Coevolving Innovations

With the primaries in the United States making headlines, Americans have been making noises about revisiting NAFTA. Michael Hart and William Dymond provided a Canadian perspective¹, with a global perspective on the larger trends.

If our neighbours elect a Democratic president, Senate and House on Nov. 4, things could get ugly, as a falling U.S. dollar, the credit crunch and serious troubles in the housing market add to recession anxieties.

The target for much of that ugliness will be China and other low-cost suppliers to the U.S. consumer market. Most Americans do not have much understanding of the role of these suppliers in maintaining U.S. economic activity. Both politicians and the public fail to realize the benefit of Chinese manufacturing goods produced to U.S. design and using U.S. technology. A recent University of California study found that, of an Apple iPod sold in the U.S. for $299, $160 goes to American companies that design, transport and retail iPods. Only $4 stays in China with the firms that assemble the devices.

I was curious about that $4, and tracked down the report to the Personal Computer Industry Center (PCIC), part of the Alfred P. Sloan Foundation. The paper by Dedrick, Kramer and Linden² has some interesting tables. Here’s a breakdown from the $299 retail price of the iPod.

Table 5. Derivation of Apple’s Gross Margin on 30GB Video iPod

Retail Price	$299
Distributor Discount (10%)	($30)
Retailer Discount (15%)	($45)
Sub-Total (estimated wholesale price)		$224
Factory Cost	($148)
Remaining Balance (estimated Apple gross margin)		$76

Source: Authors’ calculations; see text

The “new economy” of the 21st century can be interpreted in many ways. One foreshadowing view appeared in 1973 with The Coming of Post-Industrial Society by Daniel Bell. It can take academics years to accumulate enough data as evidence of real societal change. I had seen some cool diagrams in a presentation by Uday Karmakar in April 2007, so I searched for some more background. On the Papers & Articles page at The Business and Information Technologies (BIT) Project, I found a June 2007 paper¹. The tables at the end of the publication say three things:

• The distribution of GNP (in the U.S.) has shifted from delivery forms of products to services; and from end products of material to information.
• The annual growth rates of value added are much higher in end products of information than material.
• Services dominate employment, and information workers are better paid.

To make these ideas more digestible, I’ve reoriented and colour-coded the data.

Distribution of GNP

Read this chart in the following way: the trends (i.e. the direction in which the lines are moving) have been a shrinking brown box in the upper left, with an expanding green box in the lower right.

Japan would seem to be a wonderful place to live, socially and economically. Merrill Lynch ranks Canadians as #2 in the G7. Here’s a summary that I’ve put together from news sources.

John Partridge, in the Globe & Mail, explains how these numbers are calculated:

I’m giving a lecture on business innovation at the University of Hull Business School this week. Preparing the lecture, I thought I might start with Schumpeter. Although some of the 1934 work, The Theory of Economic Development, is available on books.google.com, the more popular 1943 work, Capitalism, Socialism and Democracy (which writes more about “creative destruction“) isn’t.

Jennifer took me over to the University of Hull library, where there’s a really old volume, with the following publication information.

CNNMoney had a headline that the cheapest place in the world to buy an 2GB iPod Nano was in Canada.

Working from up from the bottom of the list, the next-cheapest locations for an iPod were in Hong Kong, Japan and the U.S.

The iPod is most expensive — by far — in Brazil, with India and Sweden next in line.

The writers point out that, at current exchange rates, the iPod is actually cheaper in Canada than in China, where the product is manufactured. Shipping costs seem to matter less than currency issues, with the U.S. dollar noted as undervalued.

On the other hand, The Economist recently posted its Big Mac Index. This long-running statistic had its 10th annual release in 1998, so we’re coming up to the 20-year point for that measure.