EEC) and, on the other, the global economy—are now developing side by side; in some areas they are competing. Where the European firm is an acknowledged leader in an advanced sector, these processes run in tandem; where the reverse is true, European considerations tend to take second place.
Many European firms are seriously at risk of being left behind in this competition by becoming the weak link in the triad, a link that provides ideas, labor, services, and markets but essentially leaves strategic initiatives to their U.S. and Japanese partners. Europe is a divided continent and, considering only the EEC, an uneasy mix of old, established, industrialized countries and others in which rural cultures and outlooks still prevail. Policies to pump subsidies into ailing agriculture, declining industrial sectors, and overstretched nonmarket services such as public sector health care, road and rail networks, postal services, and primary and secondary education—Europe’s first response to the economic crises of the 1970s—are proving difficult to remove.
Basic scientific research is still in good shape in Europe, and individual scientists and relatively small, high-level research groups produce excellent results. The few large, cohesive research teams that were created in Europe in certain areas of scientific research, such as the European Organization for Nuclear Research (CERN) in high-energy physics, are highly competitive. Europe even occupies a leading position in some important industrial sectors: precision machine tools, electronic instrumentation, pharmaceuticals, and fine chemicals. In general, however, European industry still tends to think in terms of closed markets with the survival, wherever possible, of producer cartels. Public procurement policies remain largely at the level of single nations; this is a serious obstacle to a more active, relevant role in the world economy. There are, however, heartening signs that Europe is becoming more aware of its weaknesses in this area. Initiatives in science and technology are being undertaken at the EEC level and, separately, in the ambit of the so-called EUREKA program of coordinated, transnational research and development in advanced sectors.
An interdependent and more open world society will lend itself best to the challenge of innovation. The world needs much more material growth; the world population has reached 5 billion and will increase to 8 billion in 2050 before it stabilizes at something under 10 billion. The increase will take place almost entirely in the Third World. A quarter of the world’s population now inhabits today’s industrialized countries, but this proportion will fall to less than 20 percent in 50 years. The inhabitants of industrialized countries already consume three-quarters of the world’s energy and mineral resources. It is difficult to imagine that disparity on this scale can continue far into the next century.
It is essential for world society that the existing gap between North and South be narrowed. This narrowing should be seen not only as a moral obligation for prosperous nations but also as in their own long-term interest. Development in the Third World will create areas of complementary production that will expand and broaden the international economy. This will, in turn, generate new markets for tradable goods and services, thus replacing today’s frenetic paper market in financial instruments. If present trends continue, this market is bound to increase the disparity between the rich and the poor in the world and hamper investment in industry and other productive activities.
Patterns of development for the Third World need not follow those set by today’s industrial economies. Available new technologies (for example, in agriculture, rural industrialization, and education and for the delivery of services) make it possible to achieve a more balanced growth without the exaggerated and disorderly urbanization and subsequent unemployment and other social ills now occurring in much of the Third World.
In this optimistic vision of the future, multinational enterprises are very
important, but not in the traditional sense. Globalization will be increasingly linked to innovation. Furthermore, many small and medium-sized multinational corporations will emerge, relying on alliances that draw on the experience and information available to partners in each market in which the alliances operate. The role of government will not diminish. This role will not necessarily be antagonistic but will provide overall strategic direction, infrastructure, monitoring of conditions for fair competition, and preservation of cultural heritage and environmental quality.
Thus, the availability of abundant raw materials and cheap labor are no longer key factors for success in the world market. New technologies restore vitality to certain sectors in industrialized countries, sectors that were hitherto viewed as almost certain candidates for relocation to the Third World. At the same time, developing countries now have available to them a whole set of new technologies that lend themselves to blending with traditional technologies and thereby make faster development possible across the board.
Those developing countries endowed with raw materials and energy may convert them into more valuable commodities, but unless they are able to master the technology needed to upgrade such commodities, they will derive little benefit from this primary transformation. Emphasis must therefore be placed on research and development and enhanced international cooperation, because it is not in the interest of advanced countries to keep the developing countries’ margins so low as to hamper their advancement and preclude their becoming healthy producers and active market forces. Whether this happens depends largely on the wealthier societies of North America, Western Europe, and Japan. Responsibility therefore lies with them.
Ohmae, K. 1985. Triad Power: The Coming Shape of Global Competition. New York: Free Press.