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(originally published by Booz & Company)


A Return, Not to Normal, but to Reality

S+B: By mercantilists, do you mean only China?
No. Japan was the original expert mercantilist, even before World War II. After World War II, the Japanese refined their model, the South Koreans refined it further, and the Chinese learned from both. Today, the Chinese model is probably more advanced than the other two. The Chinese didn’t want to wait 40 years. So whereas some Japanese and South Korean companies obtained IP in nefarious ways, only China made the acquisition of intellectual property a serious government program. It was required in the contracts of American companies doing business in China that they give away their patented designs, processes, and innovations as part of the right to trade.

The Chinese also allowed huge amounts of investment, even though they prevented outright ownership of companies by outsiders. This was clever. In effect, the Chinese said, “We will take your money and IP in exchange for access to our market — but it’s faux access. You’ll be able to sell cars and airplanes here until our companies are ready to compete, and then we’ll cut you off.” A lot of people got fooled into thinking that it was either an open or partially open market. In fact, it was just a very well-designed mercantilist program.

In the mercantilist model — which, by the way, is a very intelligent way to build a fast-growth economy — you bring together business and government leaders and set up a deliberate trade policy. You list the industries you’re most interested in and target them one by one. Cars are important because they use steel and involve a lot of employees. One test for the effectiveness of mercantilism is the number of outside products sold in that country; for example, only a handful of American cars are sold in South Korea and Japan.

The indicators so far are all in favor of the mercantilist countries winning over their free market counterparts. And as the United States and Europe lose manufacturing and intellectual property, and as we find that the return on investment for IP starts to decline, how do technology companies fare in that environment? It’s tough to make a $2 billion investment in an operating system if it shows up on the street for a dollar 10 days later in Hong Kong. This is a big problem that hasn’t been fixed.

S+B: How will free market countries try to fix it?
There are only a couple of choices for the governments of the West. Choice A: Keep going as is. In that case, the value of IP will disappear. With limited returns, the whole world, essentially, will stop investing in innovation.

Choice B: The governments of the West focus on protecting IP — in trade agreements, other policies, and their public talk. There has to be almost a cultural shift, where people recognize that civilization — the discoveries, cures, drugs, chips, and advances that we’re most proud of — are all forms of intellectual property. We’ve already created geographical alliances for trade, such as the North American Free Trade Agreement. Having trade alliances based on intellectual property would make a lot more sense; countries should only trade with others that have similar protections in place. India saw this coming. After having a very loose environment for a long time, it passed one of the strictest sets of IP laws.

S+B: Could India’s approach become a model for other countries?
I think it could. The idea of moving research and development to India looks better and better to companies that have been burned a few times in other countries. India is now a healthy competitor. Its people are very smart. A lot of Indian Institute of Technology (IIT) graduates are brilliant programmers. The government leaders very much want to have their own industries. India will be a real player among global high-tech competitors.

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