Why Andy Grove Is Wrong About Job Growth

In Bloomberg Businessweek's recent cover story, Intel co-founder Andy Grove writes of the need to create American jobs. He points out that although invention still happens in the U.S., the manufacturing—of even the most advanced technologies—is done abroad. America's consumers benefit from lower prices, and its corporations reap higher profits; but American industries lose the critical knowledge of how to scale technologies from prototype to mass production. Grove is right about the importance of creating jobs and keeping R&D in the U.S. But his proposed solution—levying a tax on the products of offshored labor—will do nothing more than resurrect the ghost of the 1930s Smoot-Hawley tariff. Many historians credit this tariff with igniting a global trade war that contributed to the Great Depression. Things have changed a lot since Grove was building Intel (INTC) in the 1970s and '80s. We cannot recapture a bygone era. So let's start by understanding the new realities and develop more enlightened policies.

The New Realities

First, even the bluest of blue chip American companies aren't really American anymore: They typically get more than half their revenue from abroad. Take Hewlett-Packard (HPQ), Caterpillar (CAT), and IBM (IBM). They generate two-thirds of their sales in foreign markets. Intel's proportion is even higher: 72 percent of its revenue now comes from abroad. To create jobs, Grove advocates a trade war and says we should "treat it like other wars—fight to win." The problem is that American companies will be the first casualties in such a war, and American jobs will be lost. There is no way to win.

Second, do we really want the types of manufacturing jobs being created abroad, at companies like Foxconn? The recent spate of suicides at Foxconn's giant factory complex in Shenzhen, China, was attributed to the mindless work and repetitive tasks that its employees had to perform, day in and day out. Things were different at the turn of the century and after the Great Depression, when American workers did not have the education and skills to perform higher-level chores, or were desperate for any kind of work. I doubt that even the most depressed regions of America would want to be home to factories that pollute the environment, pay minimum wage, and work at the profit margins of these sweatshops.

Third, the majority of new jobs created in the U.S. aren't created by companies like Intel, but by startups. The Kauffman Foundation's analysis of Census Bureau statistics shows that net job growth in the U.S. economy occurs only through startup firms. From 1977 to 2005, existing companies were net job destroyers, losing 1 million net jobs per year. In contrast, new outfits in their first year added an average of 3 million jobs annually. Having small firms scale into large firms is important, but the cycle of destruction of old industries and the creation of the new has given the U.S. its greatest global advantage. Protecting old industries isn't the best way to reduce unemployment; it is a sure road to downsizing.

Proposals for Job Creation

So, what types of policies will lead to job creation?

Let's start by first recognizing that globalization will disrupt industries and cause job losses in one industry while creating jobs in another. We need to upgrade our investment in workforce training and development as a national priority. We need to have the concept of lifelong education become part of our culture. Education doesn't end when you graduate from college; that is when it begins. This is the best way of staying ahead in the global race for skills.

Second, we need to foster entrepreneurship at the source: the workforce. My team's research has shown that most high-growth companies are founded by middle-aged workers who have extensive industry experience, want to capitalize on their idea, and want to build wealth before they retire.What inhibits Americans from starting companies is a lack of knowledge of how to do it, lack of financing, and fear of failure. Clearly, not everyone is cut out to be an entrepreneur, but a significant proportion of the workforce can be taught to start successful companies and create jobs.

Third, we need to recruit the world's best and brightest to the U.S. and do all we can to keep here those already in the U.S. on temporary visas. My team's research has also shown that during the recent tech boom, immigrants founded more than half of Silicon Valley's startups. In recent times, they have contributed to more than a quarter of U.S. firms' global patents and helped boost U.S. competitiveness. These skilled workers tend to be highly educated, to understand foreign cultures and markets, and to be highly entrepreneurial.

Fourth, we need to more effectively tap the gold mine of knowledge and innovation locked in our universities. We've invested on the order of a trillion dollars in university research over the years. Yet we have consistently failed to convert all but a tiny fraction of these lab breakthroughs into actual products and further economic activity. We need to harness this innovation treasure by building mechanisms to break the innovation logjam at the source—the nexus between the scientists who make the discoveries, the universities that market the discoveries to the world, and the entrepreneurs with domain experience who could take these discoveries and turn them into products.

Last, we need to provide incentives to American companies to keep research in the U.S. Grove didn't mention the huge incentives that countries like China provide to Intel and other tech companies. The lure for them isn't just cheap labor (with lax labor regulation), but also heavily subsidized infrastructure and cash subsidies. We may have to level the playing field in industries where other countries aren't playing by the rules. But we need to be smart in how we do it.

There is no doubt that the U.S. has reason to worry about its competitiveness. China, India, and many other countries have learned the secrets of America's success—its open economy and capitalist ways. They are trying very hard to become like us. Let's not become like they used to be.

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