Blueprint for an American comeback

When we read the manuscript of Joel Kotkin and Yoriko Kishimoto's new book, we were struck by its fresh perspective on the economic future of the United States. The rise of the Pacific Rim countries, the authors argue, presents historic opportunities as we begin our third century. -- The Editors

As it enters its third century under the Constitution, the United States confronts unprecedented questions concerning its essential character, its mission as a nation, and its ultimate destiny. Until this decade, Americans comfortably identified themselves as the vanguard of a European-based Western civilization that since the 1600s has imposed its will on the other peoples of the world.

Today that once-supreme confidence in the superiority of the West no longer conforms to reality. In 1900, Europe itself accounted for more than 36% of world trade and controlled much of the commerce of Asia, Africa, and North America. Today, however, its great empires are only a memory. By 1980 Europe's share of world commerce had shrunken considerably.

The world's economic center lies not along either side of the Atlantic, but among the cities and states of the Pacific Rim, which account for an increasingly large share of international commerce. This shift in economic power from the Atlantic to the Pacific, however, need not be bad news for America. Nothing about it automatically consigns this country to second-class status as an economic power. On the contrary, the vast changes taking place in the world economy present historic opportunities for the United States.

The evidence of a changed world is everywhere. In 1960, America's trade with Asia was just over half its trade with Western Europe; within 20 years, trade with Asia was the larger. By 1986, U.S. trans-Pacific commerce reached $215 billion, exceeding by more than 50% its trade with Western Europe. And if our trade with Asia keeps growing at current rates, according to a report by the President's Commission on Industrial Competitiveness, by 1995 it will be twice that with the Atlantic-facing world.

The first order of business in building a successful American future lies in redefining our relationship with the East. The Pacific Rim represents the crucible of the new economic forces. With the highest economic growth rates in the world, this region since 1960 has notably boosted its share of the international economy. As late as 1960, Japan's gross national product was smaller than that of Great Britain, France, or West Germany. By 1986, it was 30% more than that of Britain and France combined and more than twice that of West Germany.

Today Japan stands behind only the United States as the free world's foremost economic power and has emerged as a financial leader. In the late 1980s, Japan also has control of more than one-quarter of international banking assets -- slightly more than the United States.

But even as Japan stretches for the economic pinnacle, its place as number one in Asia is rapidly being challenged by other ascendant nations. From grinding poverty only a quarter of a century ago, the newly industrializing economies of Asia -- Hong Kong, Taiwan, Singapore, and South Korea -- have enjoyed the developing world's fastest economic advances. Once destitute, South Korea now boasts an economy larger than such industrialized European nations as Denmark and Austria. Korean officials believe this is just the beginning. "We'll overtake Britain in less than 20 years," predicted Yu Hee Yol in 1986, while director of technology transfer at South Korea's Ministry of Science and Technology.

Although still desperately poor, China is also emerging as one of the world's largest and fastest-growing economies. Between 1977 and 1985, China doubled its GNP in constant dollars. In 1985 alone, China's growth was larger than the entire GNP of South Korea.

The past decade hasn't been nearly so bright for Western Europe. In the wake of the great "European miracle" of the postwar years, the 1970s ushered in a period of decline on the continent, with Europe's economic growth rates falling well below those of both Asia and the United States. Once the dominant traders of the world, Western Europeans today trade mostly among themselves, and increasingly with the controlled economies of Eastern Europe and particularly the Soviet Union.

Even the much-discussed plans for European economic unification in 1992 cannot obscure the harbingers of continental decline: a decade of flat levels of industrial investment, rising unemployment, slow growth rates, and fading technological leadership. And even if somehow Europe can correct its current economic deterioration, demographic trends seem almost certain to reduce its role as a marketplace. In its era of great expansion during the eighteenth and nineteenth centuries, Europe experienced an unprecedented population explosion, both creating a large urban work force and spurring the colonization of much of the globe. Today large-scale immigration, mostly from Asia and Latin America, keeps the U.S. population growing, but Europe's reluctance to admit newcomers consigns it to a rapidly aging, and eventually shrinking, population.

Since 1975, West Germany has suffered a net loss of about one million people. By the turn of the century, most other major Western European nations -- including Great Britain and perhaps even Italy and France -- are also likely to begin to experience population decreases. Demographers estimate that by 1990 Europe may account for less than 10% of the world's consumption of goods and services, a figure that could drop to little more than 6% early in the next century. The era of Europe as the home of the world's preeminent metropolitan areas is also coming to a close. According to a United Nations estimate, by the year 2000, 6 of the 10 largest cities in the world will be on the Pacific Ocean; none of them will be European.

* * *

America already is in a remarkably good position to profit from these wrenching changes. Until now the U.S. economy has remained an unusually open system -- characterized by relatively uncontrolled access to capital, new-business formations, bankruptcies, and all the other messy turbulence of free-market capitalism.

This open system, in turn, has spawned a dynamic entrepreneurial culture, the nation's greatest asset in the years ahead. Even as many of the nation's largest companies have retreated before the competition from Asia, others, including many founded by immigrants from those same countries, are creating new industries and companies at an unprecedented rate. In the nation's third century, these children of America's open system represent the most crucial asset, the key ingredient for prevailing over ascendant Asia.

Despite its critical importance, there is a growing tendency among liberals and conservatives alike to urge the basic abandonment of this open system. The post-Reagan political atmosphere will likely be colored by acceptance of the superiority of role models that embrace mercantilist strategies using government policy and planning to develop and maintain trade surpluses.

Kevin P. Phillips, a leading conservative thinker, openly calls for a tough-minded "nationalist" business strategy. "American businessmen, facing foreign competition underwritten by business-government partnerships," notes Phillips, "must set aside old concepts of laissez-faire and adjust to -- even advocate -- new kinds of business-government collaboration.'

At the other end of the economic spectrum, Robert B. Reich, perhaps the most influential of the new statists, urges Americans to abandon the legend of Horatio Alger, the central leitmotiv of the American economic dream, and leave "the myth of the self-made man" behind forever. The new realities of international trade, Reich argues, have made entrepreneurs -- with their limited capital and human resources -- poor economic risks. Because they "short-circuit progress," opportunistic individuals are no longer appropriate to "our place in the world.'

To meet the challenge of world competition, Reich maintains, Americans should turn to the "stewardship" of government and business leaders. Rather than look toward the American "open system," Reich argues that the best blueprints for the future lie in ministry and corporate offices in Tokyo, Bonn, and Paris.

To a nation once certain of its historic mission, the widespread yearning for foreign models represents a major psychological watershed. To scrap the open system and rely instead on government planners and huge corporations would amount to discarding a prime source of the American economy's capacity for self-renewal.

The United States is unlikely to get the growth it needs through the large corporations that Phillips and Reich discuss. In 1968, U.S.-based multinational corporations dominated both the nation's business and much of the world's as well. Eighteen of the world's 20 largest industrial corporations were American based. European nations perceived these giants as powerful enough to threaten national independence itself. In his 1968 book The American Challenge, Jean-Jacques Servan-Schreiber warned, "We are simply letting European industry be gradually destroyed by the superior power of American corporations.'

Two decades later, however, that once overwhelming power has faded considerably. Between 1959 and 1978, the world market share of the top U.S. companies dropped between 30% and 50% in such key fields as pharmaceuticals, chemicals, electronics, and aviation. Some of America's great companies -- notably IBM, Hewlett-Packard, and 3M -- remain world leaders, but in far too many fields it is Asian competitors that clearly have seized the initiative.

In a country without America's unique renewal power, such a development could have proved disastrous. When Britain's great corporations -- such as British Steel, British Leyland, and Upper Clyde Shipbuilders -- began failing in the years after World War II, so also did the British economy. But America's experience has proved different. Although plagued by trade deficits, the American economy in the 1980s has revealed surprising strengths. Once beset by relatively high unemployment and persistently sluggish growth, the United States has recently been outperforming most of its major industrial competitors on both counts.

Behind this renaissance lies the emergence of a host of new growth companies that have risen to rapid prominence unparalleled in any major industrialized country. Even as Fortune 500 companies such as Sperry and Kaiser Steel fell from the ranks of the elite, new ones developed to take their place. Between 1979 and 1986, 9 companies from INC.'s list of the 100 fastest-growing small public companies -- running the gamut from computer manufacturers Tandem and Apple Computer to such service firms as Federal Express and Southwest Airlines -- vaulted their way to the ranks of the Fortune 500 and the Fortune Service 500.

The structure of the economy as well as the cast of characters has changed dramatically. Once dominated by a seemingly irreversible process of consolidation, the economy in the 1970s began generating record numbers of new businesses. In 1985, more than 700,000 new corporations were formed in the United States, up from 200,000 two decades earlier. Between 1977 and 1985, American companies with fewer than 100 employees generated 89% of the roughly 18 million new jobs created. In contrast, Fortune 500 companies, after increasing payrolls in the late '70s, lost 2.8 million positions between 1980 and 1986.

While many American leaders seek to emulate the tightly ordered economic systems of Japan and some European countries, people in those and other nations see in America's entrepreneurial system the presager of the economic future. Faced with rapidly contracting product-development cycles, growing competition from other Asian nations, and the burgeoning of niche markets, Japan -- according to a 1986 Ministry of International Trade and Industry report -- must move away from a reliance on the "organization man" and toward individuals with such entrepreneurial characteristics as "adventurousness and strong individualistic leadership." Similar realizations have sparked radical decentralization and privatization of economic activities in Europe and even China -- and, in the future, perhaps the Soviet Union will follow.

In the coming competition, the edge will belong to those nations and companies strong enough to nurture individual initiative, creativity, and quick decision making. With the explosion of entrepreneurial vitality in the past decade, the United States -- which provided the role model for the mass-production methods and giant companies of the past -- could again forge the next great economic paradigm.

* * *

The entrepreneurial culture is a vital ingredient of America's economic future. But success in this new Pacific era also will require new attitudes from businesspeople and policymakers. The changes this country will undergo during the next 50 years will challenge racial stereotypes and expand our concept of America as the great melting pot.

As if it weren't enough for the economy to reposition itself to Asia, American society itself is also going through a similar process of de-Europeanization. Today the Pacific Basin countries constitute the largest source of new legal immigrants, with Europeans accounting for barely one in 10 newcomers. The object of the greatest wave of immigration since the turn of the century, the United States is no longer simply a melting pot of various European peoples, but an emerging "world nation" with ethnic ties to virtually every race and region on the planet. By the end of the third century, an absolute majority of Americans may be descended from people who came from somewhere other than Europe.

For many, these changes threaten long-cherished ideas about the nation's racial identity, its traditional Atlantic ties, and its ways of doing business. Identifying with the fate of Europe, some Americans see the rise of Asia as an omen of national decline. Yet the United States need not be imprisoned by its prior associations. Through the openness of its culture and its political system, its racial diversity and the entrepreneurial dynamism of its economy, America can assume a pivotal, indeed dominant, position in the emerging post-European international order.

Regions such as southern and northern California, southern Florida, greater New York, and Texas are all likely to experience unprecedented entrepreneurial activity and market growth, thanks to the impact of the new Americans. In 1982, for instance, Hispanic, American Indian, and Asian-owned businesses in California alone accounted for more than $10 billion in sales.

This trend could not have come at a better time for American business. Like its European cousins, white America is aging rapidly; in contrast, U.S. Asian and Hispanic populations remain young and vigorous.

The new non-European America constitutes not only tomorrow's customer base, but increasingly a most crucial portion of the nation's work force. Nearly all the most rapidly expanding manufacturing areas -- from California and Texas to Florida -- rely heavily on immigrant labor. Equally important, these groups account for a growing percentage of the nation's skilled work force. By 1984, nonwhites accounted for more than 40% of all entering freshmen at the University of California at Berkeley, with a majority of them Asian and a large percent of them Chinese. Across the continent, 14% of all new entrants at Harvard University in 1987 were Asian-Americans.

What's more, Asians account for nearly 70% of all foreign engineering doctorate recipients, many of whom choose to stay after graduation, enriching America's technology companies. Taiwan, for instance, has sent nearly 100,000 students to the United States for graduate degrees. Of the 10,000 who earned Ph.Ds, 85%, including several eventual Nobel Prize winners, have remained in America.

But recruiting this new ethnic brain power will not be enough. American business, accustomed to stereotypical views of nonwhites, must learn to better work with the new Americans. Asian-Americans, for instance, are well known for their technical skills, but are often overlooked for management and sales positions. Asians fill nearly a third of the technical staff at Intel Corp., but "very few," according to Albert Yu, a corporate vice-president, are employed in top management positions.

As these Asians acculturate more into American society, Yu believes, American managers should take advantage of their potential for leadership in management and marketing, particularly given the growing technological importance of Asia. Complains Silicon Valley electronics entrepreneur David Lam, president of the Asian-American Manufacturers Association, "Americans think just because they have a slight accent, Asians can only be workhorses. They haven't realized that some of us can be racehorses.'

American companies must also realign their thinking about the most promising area for future trade. They have tended to write Asia off as a potential marketplace, preferring instead to do business exclusively at home or in familiar European markets.

This seems particularly true for the small and midsize companies that now represent the most dynamic force in the U.S. economy. A 1987 INC. survey of small and midsize companies found that a large majority had little interest in overseas markets. Equally disturbing is the choice of the United Kingdom -- a nation with only limited economic growth potential -- as by far the most favored locale for overseas expansion among those expressing interest in foreign sales. The United Kingdom was almost twice as popular as Japan, for more than 20 years the top purchaser of American products after Canada. Companies also showed a marked preference for other slow-growth European countries over the rapidly expanding economies of Asia.

In their reluctance to do business overseas, or in choosing Europe as a preferred base of operations, American companies display instincts they would rarely show at home. Ignoring Asia for Europe, for instance, makes as much business sense as neglecting areas such as Los Angeles, Phoenix, or Orlando -- all with rapid population, industrial, and financial growth -- in favor of the industrial Midwest and Plains states, which have been losing both jobs and population. By ignoring the new growth markets, U.S. business could be conceding vast fields of opportunity to other nations, most notably Japan.

Executives of U.S. companies must change their thinking in one other important way in order to compete in the third century. They must adopt approaches to management that give employees more of a stake in their company and more motivation to produce quality products or services. New machinery and methods can improve performance only so much; more important is motivating workers and managers.

To date, American business has produced two equally lethal archetypes: one is the sprawling corporate bureaucracy, characterized by remote-control management and financialism; the other is ego-driven, individualistic entrepreneurism. In both cases owners and managers have often treated themselves royally while short-changing their companies, employees, and investors.

But out of the difficulties of the past decade a new breed of company has emerged, one that combines the entrepreneurial spirit of America with the humanistic approach and long-term perspective characteristic of many Asian businesses. Although risk oriented and quick to exploit new markets, these companies often function not under the domination of one person, but as "smart teams" that share responsibility among top management while granting greater autonomy to line workers.

This new form of organization is most evident among younger companies, many of which never developed the sense of superiority toward Asian ideas and methods inbred to older generations of American managers. Among the most prominent of the "crossover companies' -- those making the transition to America's third century reality -- is Compaq Computer Corp., which stresses long-term development and teamwork within the organization.

In many cases, crossover companies are themselves led by Asian-born executives who, attracted by America's entrepreneurial climate, also seek to inculcate Confucian principles into their organizations. At companies such as Sigma Designs Inc., a computer firm run by Chinese and Vietnamese immigrants, top executives provide role models by keeping corporate perks low and investing all profits for the long-term health of the business.

"We are devoted to surviving, no matter what," explains Binh Trinh, Sigma's vice-president of finance. "Salaries are fixed expenses. High salaries don't give you much flexibility. We don't want to lose the ability to react to adversity.'

* * *

Central to the success of such crossover companies is the realization that American business can learn much from Asian models while still retaining the entrepreneurial culture that lures so many to these shores. Jim Pinto, an Indian-born engineer who in 1972 founded San Diego-based Action Instruments, synthesizes these principles by sharing 80% ownership of the company with his employees while reinvesting virtually all profits in new production, research, and development. He works without a secretary. "I guess I'm a bit of a new hybrid," says the 50-year-old Pinto, whose measurement and control business has been among the fastest growing in the industry. "My body was made in India, my science was learned in England, and my management philosophy comes largely from the Jap- anese, but I'm putting it all together in California.'

Like Pinto, the new Americans from Asia give the United States the energy, connections, and know-how required to break down many of the barriers that have stood in the way of profitable relations with the nonwhite world. Through them, Americans can learn many effective management ideas, born of Confucian roots, particularly with regard to the importance of commitment to employees, customers, and suppliers.

Indeed, despite the notions of decline fashionable among many in the intellectual establishment, the United States has at its disposal the tools for a new ascendancy. The dawning of new industrial powers does not necessarily mean the setting of the American sun. Drawing on the open system bequeathed by its founders, enriched by its status as a world nation and the favored area for foreign investment, the United States can flourish anew in the age of Asia.

* * *

Copyright 1988 by Joel Kotkin and Yoriko Kishimoto, adapted from The Third Century: America's Resurgence in the Asian Era, published by Crown.