Economic Force: Free Flow of Information

The Internet has radically changed the availability and cost of information.

How Information Flow is Shaping the Economic Landscape

The Internet isn’t just moving advanced technology across town, or across the nation. It’s moving it from one nation to another, from areas of high concentration of technology to areas of low concentration. It is leveling the playing field.

This revolution of information access is at least as important as the other major revolutions, such as the Industrial Revolution of the late 19th century. The graph below shows the exponential growth in access to information via the Internet

It’s an Economic Earthquake

Free flow information isn’t simply a technological change. It represents a fundamental and massive economic force. The economy cannot remain static in the presence of such a powerful shift. The strategies that will work in tomorrow’s economy must take this revolution into account. They must recognize the effects and harness the power of this force in order to be successful.

What is the economic impact of free flow of information? How does it affect today’s business climate? How does it affect your job? What should be our national policy on information flow in the years ahead? Let’s explore these questions in detail.

The Economic Impact of Free Flowing Information

Let’s examine how the flows of information have changed in the past 15 years. Think of outsourced software development, and global supply-chain management, and online patent databases, open-source software projects, and Wikipedia. Think about AliBaba, the web-based global marketplace for manufactured items. Everyone has nearly equal access to the latest technological information, regardless of which society created that knowledge. This has produced a sudden and accelerating shift in the relative capabilities of whole nations, and has moved entire economies away from certain kinds of economic activity and toward others. Manufacturing has moved to emerging economies. Technical skill has followed via the outsourcing boom. If manufacturing know-how and technical know-how has flowed around the world, can other forms of know-how be far behind?

In addition to changing the worldwide competitive-advantage landscape, the Internet has clearly transformed many areas of our society, such as media, entertainment, commerce, and the retail shopping experience. The presence of a mechanism to quickly comparison shop prices and get the lowest one, or even to conduct online auctions has meant a huge shift toward online shopping, at the expense of local retailers and, of course, jobs. But the elimination of retail and other service sector jobs has not been the only result of the internet explosion. The internet has also had a fundamental impact on other forms of employment as well.

Leveling World Wage-Rates

Most studies place the percentage of workers that are classified as knowledge workers anywhere from 30-50% of the workforce in the most service-oriented economies, such as the UK and US economy. A knowledge worker is one whose contributions depend on the development and synthesis of ideas. While knowledge work has expanded and is expected continue expanding, knowledge workers in the developed world are facing fierce price competition from the places where the information is now more freely flowing. This isn’t your ordinary price competition, though. A software engineer’s salary in an emerging market can be 10% of the salary in a developed country. In other words, an engineer in India may make $7,000, while his U.S. counterpart expects to make $70,000. In a globalized economy, who will win this price war?

Opening the Floodgates – Open versus Closed Intellectual Property (IP)

On a recent trip to an aerospace museum in Tucson, Arizona, I was standing in front of a Kaman HOK-1 Twin Rotor helicopter when I met a man with an interesting story to tell. As I studied the design of the helicopter and commented on it, the retired engineer standing next to me told me what really impressed him about Kaman. It wasn’t their helicopters, it was their bearings. He told me the story of his days designing landing gear for companies such as Boeing, and how no company could match the Kaman self-lubricating bearing products. Nobody knew what was inside, and for the longest time, Kaman would not even file a patent on their technology, because that would mean they would have to disclose how they did it. Kaman shut others out of their market for years and successfully deployed their bearings on many aircraft platforms. (http://www.kaman.com/history/history_p.html) Kaman’s approach to information flow was simple – trust no one because then no one can duplicate what you do.

In today’s economic landscape, Kaman’s approach to IP protection and business building is a relic from the past. Today’s corporate strategy is usually built around a different set of criteria. Instead of building basic technology and creating a product line around it, today’s corporations add value to technology they buy. They may develop a market by integrating hardware, and software and meeting an end user need. Instead of technology differentiation, what is more important is time-to-market, head-to-head price competition, and being in the right place at the right time. What becomes deemphasized is the traditional model of building a product line from company owned technology and owning the market because your engineering and know-how is fundamentally just better. One clear culprit in this changing landscape is the free flow of information.

Open development. Open Source. Open Access. Open Architecture. Open Standards. The Open movement has elicited fundamental changes in the way information is shared, especially in the technology industry. The growth of open source software projects, for instance, has been exponential in the past decade. What is interesting is to compare the graph below to the growth of the internet. Clearly, the more information flows, the more collaboration between people occurs. This is very evident in the open source world.

Source: The Total Growth of Open Source Amit Deshpande and Dirk Riehle Proceedings of the Fourth Conference on Open Source Systems (OSS 2008). Springer Verlag, 2008. Page 197-209.

While it can be difficult to assess the impact of open source on, say, overall software employment levels in the US, it suffices to point out that, overall, open source tends to move the software talent pool away from fundamental technology development and toward a value-add support model instead.

While the software industry has been significantly impacted by the free-flow of information, the domain of computer circuit design has proven much more resistant to this free information flow. So called IP cores (blocks of hardware logic) have been a fixture of the hardware design industry for some time, they are much harder to use in an open development process. In the hardware arena, the notion of selling IP (in the form of IP cores, Application Specific Integrated Circuits (ASICs) and silicon chips) is much more developed. A well known example of IP reuse illustrates this point. Consider the the graphics engine first introduced to the world via the Sega Dreamcast.

Sega’s Dreamcast game console has been called many things, but a roaring commercial success is not among the terms commonly used. However, the PowerVR 3D graphics engine found in the Dreamcast has had an illustrious history. Eventually taken over by silicon IP vendor Imagination Technologies, the PowerVR IP now powers most mobile 3D applications on cellular phones, including Apple’s phenomenally successful iPhone. In this case, the same IP resulted in two very divergent commercial products, but the technology’s creators were able to retain control, and benefited from the investment in basic technology that they created.

Whether for hardware or software, openness is here to stay. Are business models that stress value add, support, agile development, time to market, and customization the wave of the future? Will we lose our capacity for innovative development in basic technology because no one wants to risk capital developing a technology that everyone can use for free? The mechanisms by which innovation is grown, nurtured, and eventually turned into commercial success are key to tomorrow’s economy. How should we prepare ourselves to compete in a world where everyone’s got equal access to information?

Innovation – Relic of a By-Gone Era?

Not long ago, I had lunch with the CEO of the company where I work. He’s in regular contact with the venture capital (VC) community, and during our conversation the subject turned to the current climate for VCs in Silicon Valley. The picture he painted was pretty dark. “Nobody is investing in tech right now. They are all in safe investments with known returns, such as real-estate”. His message was clear – we better be prepared to live – and innovate- off of operating revenues if we were to survive. Funds to grow and innovate were going to be scarce for quite some time.

Venture capital is not the only means by which innovation occurs in advanced economy. Innovation has always been what drives advanced economies such as the US forward. On a recent visit to China, I had this pointed out to me. The Chinese, it seems, have a view of America that many Americans themselves no longer seem to believe in. They see America as a shining city on the hill – of technology and innovation. A conversation with my Chinese host was eye-opening. “We need to work with Americans to get the high tech. We are not so strong in this”, she said. “In China, we have many engineers, but not so many who now how to build the whole system, to design it”.

So, if innovation is the basis of advanced economies strength, but innovation funding is being cut in a risk averse capital environment, where will futire innovation come from especially in the era of free-flow of information? There is no easy answers, but there are some helpful ideas. There are other avenues for innovation funding to take place, such as the U.S. Governments Small Business Innovative Research (or SBIR) program, whereby the U.S. Government conducts targeted research via small businesses to help it solve problems in many areas, especially military technology, and supports commercialization of the developed technology. But relying on government will not be enough. Instead, the new global economy needs a bottom-up approach to nurturing innovation and creating viable businesses incorporating it.

Bottom-Up Transformation and the Information-Enabled Globe

Clearly, we need to adjust to new economic reality. Forces such as the free flow of information are fundamentally changing the economic landscape in ways we are only beginning to understand. The current top-down mechanisms being tried by governments and central banks to restore the economy of yesterday cannot address the long term changes being wrought by these underlying economic forces. Advanced economies are being hollowed out. Their capacity for leadership and growth is being whittled away, while too much treasure, too many resources, and valuable brainpower is being allocated to areas of the economy that may be prifitable but do not further the collective good. The global challenges are great. We can no longer afford to let the situation deteriorate. We need to somehow turn the tables – to harness free flow of information to remake the economy of tomorrow. It will take a bottom-up approach and free-flow of information can be an ally in this endeavor.

How do we do that? We get everyone involved in innovation. We use that free flow of information to equip ourselves to innovate and especially to collaborate. We take innovation to the next level, and we apply it to world-wide problems.

Raising the Level of the Level

Free flow of information is the great income leveller. But it does not have to mean we all are dragged down. Freely flowing information could and should function as an upward leveller. As more knowledge is distributed to more places, the information will begin to elevate areas of the world where future demand must come from. Information can expand knowledge to allow more minds to meet the challenges we all globally face. What must we do? We must learn to better collaborate and exchange information with real problems in mind. Rather than building hundreds of businesses whose goal is to make a cheaper cell phone or different ways to loan money, how about hundreds of businesses whose goal is to make smarter use of agricultural resources? How about smart technology for tomorrow’s farms, or tomorrow’s energy grid? How about low-cost delivery of medical information, in the language it is needed, at the right level, where is it needed? All of these things can be beneficiaries of free flow of information, if we only put it to good use. This is how this massive economic force, the free-flow of information, can be used to create a better world.

This is the first article in the BrainTrust’s “Top 10 Economic Forces” series. The goal of this series is to develop a widely-held consensus about what the major forces are that are moving the world economy. These articles are collaboratively written by the members of the BrainTrust@RealEconomy.Org

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