China comes up for criticism in modern times for stealing software technology from the West.
Software is a language (or a set of languages) which can be used to make computer hardware do marvelous things, and because software is easy to copy (or reverse engineer), it’s easy to steal.
But if there is software stealing going on in China and elsewhere, should we really be concerned about it?
Software development is currently a fertile ground for creative minds to explore because the leverage provided by billions of computers and smartphones networked over the Internet means that a single piece of software can be used to solve problems and delight millions of people. And the additional cost of reaching one extra person is basically zero.
This presents a wonderful opportunity for creative minds to make a big impact.
And when it comes to stealing software, the reality is that creative types have been stealing from each other since the dawn of time.
In ancient times, travelling minstrels would borrow each others words, using the principle that “he writeth best who stealeth best all things both great and small, for the great mind that used them first from nature stole them all.”
In more modern times, Steve Jobs adopted the philosophy of a travelling minstrel, and is well known for stealing many of his best ideas including the idea for the computer mouse which he discovered at Xerox park.
Legal protections for intellectual property like patents and copyright remain important. But not for the reasons that most people will tell you.
The common line in the media is that patents and copyright are important because they protect the innovator’s profits, and therefore protect the innovator’s incentive to invent new technology and continue innovating.
This may be part of the story, and it is certainly true that many people are interested in profit. However, the biggest innovators in history have been the people who have pushed the boundaries because they were interested in the work. People like Galileo Galilei, Leonardo Da Vinci and Steve Jobs. They were not driven by profits but by a passion for the work.
And so, if the most creative people are driven by passion, and will do the work whether they get paid or not, then why are legal protections required?
Well, at the heart of the issue would appear to be the concept of “fairness”.
Discovering new technology is difficult, but copying a technology once it exists is often a task that any fool can accomplish. And once a new technology has been copied, the production process can often be scaled up quite quickly.
What this means is that, in the absence of legal protections, a fast follower might be able to scale up more quickly than the original innovator and thereby take most of the benefits from innovation.
This seems like a very unfair outcome.
And it is not the kind of outcome that is encouraged in countries that champion innovation such as Australia, America, or the UK.
By making legal protections available for new technology, a community can give the original innovator time to scale it up and the chance to make an impact. And this is the community’s way of saying thank you for the gift of a new creation.
An issue arises though when multiple countries are innovating concurrently, each playing by a different set of rules.
Should we be concerned if new technologies are being created in America, say, and then copied and scaled up overseas?
On the one hand, this seems quite unfair. The reason that firms in Silicon Valley are able to innovate and develop new technology is that they are located in a country that supports innovation and provides appropriate legal protections. Having secured these protections, though, many of these firms then turn to foreign companies to help them scale up production. Thereby transferring employment, productive capacity and tax revenues overseas.
It is easy to see how some people might view this as unfair.
On the other hand, most Economists would argue in favour of technology transfer and the offshoring of production to low cost jurisdictions. Average labour costs in China, for example, are low relative to developed countries, and so increased production in China allows the rest of the world to benefit from cheap imports (and Chinese workers to benefit from rising wages). Many young people in China aspire to study in Western countries and buy Western products, and successful Chinese firms are likely to invest overseas. And so, by helping China to become more prosperous, America and other developed countries are helping themselves in a kind of positive feedback loop.
One thing that seems clear is that the creative process involves two separate components. Firstly, it requires some kind of creative leap, which might involve discovering a new technology, or combining existing technology in a way that people really love. Secondly, it requires a viable business model that allows the organisation to provide the new offering at a price which exceeds the cost of production, which is likely to require economies of scale and production experience.
The role of Silicon Valley firms in making the creative leap and pushing the boundaries of innovation is crucial for the creative process. At the same time, however, it might be argued that the role played by low cost manufacturers in places like Shenzhen, China is equally crucial because it allows new offerings to be created at sufficiently low cost to allow for viable business models.
Successfully harnessing humanity’s creative energy clearly requires high levels of cooperation. Lots of people in many different organisations working in various countries across the globe.
Thinking as an Economist, I would argue without hesitation that the more globalisation, foreign direct investment and international trade we have the better it will be for everyone.
However, we need to bear in mind that organisations and their respective country governments will typically care more about their own self interest rather than obtaining the theoretical optimal solution for the world as a whole.
Thinking as a strategist, I would provide some words of caution. When an organisation is thinking about outsourcing activities that provide value for the end customer, it is important to consider how strategically important those activities might be. Will outsourcing lead to the loss of crucial knowledge that will be difficult to re-learn? Is it possible that the supplier will become a future competitor? What are the firm’s competitive advantages and will these be strengthened or weakened as a result of outsourcing? Will the new supplier benefit from economies of scale and so be difficult to compete with later if necessary?
Thinking as a government policy maker, there are some other issues that might be relevant. For example, how many jobs and how much tax revenue might be lost as a result of local firms sending production overseas? Instead of providing welfare payments to unemployed people, would it make more sense to provide subsidies and tax incentives to encourage firms to incorporate and build production capacity locally rather than overseas? Is the outsourced knowledge important for national security? Are domestic firms outsourcing production to a country whose government is uncooperative or hostile to the values of the domestic country?
We live in a world where robots and the automation of work could lead to unprecedented levels of unemployment over the coming decades. And so, it has never been more important for individuals, firms, government and the world at large to think about how we can harness our collective creative energy.
Globalization will have a large role to play, but it will also be important for individuals, firms and our respective governments to act independently and work for the benefit for their respective stakeholders. Through cooperation, we can all be made better off.