Creakonomics Part 3 — Global Local Innovation Alliances

President Obama has focused much of the US Presidential election on Mitt Romney’s outsourcing American jobs overseas during his time at Bain Capital. What really stings about the attack is it rings true.

Writing in the New York Times economics blog, Nancy Folbre does a good job of describing the process and impact :

“technological agility threatens to render national borders almost irrelevant. The result is a process of strategic investment that often yields high profits without generating employment or tax revenues in the United States.”

More accurately, globalization, or innovation, which I believe is a more accurate descriptor, is redrawing borders completely. As Folbre writes, innovation can leave disruption, and particularly national and incumbent disruption, it its wake. Innovators and innovations are not only redrawing borders, but also are redrawing alliances, interests and friendships. In the process, it is affecting culture as well.

If I were to redraw the map today, the world essentially can be broken down into two economies (hint: it is not the OECD and others). On the one hand, you have innovation economies. Even in the wake of 2008, these innovation economies are doing well both on an absolute and relative basis. Innovation economies show some or all of the following characteristics: Risk taking culture, small and nimble companies, outsourcing or partnering on non-core functions, and they live outside the regulatory strictures. On the other hand, you have status-quo economies, which are disintegrating at an ever-increasing pace. Status quo economies and businesses tend to be defined by a few characteristics: Large numbers of employees, integrated corporate functions, they are meaningfully impacted by regulation.

Internet and mobile technology coupled with global mobility and connectivity has accelerated the rate at which innovation economies are attacking and dismembering status-quo economies and businesses. And, as I mentioned above, they tend to partner, outsource and collaborate non-core functions so as they move to unseat status-quo incumbents, they are finding new, like-minded partners all over the world to collaborate with in this process. This process of cross-world and cross-function collaboration is redrawing business alliances and reinforcing cultural ties between innovation economies. This cultural affinity of innovators and innovation centers is what enables an entrepreneur like Joel Gascigone to take his start up Buffer from one innovation center to another and feel completely at home.

When you begin to think about a 21st century economic alliance, we can throw the OECD in the garbage. Instead, we can start thinking of Global Local Alliances between innovation economies. The charter members are fairly obvious: Silicon Valley, Tel Aviv, Berlin, New York City (thanks to Mayor Bloomberg), Cambridge, England, Bangalor, India, Shanghai, China (feel free to add others including possibly Singapore). Notice that these are all cities and not countries. Notice that a very large number of the companies and products that were not here 20 and 30 years ago and today impact our lives come from these locations. Innovators, people and companies from these cities all speak the same language of innovation. They are culturally similar and are net global generators of new employment. However, as Folbre points out, they are not “national” generators of employment. This is disruptive and, in a “national” election, it is great fodder for TV ads.

Over time, these globally focused but very local innovation economies will eat more and more of the status quo economy, biting into the big employers like banks, insurance companies, automotive companies, telecom providers by using technology and partnering to automate functions and dismember 20th century corporations through partnerships and collaborations. Their increasing nimbleness, alternative currencies, global nature and innovativeness will also deprive national governments of tax revenues and thereby its social welfare functions.

Therefore, we need to completely rethink the size and nature of government, government services and how we provide them. We need to rethink political and strategic alliances between nation states (if that will still be relevant). We need to rethink security alliances. Without going too far afield, I would argue that national identity is weakening significantly and economic and religious/tribal identity are ascendant. When you think about the vast swaths of the world being left behind by the pace of innovation economies, we can understand a lot of the national and social unrest. And it is accelerating. Some will find salvation in the economy and others in community and religion and some in both.

So, for those leaders who want to look to the future, recognizing the shifting economic sands and acting differently, is critical to the economic and social well-being of your constituents. Therefore, to state the obvious, if you are the mayor, governor or President of a city, state or country that is not in the above list, what you want to do is partner with the innovators in these cities. Other than trying to become an innovation economy, your next best economic policy is to try to develop goods and services that provide service to or benefit from the innovation economies.

What follows is that the natural economic alliance of the 21st century is the OICG (Organization of Innovative Cities Globally). This organization will need to develop loose policies around IP, Taxes and protocols to keep pushing innovation forward for the development of the world. It will need to lead the way economically as existing national structures try to regulate the status quo economy into a sustained comatose existence and existential peril. These Innovative cities and innovation centers, will also need to rethink social policies for those around them. Silicon Valley will need to rethink its responsibility for Sacramento and Stockton and Tel Aviv will need to think about Sderot and Netivot and perhaps even Athens.

It is critical that innovation economies begin thinking about how they will provide many of the services that governments will be increasingly unable to provide. How will innovation economies upscale the skills of others around them and bring them into the innovation economy? In tribal, religious and global brotherhood, we have responsibility for each other. That is a basic tenet of humanity and every religion. If existing government institutions and structures are unable to keep up, nor provide and enable our fellow brothers to be successful, it is the responsibility of innovators and entrepreneurs to do that. Something like an OICG can begin to lay the groundwork for that. This is not anarchy nor diffuse democracy but rather a blueprint for a nimbler, innovative and responsible government in the face of dramatic economic change.

The creaking you hear and see in the status quo economy and national governments resulted from manifold causes. Placing blame is pointless. However, further reinforcing the status quo through regulation and Creakonomics is only accelerating the sclerotic rot and will make the end-game that much harder. We need an equally accelerated discussion and decision on how we redraw economic alliances, security alliances and social responsibility around innovation before it is too late.

[Originally published on 29th August 2012 by MIchael Eisenberg]