Thomas Friedman - The World is Flat

What makes America unique is not that it built MIT, or that its grads are generating economic growth and innovation, but that every state in the country has universities trying to do the same. “America has 4,000 colleges and universities,” said Allan E. Goodman, president of the Institute of International Education. “The rest of the world combined has 7,768 institutions of higher education. In the state of California alone, there are about 130 colleges and universities. There are only 14 countries in the world that have more than that number.”

Take a state you normally wouldn't think of in this regard: Oklahoma. It has its own Oklahoma Center for the Advancement of Science and Technology (OCAST), which, on its Web site, describes its mission as follows: “In order to compete effectively in the new economy, Oklahoma must continue to develop a well-educated population; a collaborative, focused university research and technology base; and a nurturing environment for cutting-edge businesses, from the smallest start-up to the largest international headquarters... [OCAST promotes] University-Business technology centers, which may span several schools and businesses, resulting in new businesses being spawned, new products being manufactured, and new manufacturing technologies employed.” No wonder that in 2003, American universities reaped $1.3 billion from patents, according to the Association of University Technology Managers.

Coupled with America's unique innovation-generating machines— universities, public and private research labs, and retailers-we have the best-regulated and most efficient capital markets in the world for taking new ideas and turning them into products and services. Dick Foster, director of McKinsey & Co. and the author of two books on innovation, remarked to me, “We have an 'industrial policy' in the U.S. -it is called the stock exchange, whether it is the NYSE or the Nasdaq.” That is where risk capital is collected and assigned to emerging ideas or growing companies, Foster said, and no capital market in the world does that better and more efficiently than the American one.

What makes capital provision work so well here is the security and regulation of our capital markets, where minority shareholders are protected. Lord knows, there are scams, excesses, and corruption in our capital markets. That always happens when a lot of money is at stake. What distinguishes our capital markets is not that Enrons don't happen in America-they sure do. It is that when they happen, they usually get exposed, either by the Securities and Exchange Commission or by the business press, and get corrected. What makes America unique is not Enron but Eliot Spitzer, the attorney general of New York State, who has doggedly sought to clean up the securities industry and corporate boardrooms. This sort of capital market has proved very, very difficult to duplicate outside of New York, London, Frankfurt, and Tokyo. Said Foster, “China and India and other Asian countries will not be successful at innovation until they have successful capital markets, and they will not have successful capital markets until they have rule of law which protects minority interests under conditions of risk... We in the U.S. are the lucky beneficiaries of centuries of economic experimentation, and we are the experiment that has worked.”

While these are the core secrets of America's sauce, there are others that need to be preserved and nurtured. Sometimes you have to talk to outsiders to appreciate them, such as Indian-born Vivek Paul of Wipro. “I would add three to your list,” he said to me. “One is the sheer openness of American society.” We Americans often forget what an incredibly open, say-anything-do-anything-start-anyming-go-bankrupt-and-start-anything-ag ain society the United States is. There is no place like it in the world, and our openness is a huge asset and attraction to foreigners, many of whom come from countries where the sky is not the limit.

Another, said Paul, is the “quality of American intellectual property protection,” which further enhances and encourages people to come up with new ideas. In a flat world, there is a great incentive to develop a new product or process, because it can achieve global scale in a flash. But if you are the person who comes up with that new idea, you want your intellectual property protected. “No country respects and protects intellectual property better than America,” said Paul, and as a result, a lot of innovators want to come here to work and lodge their intellectual property.

The United States also has among the most flexible labor laws in the world. The easier it is to fire someone in a dying industry, the easier it is to hire someone in a rising industry that no one knew would exist five years earlier. This is a great asset, especially when you compare the situation in the United States to inflexible, rigidly regulated labor markets like Germany's, full of government restrictions on hiring and firing. Flexibility to quickly deploy labor and capital where the greatest opportunity exists, and the ability to quickly redeploy it if the earlier deployment is no longer profitable, is essential in a flattening world.

Still another secret to America's sauce is the fact that it has the world's largest domestic consumer market, with the most first adopters, in the world, which means that if you are introducing a new product, technology, or service, you have to have a presence in America. All this means a steady flow of jobs for Americans.

There is also the little-discussed American attribute of political stability. Yes, China has had a good run for the past twenty-five years, and it may make the transition from communism to a more pluralistic system without the wheels coming off. But it may not. Who would want all his or her eggs in that basket?

Finally, the United States has become one of the great meeting points in the world, a place where lots of different people bond and learn to trust one another. An Indian student who is educated at the University of Oklahoma and then gets his first job with a software firm in Oklahoma City forges bonds of trust and understanding that are really important for future collaboration, even if he winds up returning to India. Nothing illustrates this point better than Yale University's outsourcing of research to China. Yale president Richard C. Levin explained to me that Yale has two big research operations running in China today, one at Peking University in Beijing and the other at Fudan University in Shanghai. “Most of these institutional collaborations arise not from top-down directives of university administrators, but rather from long-standing personal relationships among scholars and scientists,” said Levin.

How did the Yale-Fudan collaboration arise? To begin with, said Levin, Yale professor Tian Xu, its director, had a deep affiliation with both institutions. He did his undergraduate work at Fudan and received his Ph.D. from Yale. “Five of Professor Xu's collaborators, who are now professors at Fudan, were also trained at Yale,” explained Levin. One was Professor Xu's friend when both were Yale graduate students; another was a visiting scholar in the laboratory of a Yale colleague; one was an exchange student who came to Yale from Fudan and returned to earn his Ph.D. in China; and the other two were postdoctoral fellows in Professor Xu's Yale lab. A similar story underlies the formation of the Peking-Yale Joint Center for Plant Molecular Genetics and Agrobiotechnology.

Professor Xu is a leading expert on genetics and has won grants from the National Institutes of Health and the Howard Hughes Foundation to study the connection between genetics and cancer and certain neuro-degenerative diseases. This kind of research requires the study of large numbers of genetic mutations in lab animals. “When you want to test many genes and trace for a given gene that may be responsible for certain diseases, you need to run a lot of tests. Having a bigger staff is a huge advantage,” explained Levin. So what Yale did was essentially outsource the lab work to Fudan by creating the Fudan-Yale Biomedical Research Center. Each university pays for its own staff and research, so no money changes hands, but the Chinese side does the basic technical work using large numbers of technicians and lab animals, which cost so much less in China, and Yale does the high-end analysis of the data. The Fudan staff, students, and technicians get great exposure to high-end research, and Yale gets a large-scale testing facility that would have been prohibitively expensive if Yale had tried to duplicate it in New Haven. A support lab in America for a project like this one might have 30 technicians, but the one in Fudan has 150.