Does The Kindle Show The Decline Of American Innovation?

Another argument that outsourcing manufacturing is hurting the U.S. economy.

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That's the interesting suggestion of a new paper from Harvard Business professors Gary Pisano and Willy Shih. They argue that the willingness of American companies to outsource the manufacturing of consumer electronics to other countries—especially those in Asia—has led to an innovation problem:

What those companies have been ceding is the country’s industrial commons—that is, the collective operational capabilities that underpin new product and process development in the U.S. industrial sector. As a result, America has lost not only the ability to develop and manufacture high-tech products like televisions, memory chips, and laptops but also the expertise to produce emerging hot products like the Kindle e-reader, high-end servers, solar panels, and the batteries that will power the next generation of automobiles.

I find the example of the Kindle strange. The Kindle may not be manufactured in the U.S. But it certainly was designed here—by Lab126 in Silicon Valley. That would seem to suggest that outsourcing manufacturing while insourcing the intellectual know-how go hand-in-hand. American companies like Amazon or Lab126 don't need to physically manufacture the Kindle to reap benefits.

This summary of the study gives more details:

Case in point. The U.S. can make alternative energy vehicles such as the upcoming Chevy Volt, but not a key component: the battery. Turns out that countries such as Korea, which built many of our consumer electronic products for us, also became in the process quite expert at making batteries that are smaller and lighter—expertise and innovation that today is in great demand. Little of that capability resides in the U.S.

My thoughts: Why does it matter where the battery is produced? U.S. consumers benefit regardless of whether the battery says "made in Korea," "made in China," or "made in the U.S." Sure, there are plenty of U.S. businesses that would like that contract to make the battery. But if that was the cheapest or most efficient way to build the battery, it seems like that would be going on already.

Anyway, Pisano and Shih's paper suggests that U.S. businesses are missing something and actually shooting themselves in the foot by constantly outsourcing.  It seems worth a read for that unconventional conclusion.