William F.Miller Herbert Hoover Professor of Public & Private Management Emeritus

1. “The Next Innovation Strategy Towards an Era of Globalization”International Conference on 2006 Industrial Technology InnovationTaiwan, August 3-4, 2006 William F.Miller Herbert Hoover Professor of Public & Private Management Emeritus Professor of Computer Science Emeritus Former Provost Stanford University President and CEO Emeritus SRI International Chairman Emeritus Borland Software Corporation Chairman and Founder Nanostellar, Inc. Email: <wmiller@stanford.edu>

2. Setting the context of Globalism • Today the two major challenges for businesses and for countries and local regions are: 1. Responding to Globalism, and 2. Fostering innovation and entrepreneurship

3. Globalism: The Welch Paradigm In 1987,Jack Welch,Chairman of General Electric said: “The winners in these global games (business) will be those who can put together the world’s best design, manufacturing, research, execution, and marketing on the largest scale. Rarely are all of these elements found in one country or on one continent.” Welch,J.F.Jr.”Evolving Industrial Alliances”,The Bridge, 1987,17(4),p.10

4. The World is Flat? According to Thomas Friedman the world is flat. Indeed there are strong forces of deglommeration that are leveling playing fields and facilitating a broader distribution of the factors of production. At the same time there are forces for agglomeration that are giving rise to concentration of activities in clusters and regions.

5. The world is a waffle On closer inspection the world is a waffle. The peaks are “steeples of excellence” representing excellence and specialization in design, manufacturing, research, marketing, etc. Comparative advantage no longer accrues to a country, per se, but accrues to a region or locale.Those regions with the highest level of knowledge intensity are the most advantaged. As a consequence countries are less flat than previously. In the days when economies were largely agricultural countries were more flat, although even then there were pockets of wealth and prosperity. Today there is greater differentiation between regions within countries. Those countries with the largest array of “steeples of excellence” will, on average, be the most advantaged.

6. Creating Assets There is nothing inevitable about economic development today. Comparative advantage, largely, does not depend on endowed assets,eg rainfall, agriculturial land, mineral resources,etc. Today it depends on created assets such as a highly educated and flexible workforce and appropriate supporting infrastructure including flexible financial institutions, communications and transportation infrastructure, research institutions, and supporting government policies.

7. Globalism’s Major Changes • From producers market to buyers market (from Economy of Need to Economy of Choice) • In the IT industry Geographical shifts in demand Shifts in device utilization Shifts in production • Changes in other industries New business models, eg lean retailing Environmental regulatory changes Demographic changes affect health and consumption • New regional strengths New technologies New talents New sources of innovation and entrepreneurship

9. Globalism:Five Cross Cutting Dynamics are changing Locational Issues • Technological and organizational advances in transportation and communication • Multifaceted drive for greater speed, in terms of speed to market, more rapid product design, and more rapid inventory turnover • Unrelenting cost pressure that continually commodifies existing products • Knowledge creation concentrated in certain locations or industries • Management decisions as to where to site various corporate functions in relationship to their customers Source: “Locating Global Advantage”, Edited by Martin Kenney with Richard Florida, Stanford University Press, 2004,p. 4

10. Why Place is important;What Will Happen Where “Previous rounds of infrastructure improvement always have had a double effect, permitting dispersion of certain routine activities but also increasing the complexity and time-dependence of productive activity, and thus making agglomeration more important. We argue that the Internet will produce more of the same-forces for deagglomeration, but offsetting and possibly stronger tendencies toward agglomeration.” Edward E. Leamer and Michael Storper,”The Economic Geography of the Internet Age”,National Bureau of Economic Research,Working Paper 8450,accepted for publication in the Journal of International Business Studies.

11. Coordination Costs “It should be remembered that in some industries, coordination costs overwhelm the savings of global sourcing.” “From Regions and Firms to Multinational Highways”, Bruce Kogut, Chapter Ten, Locating Global Advantage, Edited by Martin Kenney with Richard Florida, Stanford University Press, 2004, p. 280

12. Managing Location Risks “ From computers to home building-supply products, a growing percentage of consumer products is being sold via distribution systems using lean retailing principles. This means that proximity, inventory risk reduction, and replenishment have a bearing on sourcing decisions for many industries beyond the apparel and textiles. ….. We believe that supply chains in other industries are increasingly balancing the old costs of supply(labor factor, and direct transportation) against the new costs associated with managing risks.” Source: “Globalization of the Apparel and Textile Industries”, Frederich H. Abernathy, John T. Dunlop, Janice H. Hammond, and David Weil, Chapter Two in “Locating Global Advantage” Edited by Martin Kenney with Richard Florida, Stanford University Press, 2004, p. 43

13. Temporal Dynamics “ Temporal dynamics are forcing relocation of certain functions closer to the final customer, while in other cases it has meant closer integration between value chain nodes in different countries” Source: “Locating Global Advantage”, Edited by Martin Kenney with Richard Florida,Stanford University Press, 2004, p. 8

14. The Pull of Geography “MNCs are unable to escape the pull of geography due to the knowledge and capabilities embedded in regions.” Source: “Locating Global Advantage”, Edited by Martin Kenney with Richard Florida, Stanford University Press, 2004, p. 17

15. Firm Strategies “In other words, globalization is less and less about national competition around sectoral dominance but about the location of the value-added activities that compose the global commodity chain.From this perspective, firm strategies matter more, since comparative advantage and firm advantage are more delinked today than they have ever been before.” “From Regions and Firms to Multinational Highways”, Bruce Kogut, Chapter Ten, Locating Global Advantage, Edited by Martin Kenney with Richard Florida, Stanford University Press, 2004, p. 280

16. Firm Strategies 1. Follow the Welch Paradigm 2. Build Global Linkages 3. Build effective collaborations with research institutions and universities both at home and abroad

17. Connecting University Research “If university research is to raise a particular region’s productivity growth via technology,it must connect with local industry performance…..The destination of graduates from local institutions will substantially affect any calculation of payoff from state and regional investments in research. R&D spillovers associated with the new technology will become a source of long-run economic benefit only if the local industry R&D network draws from the technology,if commercialization occurs locally,and if the region’s industries capture the technology through diffusion and investment.” Michael S.Fogarty and Amit K.Sinha,”Why Older Regions Can’t Generalize from Route 128 and Silicon Valley”,Industrializing Knowledge,Edited by Lewis Branscomb,Fumio Kodama,and Richard Florida,MIT Press 1999,page 474.

18. Country Strategies 1.Create the assets for comparative advantage. 2. Develop features of an innovative and entrepreneurial community 3 Develop an open and flexible social-economic-political system

19. Knowledge Intensity Universities and research institutes that interact with industry Favorable government policies Results-oriented meritocracy Flexible and Mobile work force Climate that rewards risk-taking and tolerates failure Knowledgeable Venture Capital Open business environment Collaboration: business, government, and non-profits-local networks Specialized business service infrastructure: lawyers, accountants, etc. High quality of life Global Linkages 12 Features of an Advanced High Tech Entrepreneurial Habitat