via the Wall Street Journal

Fast-growing emerging market economies are attracting soaring investment flows as growth in the U.S. and Europe remains sluggish. The trend has produced unexpected downsides such as overvalued currencies. Mouse over each emerging market country to see what the effects have been, and what the governments have tried to do about it.
Click on the image to launch the interactive feature.

Cambridge, UK

via Harvard Business Review
By: Navi Radjou, Jaideep Prabhu, Prasad Kaipa, Simone Ahuja

We recently visited the brand-new R&D lab of Dr Reddy’s, one of India’s leading pharmaceutical firms. This lab isn’t located in Bangalore or Hyderabad (where Dr Reddy’s is headquartered) but in … Cambridge, U.K.

In 2008, Dr Reddy’s acquired Chirotech, Dow Chemical’s R&D unit, for $32 million, and in April 2011 relocated it to a new 33,000 sq. ft. facility in Cambridge Science Park. Chirotech specializes in biocatalysis and chemocatalysis, two important subspecialties of biotechnology and chemistry that help develop key biological and chemical intermediates needed for the efficient production of medicines. Dr Reddy’s plan is to leverage Chirotech’s scientific capabilities to optimize drug development processes, thus lowering manufacturing costs and speeding time-to-market. In doing so, Dr Reddy’s strengthens its core generic drugs business and boosts the custom manufacturing services it provides to Big Pharma and nimble biotech startups.

In prior blog posts, we have described how Western multinationals such as Xerox and GE are embracing polycentric innovation by sourcing more R&D capabilities from emerging markets such as India and China and integrating them into a synergistic global innovation network. In recent years, Indian firms such as Dr Reddy’s have also started globalizing their R&D footprint by moving into Western markets. They have been tapping into the sophisticated technical and scientific talent available in Western economies as part of their strategy to access international markets and build global brands.

Besides Dr Reddy’s, several leading Indian firms are pioneering polycentric innovation:

Tata Motors. While the $2000 Nano car was mostly developed in India, Tata Motor’s Indica Vista Electric Vehicle and the Pixel city car were primarily designed and built by the Tata Motors European Technical Centre (TMETC) in Coventry, U.K., in close partnership with the University of Warwick. TMETC, which was established in 2005, got a big talent boost when Tata Motors acquired Jaguar and Land Rover in 2008.

Suzlon. The world’s eighth-largest wind turbine manufacturer may be headquartered in Pune, India, but its main R&D centers are located in the Netherlands, Germany, and Denmark, nations that actively promote wind energy and boast a huge talent pool. Suzlon recently completed its acquisition of Germany-based REpower Systems, gaining access to cutting-edge expertise in aerodynamics and electronics.

Reliance MediaWorks. This media powerhouse offers creative and production services as well as cutting-edge post-production services to such films as Avatar and The Curious Case of Benjamin Button. To best leverage worldwide creative talent, Reliance MediaWorks operates a global network of creative centers located in Burbank, San Francisco, London, Tokyo, and across India.

TCS. Asia’s largest IT service provider has built what it calls a global Co-Innovation Network (COIN), which includes technology partnerships with startups and VC firms in Silicon Valley as well as academic tie-ups with leading American universities such as MIT, Georgia Tech, and Stanford.

Having extensively interacted with the leaders of these organizations, we find that Indian firms have developed several best practices around how to implement polycentric innovation effectively:

Cultivate a polycentric mindset to make global innovation work. Polycentric innovation won’t work in organizations that promote groupthink. The Indian firms we studied promote diversity in their R&D management by hiring external talent to build and oversee their global innovation network. Tata Motors appointed Tim Leverthon, who previously led R&D at BMW, as head of its global R&D. Suzlon’s head of technology is John O’Halloran, a former Cummins Engine executive who now leads Suzlon’s 500-strong global R&D team out of Hamburg.

Decentralize and empower global R&D units. You can’t run your global R&D operations from headquarters in Mumbai. The Indian firms we worked with strive to empower their regional R&D units. TMETC has full operational autonomy even though it collaborates closely with Tata Motors’ Indian R&D unit. Reliance MediaWorks’ global creative network is highly decentralized, allowing each design studio head in the U.S. and the U.K. to make independent decisions that best serve local customer needs.

Communicate constantly to break down cultural barriers. Cultural differences can severely hamper cooperation between Western and Eastern engineers. Constant communication across geographically dispersed teams is vital to keep creative synergies flowing in a global R&D network. The senior leaders of the Indian firms we examined regularly meet with their global R&D units to ensure they feel part of a ‘global family,’ as Ravi Kant, Vice Chairman of Tata Motors, puts it.

Integrate with local innovation ecosystems. Building a global innovation network doesn’t just mean opening R&D labs all over the world. It also means integrating yourself into local innovation ecosystems. That’s why Tata Motors collaborates extensively with the University of Warwick in the U.K. while Suzlon has forged partnerships with Delft University in the Netherlands and the Fraunhofer Gesellschaft and the University of Kiel in Germany.

Leverage global talent to move up the value chain while defending core business for now. It is commonly believed that emerging market companies tap Western R&D talent in order to ‘move up the value chain.’ That is certainly true in the case of Tata Motors, which is using TMETC to develop its electric car, and Reliance MediaWorks, which is leveraging its studios in California and London for high-end work. At the same time, these companies are using foreign expertise to bolster their core business as well. Some TCS academic alliances in the U.S. are aimed at finding ways to lower the cost of its core activities like software testing. And Dr Reddy’s is using Chirotech’s talent to make its generic drug business more cost-competitive rather than develop new branded drugs.

In an increasingly polycentric world, the battle between incumbent Western multinationals and up-and-coming Eastern multinationals will be fought around who is best at integrating and driving synergies across globally-distributed R&D networks. Moreover, Western and Eastern firms come to this battle with different assets and backgrounds. Western firms are masters of structured approaches to innovation that deliver scale and efficiency. Eastern firms excel at more frugal and flexible forms of innovation. In a global market that includes both affluent and mass market consumers, and in a world of polycentric innovation, firms will need to master and integrate both structured and flexible approaches to innovation. It will be interesting to see which firms turn out to be best at seamlessly integrating both approaches into a new paradigm for a polycentric world.

Is your company globalizing R&D? How are you preparing for the world of polycentric innovation? Do you have examples of companies that are innovating wisely across geographies? Please share with us your stories, challenges and best practices.

August 30, 2011 from WAMU

The Walter Reed Army Medical Center has a storied past. It has been the country’s leading Army hospital for more than 100 years, sitting on a complex that includes a Civil War battlefield. There was a time when 16,000 patients a year sought treatment for wounds of war or illness.

By the end of August, all of the patients and doctors will have left, moved to Bethesda and Fort Belvoir as the Army consolidates its bases. But as one era closes, another opens: Washington, D.C., may be left with nearly 70 acres of prime real estate.

Neighborhood Businesses Face Change
Just after the midday rush at Ledo’s Pizza on Georgia Avenue in Northwest D.C., Tim and Kelly Shuy sit down at a table.

“We get a lot of military families, people who are visiting, folks who are in the hospital. We get a lot of contractors,” Kelly says.

Their pizzeria is across the street from the sprawling Walter Reed campus. Lush with trees and a hilly landscape, the campus includes several iconic 100-year-old buildings with red tile roofs where patients, their families and staff were able to wander and just look out on the rest of the neighborhood from a distance.

Many in the neighborhood call the medical center a fortress. But for the Shuys, it was a mainstay. Doctors and patients alike have supported their business for years.

“Some of them come in uniforms. We have patients who come in who haven’t been out of Walter Reed,” Kelly says. “I’ve had dozens of people tell me this is their first meal out of the hospital.”

But those days are just about over.

“We’ve been saying goodbye to people for a long time. We say goodbye to people every day,” Kelly Shuy said. “But it’s horrible — we’ve had tears over saying goodbye to people who are regulars.”

Of course the Shuys are losing more than just familiar faces.

“As far as the business goes, obviously it’s a huge hit for us,” Kelly says. As Walter Reed closes down, it leaves behind questions. What is going to take its place? There is no shortage of opinion among interested residents:

“We are looking for quality space for our students,” says Christine Encinas.

“We’d like to use part of it to develop affordable family housing,” says Troy Swanda.

“We’d like to see a bit of parkland right along here,” says Ellen McBarnett. “Many of the neighbors have been talking about dog-walk parks or places for children to play.”

City Eyes Retail Development
And that’s just the beginning. The State Department will take a chunk of Walter Reed’s 113 acres, possibly for embassies. But that leaves almost 70 acres for D.C. In a city where a quarter of the land is owned by the federal government, demand for land is high.

“This is a uniquely vocal community, let me just put it that way,” says Victor Hoskins, deputy mayor of Planning and Economic Development. He co-chairs the committee that is going to figure out just what the District of Columbia is going to do with all of this land.

“Actually, the interest we’ve gotten from a number of retailers already has been, really, quite astounding. What’s going to happen is when that fence comes down [and] we develop the retail along there, it will become a place to go,” Hoskins says. “And there’s a chance now to revive a Main Street, which is Georgia Avenue, which has for years been suffering from decay.”

D.C.’s government has a major interest, as well. For 100 years, this property has been federal and untaxable. The city estimates it could get $20 million a year in tax revenue. And the people who worked at Walter Reed mostly drove in and drove out, not spending as much in the neighborhood as destination consumers might. Plus, if retail takes off, it might supply local jobs. Of course, that’s assuming the city gets it right.



This satellite image shows how the Walter Reed Campus will be divided between the District of Columbia (purple) and the State Department (yellow). The District’s 67-acre portion includes both the old and new hospital buildings.

Coming Up With A Plan
Faith Wheeler is a neighborhood representative who lives near Walter Reed. Standing about a mile away from the hospital, she points to a block where new development didn’t work out so well.

“Well, I don’t want to see all those for-lease signs; look at that,” she says. “If that happened on Georgia Avenue’s Walter Reed campus, it would be awful, horrible. According to textbook ideas, this is the place where retail ought to be booming. It’s not.”
This is what Wheeler does not want to see: a street that’s a commuter corridor, lined by sterile and vacant office buildings. One thing she does want is some sort of tribute to the place’s history. And that is likely; many of the historic building facades will be kept. But Wheeler’s voice is one of many.

Public Meetings, And Many Rules
“It’s kind of the new realities of urban planning in the 21st century,” says Lisa Benton-Short, a professor of geography at George Washington University who has written about previous base closings. She says the Walter Reed campus will take awhile to sort out.

“I think for much of the 20th century, planners were quite top-down in their planning,” she says. “They told us what we needed in our spaces. Sometimes they were right, and sometimes they weren’t. In the last 25 years or so, the planning profession has really changed. And one of the most important ways it’s changed is to bring in public participation and planning.”

That means public workshops, public forums and many public meetings. Benton-Short says it will be messy. And the military has its rules, as well.

There will have to be services for the homeless, there will have to be organizations that serve the community, such as schools. And there’s an entire bureaucratic process that will probably take two years before a deal is finalized, let alone anything getting built. The U.S. Department of Housing and Urban Development will have to approve the plan, and there will have to be an environmental impact assessment, as well.

“We’re talking 10 years, 15 years before these visions are actually transformed into reality,” Benton-Short says.

That only heightens the fear of area businesses who will have to wait that long. There’s also radioactive waste from X-ray machines and cancer treatments that needs cleaning up. And there’s asbestos to be removed. That’s all possible — but it will take time. It’s also one reason that the amount D.C. will have to pay the Army for the land hasn’t been nailed down yet. But when all is said and done, one thing everyone agrees on is that the site holds real potential.

A Positive Legacy
“This is something that I hope will be a positive,” says Ethelbert Dawson, 77, who attended Walter Reed’s official closing ceremony last month. He lives around the corner, and for 25 years, he worked at Walter Reed as a research chemist.

“When I was here, I never thought that this day would ever come. We used to call it Walter Wonderful, because that’s what it was.”

He says he can’t really predict what this new space will mean for Washington, D.C.

“But for Walter Reed and all of the positiveness that hospital has given this community,” Dawson says, “I don’t know if they can ever reduplicate that.”

All eyes are on this space, to see whether the disappearance of a 100-year-old place of healing will usher in an urban rebirth — or leave a scar.

Workers in China’s export heartland of Guangdong make $200 a month assembling the consumer goods Americans hold so dear. In Jiangsu, they make $175. It seems that isn’t cheap enough.
Related

Terry Gou, the founder and chairman of Foxconn, which employs one million workers in China making Apple iPads, H.P. computers and other electronic devices, announced at a company party in Shenzen last month that he would deploy a million robots at his plants by 2013 to do much of the labor currently performed by human hands.

It’s not only Foxconn complaining about expensive labor. Many companies have moved away from export hubs in coastal areas to regions like Chongqing, where workers are paid $135 a month. Others are going farther. Yue Yuen, the world’s biggest shoe maker, is setting up shop in Cambodia and Bangladesh.

Foxconn said it wants employees to move “higher up the value chain.” Certainly, moving up the technology ladder drives economic development. The tractor and other farming inventions pushed millions of Americans off the farms. Computers displaced clerical workers. These breakthroughs created better-paid jobs for educated workers. But it’s unsettling to see cutting-edge labor-saving technologies deployed in a country where jobs must be found for some 300 million Chinese who live off the land.

Wages are rising, with salaries of many factory workers in China going up 20 percent to 30 percent annually. But that’s mainly because the new manufacturing jobs are far from where the underemployed farmers live. And the Chinese government doesn’t make it easy for workers to move from where they live to where they are wanted.

Even with this kind of wage pressure, pay is still very low. A Department of Labor study estimated that manufacturing workers in China earned $1.36 an hour in 2008 — about 4 percent of what an American worker made and less than wages in Mexico, Brazil, the Philippines and even India.

It’s hard to believe that hundreds of millions of Chinese can move quickly up the economy’s “value chain” to become tomorrow’s nurses and engineers. In the meantime, as robots take over more work, the millions trapped in the countryside will have even fewer opportunities.

August 14, 2011
The Opinion Pages, Editorial
The New York Times

Over the years I’ve heard many Americans fret about buying goods that are “Made in China,” since they want their cash to go to American companies instead of Chinese ones. A new study, however, finds that a majority of the price consumers pay for goods labeled “Made in China” actually does go to American businesses, not Chinese ones.

The study, from the Federal Reserve Bank of San Fransisco, estimates that of every dollar consumers spend on a product labeled “Made in China,” about 45 cents goes to China for the cost of the original import.

On the other hand, about 55 cents of that dollar pays for services produced in the United States, such as the transportation for the product, rent for the store where the product is sold, the salaries of the salespeople at the store, the cost of marketing the product, the profits for shareholders of the retailer selling the product and so on.

What’s more, the fraction of a retail product’s price going to American services is higher for Chinese-made products than for products made in other foreign countries. For retail prices on overall imported goods, only 36 percent — or 36 cents on the dollar, instead of 55 cents on the dollar for made-in-China goods only — goes to American companies and their workers.

That difference is largely caused by the types of products American import from China versus other countries.

“The fact that the U.S. content of Chinese goods is much higher than for imports as a whole is mainly due to higher retail and wholesale margins on consumer electronics and clothing than on most other goods and services,” write Galina Hale and Bart Hobijn, the authors of the study.

Bear in mind that there are other ways that American consumer spending gets channeled to China, among other countries. That is, many American-made products or services use imported goods as inputs. These types of imports, which are used as parts and not sold directly to consumers, are called “intermediate goods,” as opposed to “final goods.”

Given this, the San Francisco Fed’s study also looked into what share of total personal consumption expenditures in the United States goes to imported final goods (again, consumer products) and intermediate goods (parts).



The authors found that about 13.9 percent of all United States consumer spending goes to imports, including both final and intermediate goods. Chinese imports alone — including both final goods and intermediate goods from China — accounts for just 1.9 percent of total consumer spending.

By CATHERINE RAMPELL
The New York Times

This post has been revised to reflect the following correction:
Correction: August 15, 2011
An earlier version of this post incorrectly identified the Federal Reserve Bank that issued the paper. It was the Federal Reserve Bank of San Francisco, not the New York Fed.

These diagrams are the early fruits of a new approach to the most important unsolved problem of the last century: how to make a rich country out of a poor one. Development economists have many theories about how the trick is done but few proven answers. A compelling solution would be useful closer to home, too: understanding the process of economic development would help us work out whether it matters that service jobs are replacing manufacturing ones or whether there is anything the government can and should do to stimulate new industries like biotechnology or green energy.

Strip away the mathematical language of economists, and conventional theories of economic growth are rather crude. Economies produce “stuff,” and if you want more stuff to come out of the process, put more stuff in (like human capital, say). Yet economies do not produce stuff so much as billions of distinct types of goods — perhaps 10 billion, according to Eric Beinhocker of the McKinsey Global Institute — ranging from size 34 dark stonewash bootcut jeans to beauty therapies involving avocado. The difference between China’s economy and that of the United States is not simply that China’s is smaller; it has a different structure entirely.

Thanks to César A. Hidalgo of the M.I.T. Media Lab, we can now visualize the differences between national economies in new ways. Hidalgo is a statistical physicist fascinated by the structure of networks, and along with the Harvard economist Ricardo Hausmann, he has been developing tools designed to study not just economic wealth but also economic structure and sophistication.

Hidalgo and Hausmann think of economies as collections of “capabilities” that can be combined in different ways like an Erector set to produce different products. An Internet retailer, for instance, cannot function without some kind of electronic-payment network. It also needs a working system of postal addresses — not every country has one — as well as reliable mail. Because these capabilities cannot be easily identified and observed, Hausmann and Hidalgo track the silhouettes that the capabilities cast upon trade statistics. If a product is a significant part of a country’s exports, it offers evidence that the country has certain kinds of related capabilities.

Economies that export many types of products are more likely to be sophisticated; products exported only by sophisticated economies are more likely to be complex. Sophistication and wealth do not always go hand in hand. China and India are more complex than their incomes would suggest; Libya’s economy is richer than you would expect but also simpler. When economies are relatively sophisticated but relatively poor, they often have the potential for quick growth, as we have seen in China and India.

Hidalgo and Hausmann have also mapped the world’s “product space” using trade data on 774 product classifications, from cotton undergarments to phenols. These are the gray constellations of products in the charts above. The colored circles are major exports of a given economy (in this case, the United States on the left and China on the right). Products are closely connected on the underlying network if they tend to be exported by the same economies. For example, a range of electronic components is exported by a number of economies (which happen to be in East Asia), so those products are clustered together. China is one of these electronics exporters, hence that cluster of products is highlighted. The United States is not.

At the fringes of the product space are development dead ends. Better-connected nodes represent industries that offer promising prospects for growth. Hidalgo can show how economies change in structure over time, moving from simpler goods to scarcer, more valuable ones. Countries rarely make radical structural changes. Instead, they generate capabilities gradually, and new industries usually develop from existing ones. Unfortunately, some industries — oil extraction, say, or fishing — do not naturally lead to anything new without a huge leap.

These product maps lead to an uncomfortable conclusion about economic development: they hint at how difficult and complex it may be for government planners to kick-start a new industry — while showing that there are new industries that will struggle to get started without help.

By TIM HARFORD
Graphic by CÉSAR A. HIDALGO and ALEX SIMOES
via NYTimes