Friday, February 15, 2008

The World is NOT Flat!

The other day in class, I was burdened with having to watch NYT Bestselling Author, Thomas Friedman give an overly-long and totally pointless speech to a classroom full of MIT business students (you can watch the 45-minute speech if you have nothing else to do here). Friedman wrote a book in 2005 titled The World is Flat and his book went on to win the inaugural Financial Times & Goldman Sachs Business Book of The Year Award (which, as award titles go, is as long and gassy as the book itself). Anyway, after listening to (or suffering through) Friedman’s talk, I wondered how the students at MIT, didn’t have the wherewithal to question any of the crap spewing from Friedman’s mouth? What’s wrong with Friedman’s book and accompanying lecture? Let me count the ways… First, Friedman assembles a variety of cultural, technological, and economic innovations to illustrate how the business world has changed. He lists, among other things, the fall of the Berlin Wall (basically the fall of communism), the rise of the internet, the laying international, underwater fiber-optic cable lines, and shared work-applications all businesses now use (like email, Microsoft Word, Excel etc.) as major drivers of change. He shows how these events allow businesses to communicate more easily, work across the globe more efficiently, outsource work more reliably and work much faster than ever before… to which the only logical response I have is, "Really doctor? Ya think? That’s your professional opinion?" So beyond writing a book about everything that’s painfully obvious to anyone with more than three functioning brain-cells, what else is Friedman’s award-winning book about? Well, from these advances, Friedman then goes on to draw conclusions that aren’t just backwards, but are almost non-sequiters! Friedman thinks these technologies and events are chopping the U.S. down a peg. He feels the world is now flat (because of outsourcing, the ability to communicate around the world so easily, the internet etc.) and that the United States is stumbling and will eventually be replaced as an economic superpower by other countries (or at the very least drawn down to their level and placed on equal footing with the rest of the world). He thinks this will happen very soon. Beyond being an utterly utopian fantasy and incredibly unlikely to happen in our lifetimes, this conclusion is just plain ridiculous. I don’t mean to sound like a gung-ho, U-S-A-chanting patriot who thinks America is perfect… far from it, in fact, as I think there are a lot of things about this country that could be much better… but the world is NOT getting flatter because of technological innovations. If anything it’s getting less flat and America is continuing to rise and distance itself from the rest of the world. By the way, I’m at a loss to come up with an appropriate antonym for "flatter" here… uneven? Bumpier? Hilly? Mountainous? The worst part about Friedman’s conclusions is how plainly influenced they are by his friends and his lifetime of Mid-East studies (he is not a business writer, nor someone with an undergraduate, masters, or PHD in business… he has an undergrad degree in Mediterranean Studies and a masters in Mid-East studies). Interestingly, the main conclusion and driving force for his book came to him during a visit to India, and subsequent conversations with the CEO of an information technology / communications outsourcing company there. This CEO told him the United States was losing ground to India, and the rest of the world economically (Seriously? What else would you expect him to say???) Friedman's book and resulting lecture of a "flat world" therefore draw conclusions that are the end result of irresponsible journalism. As a journalist and writer in a previous profession and now as a business student I find it hard to understand how Friedman could speak to intelligent MBA students at MIT of a "flat" world without doing the proper research to support his conclusions. How could this class of braniacs not laugh him out of the building? How did FT and Goldman Sachs think his book was worthy of an award when, with less than two hours of poking around online, I was able to completely explode his "flat world" hogwash? Personally, I don’t know… but a lot of crap gets published these days so I guess Friedman is no exception. Firstly, let’s attack Friedman’s steaming pile by taking a quick look at the Forbes Global 2000. The Forbes Global 2000 is a list of the largest companies on the planet. A comparison between 2003 and 2007 would be pretty revealing if indeed the U.S. was facing a flattening world would it not? We would certainly expect to see a sharp drop in the U.S. share of those companies over that time period, or at the very least, a stable number. Instead, between 2003 and 2007, the U.S. share of companies in the Global 2000 GREW by 6.1%. How can the world be catching up to us if we’re still adding companies to this list? Okay, maybe some of other countries are growing faster then? At the very least, India should be catching up since that’s where Friedman pulled most of his research. Well, if we look at India’s numbers, we see that they did in fact grow faster than the U.S…. their share of companies in the Global 2000 increased by 10% over the same time frame. Maybe Friedman’s right? Nope. Upon further examination, once again, completely wrong. India’s 10% rise occurred by adding three companies to their previously existing 30. America’s 6.1% rise was the result of adding 45 companies to our previously existing 714! We added more companies to the list (45) in four years than India even HAS on the list (33)!!! How can Friedman possibly be this stupid? Well perhaps he was right about outsourcing and India’s outsourcing industry is a monster on the rise? Another nope. Of the 33 largest companies in India, only five are "outsourcing" companies (ones that take America’s programming, call center work etc.). Of those companies (Infosys, Wipro, Tata Consultancy and Bhati Airtel) none are even in India’s top eight. The other 28 companies on India’s list include fourteen banking institutions, seven oil-gas-utility companies and six material and capital goods companies. Traditional businesses all. After uncovering those statistics in just a few short minutes, I quickly realized that Friedman’s research had been mistaken, so I quickly picked up his book and flipped to the back to search through his list of citations and notes to find out where he’d done his research and gotten his numbers. I quickly realized that Friedman’s research wasn't just "mistaken" but actually "non-existent". Where I expected to find a list of citations I only found two pages of "acknowledgements" graciously thanking a handful of CEO's he’d informally interviewed. What’s perhaps most noteworthy about the CEO’s he mentions is that the first two are the CEO's of Infosys and Wipro (again, who he credits with the source inspiration for his work). So while Friedman may be right about global specialization, that it is in fact, "occurring" and that technological and cultural changes have made it "possible"… he's completely missed the boat as far as the repercussions and end result of specialization. If anything specialization is making the world LESS FLAT! Nassim Taleb in his brilliant bestseller The Black Swan, says it best and I’ll steal directly from his book… "European middlebrows... will often describe Americans as unintellectual, poor in math and not 'into' equation drills. Yet the person making these statements is likely addicted to his iPod, wearing blue jeans and using Microsoft Word to jot down his cultural statements with some Google searches assisting his composition." Taleb goes on to add, "America is more creative... and more tolerant of bottom-up tinkering and undirected trial-and-error. Globalization has allowed the U.S. to specialize in the creative aspect of things, the production of concepts and ideas, that is, the scalable part of business and then assign the work to those happy to be paid by the hour. There is more money in designing a shoe than making it: Nike, Dell and Boeing get paid just for thinking, organizing and leveraging their know-how and ideas while subcontracted factories in developing countries do the grunt work and engineers in cultured and mathematical states do the noncreative technical grind." My quick review of Forbes' Global 2000 only adds to Taleb's point, while simultaneously destroying Friedman's. Friedman's research (or absence thereof) also didn't take into account the downward pressure on wages in India by American companies. After all, we're not outsourcing high-paying, creative jobs! In fact, as India's programmers are starting to demand higher wages for their work, American companies are starting to look elsewhere for their programming and customer service work (mainly Indonesia and the Philippines, but as competition heats up for those hourly-wage jobs they may eventually be shipped elsewhere once Indonesian programmers demand higher wages as well). The final two points Friedman missed are, 1.) never underestimate a society more racially and culturally diverse than any other country in the world, and, 2.) don’t understate the economic significance of America's head-start in business, economy and median household income. First, think about America’s diversity (while we're not as tolerant as I would like, and racism and biases exist in disgusting levels all over this country we're still more racially diverse than any other country in the world)… so, as a quick thought experiment, think about an entrepreneurial start-up company (let's call it Company-X) that wants to break into the widget industry. If Company-X wants to assemble the best and brightest widget experts from around the world (let's say, widget-programmers from India, wireless-widget makers from Norway, widget-microchip experts from Japan, widget-finance experts from Germany and widget-supply chain and management gurus from China) what country would Company-X be "most" likely to found itself? Where would all those determined workers be the most comfortable socially? Certainly not India, Japan or China. More than likely here in the U.S… so again, don't underestimate the diversity of this country and that impact on economics and business. Secondly, how can any country with a median household income markedly below that of the United States' expect to have young entrepreneurs working and tinkering with the newest inventions, gadgets, technologies and business innovations? If most of the people in India and China are still taking pictures with "film" cameras instead of digital ones, most don’t have access to the internet, televisions in every room, 1.2 computers for every household, a cell phone for every child and so forth, how can they be expected to lead a new revolution or come up with the next big idea? Instead, what they can do (and what most countries outside the U.S. have done over the last 100-years) is perfect something America has already created. Nobody doubts Japan, and now South Korea (witness Samsung & Hyundai's precipitous rise) make better cars, TV's, cell phones and gadgets than the U.S. does. But again, what they’ve done is perfect stuff that was created here first. What Friedman's "flattening" technologies have done is allow specialization to occur on a global level. No longer does Apple have to pay inordinate amounts of money to American workers to handle customer service calls concerning the iPod or iPhone. Instead, they can outsource that unprofitable work and go and hire the best and brightest from institutes of higher education (most of which, again, are in the U.S.) to work on the vastly more profitable work of creating the 'next' iPod or iPhone. Will a company in India, Korea or China eventually make a better iPod than Apple? Probably… but by that point, Apple (or another American company) will be hard at work on something else. And that’s the most relevant point of any discussion of specialization and why the world is (in the words of Borat) NOT flat.

1 comment:

Sprizouse said...

Wonderful piece of feedback today from Dr. Schuff (IT and Information Systems Professor at Temple):

I think you're right to look at Friedman's basic thesis critically. One thing people often
miss is that there are other cost factors to outsourcing to other countries like India and China besides cheap communication and lower wages (such as communicating across cultures and dealing with an uneven talent pool). It
makes offshoring's finanical benefits far more ambiguous. And then there's the upward trend of labor costs in those developing countries...

One implication of the ideas that Friedman brings up is that what he calls "flatness" doesn't only apply to offshoring. For example, we could improve the economic prosperity of central Pennsylvania (or many other rural areas across the country) by a combination of retraining and ensuring inexpensive connectivity across the entire area. That way you gain the inherent advantages of using American labor while still reducing labor costs.