For the new year, think about this question: What is the purpose of a supply chain? Clearly a supply chain is like a conveyor belt which moves goods and services from supplier nations to the ultimate buyers, usually in developed countries.
But a supply chain does a lot more. I recently wrote a piece entitled “Innovation and the strength of the dollar” for McKinsey’s “What Matters” site. In that piece I pointed out that:
in fact, the conveyor belt moves in both directions: in order to get the cheap goods and services, the multinational has to transfer some knowledge or technology to the supplier countries. This is the knowledge necessary for the supplier to create a product or provide a service. It might be the knowledge required for making the wing of an aircraft, a computer chip, or a living room table. Or the multinational might provide knowledge that enables an overseas call center to respond to questions.
This trade—intangible assets for access to lower-priced goods and services—is not a one-time deal. Technologies advance, products evolve, and fashions change. That means the multinational must continually provide new knowledge to the supplier to stay current with the market. If the supplier ceases to get new knowledge from the multinational, the ties of the supply chain weaken and, in fact, the supplier may become a competitor.
It’s important to realize that this transfer of intangible assets is not picked up by the conventional trade statistics. No one tracks the flow of information from US purchasing executives to the Chinese factories that make shirts for American department stores or the rudder for the Boeing 787. But this information has real value.1
These flows of intangible assets—technology, business knowledge, and market knowledge—are tremendously valuable to supplier countries such as China and India. Intangible assets can greatly accelerate the process of economic development. In fact, it’s clear that without supply chains and offshoring acting as conduits of knowledge from overseas, growth would have been a lot slower in these countries.
This reverse flow of intangible assets helps explain why the export-driven development strategy is such a powerful one. And it also helps explain why China, in particular, has been so focused on holding down the value of the yuan, and so reluctant to switch to domestic-driven growth.
Mandel on Innovation and Growth 
Very well said. I don’t know how anyone can see it otherwise.
I feel that a few global observers and participants are slowly awakening to the reality that there is little left to outsource in the U.S. and therefore little valuable knowledge left to transfer, at least not easily, not to mention little in the way of increased wealth to exploit.
I realize that it is just such negativity that riles many, but it is of the utmost importance to persist in achieving a reality-based view of the way the world works. It may even be that very doggedness that is ultimately what has enabled Americans to achieve all that makes them proud. Trying to envision where this will lead, since protectionist policy seems to be acceptable for every nation except the U.S. I am awaiting the awakening by corporate America that we need products that save us money, not ones that rob us of our wealth for a fleeting moment of satisfaction or an illusion of security.
I’m curious what happens to the dollar when the world realizes America has no genie to pull out of the bottle to make another 90’s boom happen here.
Aha, but we do 🙂 micropayments is the genie, it’s coming out of the bottle this year. The future of the dollar is irrelevant, national currencies will be replaced by private digital currencies.
Ajay,
This year? 🙂 What do you know that I don’t?
I’m not against the idea that national currencies can be replaced, although I’m not aware of any evidence that we’re moving quickly in that direction.
Ajay, CompEng, LAO
It’s so good to see you folks on this blog, makes me feel like I am home 🙂
CompEng, Micropayments will happen soon because it’s the natural momentum of things: why’re we commenting on a blog of a former journalist who’s on his own now? It’s because ads have decisively failed online but many content creators have already moved online, unlike in the 90s when this was all new. On top of that, ad spending has plummeted in the current recession. Out of necessity comes invention: the WSJ mentioned they were doing a mp system last May, that should be out this year. Others are trying it too, somebody will succeed, hopefully me. 🙂 As for national currencies, they were only ever a small part of the equation. In a fractional-reserve banking system, 85+% of the money supply is privately issued, ie private checking/savings, money market funds, and credit cards. The only reason the base fiat currency has any relevancy is because it “backs” the entire system, meaning during rare situations like a bank run some crazy customers demand dollar bills, and most importantly contracts are written with dollar sums. However, Mastercard, VISA, and Amex are essentially private digital currencies, as they have their own distribution network and some places will accept one credit card and not another. It wouldn’t be that hard to take the final step and setup a currency brand, that isn’t backed or enumerated in dollars, particularly online, where the cost of implementation has fallen to practically nil. My point is that national currencies have never been paramount- take for example right now, when the Fed has pumped almost a trillion dollars into bank reserves and yet the banks have the real power as they simply choose not to lend it out- and their last remaining uses are about to be wiped out in the next decade or so.
Put me down as a bit of skeptic here in the short term. I can’t see any reason why things won’t go as you say, but I also see insufficient evidence to believe they definitely will.
For which, micropayments or private digital currencies or both? Micropayments have been long overdue but I think we’re seeing the perfect environment for their conception right now: lots of online content creators, the continuing failure of online ads, and a recession to further squeeze it into a necessity, mother of invention. As for private digital currencies, I’ve already pointed out that that’s the world we basically live in today. I never handle cash and what is the meaning of a dollar when 90% of it is privately issued in the form of checks or savings deposits? Also, most stocks have essentially been debased into private digital currencies, as they provide no dividends or voting rights. The perfect example is Google’s stock, they’ve essentially floated their own currency as their stock gives you no voting rights and no dividends seem forthcoming on the horizon. So when you look at the uses of national currency as a store of value or for transactions, it has already died off basically. The last remaining vestige is that most contracts are still denominated in dollars, that is the one remaining use that floating new private currency brands will demolish. Excising the 10% of nationally printed money won’t happen overnight (largely because a bunch of old people will cling to their cash until they die, just like with newspapers 😉 ), but like micropayments, it is inevitable, only a matter of when.
Mike, glad to be here, 🙂 nice to be able to comment and have it show up right away, rather than the slow movable type install you guys were using at businessweek. I only ever found your blog because I was googling for some data on national wealth and stumbled across your posts with those calculations, then stuck around because I found your posts interesting. In other words, Businessweek had nothing to do with my discovery of your work nor with my sticking around, as I read their news very rarely. On the internet, YOU are the brand, hopefully you can keep improving that brand with interesting posts on this blog. 😀
Mike, wouldn’t miss it 🙂 Keep on doing that thing that you do!
Michael, The pleasure is all mine. Thanks for your kindness, and for delivering the data.
Let me add this: The Mike Mandel habit of mining the data has on occasion delivered “proof” of my suspicions about economic reality that, within my view, was not to be found elsewhere. Interestingly, some of these facts now seem to be common knowledge — the decade’s flatness of 95% of real wages, for instance, though seldom stated with such precision.
Whether you deserve credit for first nailing down such points, I cannot say with certainty, but you’ve been close enough to lead me to keep a close watch. The freedom to connect the dots in my own way, and to see what your findings and inferences mean to others with disparate views, I value highly. So, yes, it is good to find Ajay and Compeng continuing to provide their thoughts in response to your thoughtful triggers.
Does any of the above commenters know if this blog is compatible on iphones? I cant seem to get it to work.