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Everyone reading New York Times has probably come across a recent article that addresses a question many Americans ask, including President Obama: Why aren’t iPhones made in the US?
While this question is certainly of great importance at a time job growth in the US is slow and unemployment is hovering around 9 percent, it downplays the very fact that the iPhone is an American, not a Chinese product. This means that America, not China is the driver of innovation and job growth in the world economy.
A more interesting question that needs to be addressed is: Why can’t China develop its own iPhone?
The answer is that China lacks a very important resource that contributed to the development of the iPhone: Schumpeterian entrepreneurship—that is the discovery and exploitation of new market opportunities; the development of radically new products that make a difference in consumer lives, fostering the growth of new industries and new job opportunities at the same time.
Schumpeterian entrepreneurship is a special and peculiar resource. It cannot be purchased and acquired in the marketplace. Neither can it be imposed from above from an enlightened government bureaucracy. It must be nurtured and fostered within an environment that releases the imagination, ingenuity and creativity of the individual in “examining life,” by exploring new business concepts and ideas, creating wealth and prosperity at the same time. Entrepreneurship must be imbued in libertarian ideas and immersed in a culture that respects and rewards inventors, entrepreneurs, and pioneers.
Obviously, such an environment doesn’t exist in China. The very concept of Schumpeterian entrepreneurship doesn’t blend well with China’s culture of Confucian conformity to existing norms. Throughout the country’s history, the established order saved little respect for inventors, entrepreneurs, and business pioneers.
China’s conformist and at times hostile attitudes towards entrepreneurs is sharply different from those of mercantile Europe, which were imbued with the ideas of Renaissance and Reformation and immersed in the ideas of Francis Bacon—ideas that eventually adopted and disseminated by the American Revolution.
If Chinese society had little respect for business and entrepreneurs in the procommunist era, it saved no respect at all in the communist period when entrepreneurs were considered as part of the bourgeoisie, the capitalist class, sucking the blood and sweat out of the working class, especially during the Cultural Revolution. But even in the last 30 years of communist retreat and economic liberalization, the very concept of entrepreneurship is still different in China than in western societies and even some Asian countries. Instead of being seen as pioneers and risk-takers seeking market rents, entrepreneurs are regarded as heroic, hard-working social leaders, as role models for their fellow workers and society.
The problem, however, is that worker heroism doesn’t nurture innovative companies like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), and Amazon (NASDAQ:AMZN), but 19th century mass-manufacturers like Foxconn that end up making products for these companies.
Worker heroism didn’t work in the past and entrepreneurial heroism wouldn’t work now, not because Chinese do not have the ability or knowledge to pursue innovations; nor is it because of ill-intentioned communist leaders and government bureaucrats; rather, it can be traced to the nature of the Chinese institutions, which cannot follow and catch up with the demands of new technologies and global markets. In spite of the reforms in the post-liberalization period, Chinese enterprises generally lack the information, the freedoms, and the incentives to develop pioneering products, because they remain “units” within a central plan rather than “firms,” within a market economy.
Within this institutional framework, entrepreneurship begins with the supply side of the market, with resources, rather than the demand side, with consumers, as is usually the case in market economies. Such an approach may be rational from the perspective of Chinese planners who are in command of enormous resources and are anxious to find some quick uses that will produce short-term growth. But it is irrational from the perspective of fast-moving global markets where consumers rather than central planners are at the center of the economic universe.
To be fair, not all American companies understand and apply this mind-set. A number of technology companies from Eastman Kodak (NYSE:EK) to Cisco Systems (NYSE:CSCO), Hewlett-Packard (NYSE: HPQ), Research in Motion (NASDAQ:RIMM) and Bank of America (NYSE:BAC) have regressed from a consumer-driven entrepreneurship to supply-driven entrepreneurship with dire consequences for their stakeholders.
The bottom line: The iPhone is an American, not a Chinese product. Americans shouldn’t be blindsided by China’s 19th century manufacturing success. America should be the home of companies like Apple that create high-paying jobs in a modern capitalist environment, rather than the home of Foxconns that create low-paying jobs in an outdated capitalist environment.
