Ask leading senior executives in the United States, Western Europe or Japan how they intend to cope with the challenges of China and India, and you'll get a familiar response: "We shall move higher in the value-added chain." China might be the "world's factory" and India the "world's back office", but the conventional wisdom reassuringly says, "Cheap manufacturing may migrate to China and cheap services to India-but innovation will remain in America."
The conventional wisdom is a myth. Emerging multinationals in China and India are no longer satisfied with imitating. Instead, they seek to convert cost advantages to more sustainable competitive advantages-often through innovation.
Competition for Innovation
Prosperity is based on productivity, which is rooted in innovation. Often, innovation is measured by input indicators, such as research and development (which reflect the willingness to invest but do not guarantee the ability to excel). Output indicators, such as patents, also measure innovation.
Throughout the 1950s and 1960s, the United States set the standards for prosperity, productivity and innovation. America enjoyed superior leadership in science and technology, R & D and the emerging sector of information and communication technology (ICT) goods and services. After World War II, the economies of Europe's leading nations and Japan were too devastated to pose a competitive threat to U.S. multinationals, which were barely exposed to international competition. Since the late 1970s and 1980s, the innovative capacities of OECD countries have converged substantially.
Like the UK, Germany and France in the postwar era, China and India are now accelerating catch-up efforts and seeking to move higher in the value-added chain. Take, for instance, recent developments in ICT.