This week, I would like to share the concept of “sinking skill ladders” developed by my co-author Phanish Puranam. It is a very smart idea. Since it was published in our joint work, India Inside, the concept fortunately for me, also has my name on it. I will briefly describe it but for those interested in reading more about it, the longer exposition is in the book or as a TED video.

Impressed by their Indian talent in the United States, an increasing number of multinational corporations (MNCs), including those headquartered in Silicon Valley, have set up R&D operations in India. In 1985, Texas Instruments became the first major technology MNC to establish a R&D facility in Bengaluru. Since then, many other firms have followed suit, at an escalating pace. Cisco Systems placed its second global R&D headquarters in Bengaluru to leverage India’s engineering resources and develop products for emerging markets. India is also the Yahoo! base for product and service development aimed at emerging markets. AstraZeneca, General Electric (GE), Intel, Microsoft, and Google all have global R&D centers in India. Estimates vary widely, but a 2010 study counted 750 R&D subsidiaries of MNCs employing over 400,000 professionals in India.  Considering that the historical practice for R&D centers has been to locate in the country in which the MNC is headquartered, this figure is remarkable. Yet, some observers would argue that the USA and the rest of the developed world does not have to worry about this phenomenon of R&D centres in India as only the bottom end of the innovative work is being sent to India.  However, consider the problem of sinking skill ladders.

A skill ladder in a particular career or profession implies that to do highly sophisticated, innovative work, a person must have engaged in less sophisticated work in the earlier stages of his or her career. Few firms recruit a recent university graduate to handle their high-value-adding activities; rather, new entrants must work their way up each rung of the ladder. A person cannot become a partner in a consulting firm without having been an associate. Nor can an investment banker do so without serving as an analyst, a professor without having been a student, or the head of a clinical research team without having worked as a research assistant. In each case, the junior people’s contributions are valuable but often fully separable from the work of senior people. Yet the senior staff members know exactly what their juniors do, because of the seniors’ previous experience as juniors. Without such knowledge, the seniors arguably cannot do their own jobs effectively – including making use of inputs from juniors.

The increasing use of Indian R&D centers by the most innovative MNCs in the world, at least to do highly vertically segmented work (i.e., developments far removed from the consumer), implies that this ladder now extends to India. Because the lowest rungs of the skill ladders for many innovation-related jobs are grounded in countries outside the West, the ladder has been fractured over geography. How can companies get the steady supply of people for the higher rungs if the lower rungs of the skill ladder are in a different geography? This problem is not merely an issue of getting people to move across countries (from India to wherever in the developed world the MNC is headquartered), though that in itself is complicated enough, especially considering the modern immigration policies of most Western economies. Rather, the act of moving the lower end of a skill ladder to an India or a China can be self-perpetuating. With the initial steps on the ladder moved out of the West (or now less remunerative), Western university students are less likely to opt to invest in climbing the first few rungs. The limited availability of students in turn reinforces moving the lower rungs of the skill ladder offshore, and so on.

To be clear, we are not likely to hear a great sucking sound in Silicon Valley. That is highly unlikely. Nor are the R&D centers of global technology and science-based companies in the West likely to shut down tomorrow.  But the hardware or pharmaceutical company deciding whether to open a new R&D lab in New Jersey or Basel will increasingly need to justify why not Bengaluru or Hyderabad, where technology specialists are relatively plentiful and cheaper. Thus, the locations where MNCs choose to develop their innovation capabilities in the future may change dramatically relative to today’s received wisdom.

This week’s closer is the 2016 Internet Trends by Mary Meeker. Very interesting as always. Some highlights:

• Page 22 and the change from 1985 when 2/3 of global growth came from USA, Western Europe & Japan to 2015, when 2/3 of the growth comes from China and Emerging Asia
• Page 25 with dramatic picture of transformation in Pudong
• Page 38 which explains why global growth is going to be so hard with indebted governments, low population growth, and slowdown in China
• Page 44 as Facebook and Google account for 76% of Internet advertising in USA and their share is growing!
• Page 46 on the nuisance of video ads
• Page 87-88 where it shows the example of sports and relates to the last week’s post of mine on “is Facebook Biased?” This is a better example of social viewing of TV
• Page 93 is the average US user spending 41 minutes a day on Facebook? Makes me feel less guilty about the 2 minutes I spend every morning quickly hitting a few likes and wishing happy birthday
• Page 117 on voice as the new interface
• It is worth looking at the rest as the specialized topics like Auto industry, China, and Data Analytics come at the end

Warmly

Nirmalya

Magic Dust

http://nyti.ms/22EdKPU