How do Wealthy Nations Stay Wealthy? Challenges for the

How do Wealthy Nations Stay Wealthy? Challenges for the
European Policy Agenda1
BRIE Working Paper 172
March 29, 2006
© Copyright 2006 by the author
John Zysman
Professor of Political Science,
Co-Director Berkeley Roundtable on the International
Economy (BRIE)
University of California, Berkeley
Tobias Schulze-Cleven
PhD Student, Political Science,
Research Associate, Berkeley Roundtable on the International
Economy (BRIE)
University of California, Berkeley
1 This paper was written for and is forthcoming in Ramon Compañó, Corina Pascu, Anna Flavia Bianchi, Jean-
Claude Burgelman (eds.). 2006. Shaping the Future of ICT in the Global Context. Joint Research Center - Institute
for Prospective Technological Studies, Technical Report EUR (pending) ISBN (pending), European Commission.
The interpretative framework for this paper was originally developed by John Zysman in his contribution to the
forthcoming How Revolutionary was the Digital Revolution? National Responses, Market Transitions and Global
Technology. A BRIE/ETLA/HELSINKI Project. Stanford: Stanford University Press. We present it here in shortened
and revised form. The application of this framework to the European Political Economy is based on dissertation
research that Tobias Schulze-Cleven is conducting on the comparative politics of increasing labor market flexibility.
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The challenge for Europe is how to stay wealthy in a rapidly evolving and ever more competitive
global economy. In the digital era, the continuous evolution of the mechanisms of value creation
– i.e. the engines of productivity and growth – calls into question both established company
strategies and public policies. There exists broad agreement that the digital era requires
adaptation, but the precise ‘how and what’ remain unclear. This paper has the dual objective of
clarifying the character of competition in the digital era and reflecting on European attempts to
build advantages in the evolving global marketplace. In short, the paper asks how wealthy nations
– such as those in Europe – can stay wealthy in a global economy with ever shifting levers of
advantage.
The transformation of the marketplace in the digital era changes both the traditional tools of
corporate strategy and the agenda of public policy. In this global era, characterized by digital
technologies that as “tools for thought” transform all activities, firms’ internal functions suddenly
become products to be bought in the market, products that generated premium prices suddenly
become commodities, and the sources of differentiation for products and production processes
evolve.i It is not just that there is an increased pace of change, but that the market environment is
inherently less predictable. Conscious experimentation will be central to both corporate and
national adaptation. Companies will have to look at their initiatives as “experiments,” attempts to
find their way through a maze of fundamental uncertainty. Each company effort, and the efforts
of competitors, must be culled and systematically assessed for lessons. Governments must
consider what an “experimental economy” will require, and how an environment can be created
for individual firms and networks or clusters of firms to experiment effectively.
Our analysis of the challenges raised by the digital era will proceed in three steps. A first section
will review the historical evolution of production paradigms to build the empirical basis for the
framework through which we want to assess the transformations of the digital era. A second
section considers the dynamics of value creation in this digital era and the evolution of business
models. The third section considers what our analysis can contribute to the understanding of
Europe’s adjustment to the marketplace of the digital era. In that context, we will revisit the longstanding
debate on the relationship between labor market flexibility and social protection.
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Evolving Models of Production and Competitionii
The influence of the technology progress is visible in the economy through the evolution in the
production and distribution of goods and services. In this section, we distinguish among historical
phases that involved distinct business problems, a changing role of the “international” in the
dynamics of the national economy and the role of the state in the economy.
American Dominance: Fordism and Mass Manufacture
Mass manufacture, epitomized by Henry Ford and the Model T, was the first twentieth
century production revolution, though its roots lie earlier in the 19th century. In this system, largescale
manufacture implied rigidity. Fixed costs in the production line and design were high;
consequently changes in products or reductions in volume were difficult and expensive. This
rigidity created political, not just technical, problems. Mass manufacture is broadly understood to
mean the high-volume output of standard products made with interchangeable parts being
connected by using machines dedicated to particular tasks and manned by semi-skilled labor.
Important features include a) the separation of conception from execution – managers design
systems, which are operated by workers in rigidly defined roles that match them to machine
function; b) the “push” of products through these systems and into the market; c) large-scale
integrated corporations, whose size and market dominance reflect mass manufacture’s economies
of scale (Womack, Jones and Roos 1991).
There was a political consequence. Drops in demand were difficult to absorb for companies
structured according to Fordist models, leaving the national economy rigid as well. An initial
downturn in demand could cumulate into sharper economic downturns. Booms and busts implied
worker dislocations, and the national economic policy counterpart of the corporate business cycle
management task became the political debate about how to use public policy to cushion not only
the economic dislocations but also the political dislocations associated with mass unemployment.
Demand management policies, associated with the label of Keynesianism, were born. Fordism,
an American innovation, was mass production with Keynesian demand management.
Challenges from Lean Production and Flexible Specialization
Challenges to the long dominance of American manufacturing came from two different
directions. The more important challenge was the interconnected set of Japanese production
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innovations, loosely called flexible volume production or lean production Coriat 1990; Jaikumar
1988). From the 1970s onwards, Japanese consumer durables began to redefine the terms of
competition in global markets establishing new trajectories of innovation and new standards of
quality Success in the complex assembly of a large number of component parts for principally
mechanical and electro-mechanical goods set American and European industrial establishments
on their heels. The Japanese lean production system seemed to allow for rapid market response
by providing both the flexibility to adjust output in existing lines as well as introducing new
products (Tyson and Zysman 1989). Most importantly, it seemed to deliver high quality at lower
cost. While the Fordist story highlights national strategies for demand management, the Japanese
story of lean production highlights the role of a “developmental” state and the interaction among
the markets and producers of the advanced countries in international competition.iii The Japanese
state actively promoted domestic development with closed markets at home, while ‘free-riding’
on the international system to use exports for stabilizing the domestic economy. The combination
of an open international system with intense but controlled competition behind managed trade
borders proved decisive in the emergence of the innovative and distinctive Japanese system of
lean flexible volume production.iv
The second challenge to the classical American mass production model came from Europe under
such labels as diversified quality production (Streeck 1991) and flexible specialization (see e.g.
Hollingsworth and Boyer 1997) at about the same time. The “Third Italy” and the Germany’s
Baden-Württemberg were the first prominently displayed examples of an approach in which craft
production, or at least the principles of craft production, survived and prospered in the late
twentieth century. The particular political economy of the two countries gave rise to distinctive
patterns of company and community strategies (Hirst and Zeitlin 1997). Deploying flexible
machinery and skilled workforces rather than on paying low wages, firms in these countries often
competed in global markets on the basis of quality not price. Being able to produce short runs of
semi-custom goods, the companies in these modern versions of traditional industrial districts
could command an affordable premium for their products because of their distinctive
performance or quality features (Sabel 1994). They were seen to be able, in at least some markets
and circumstances, to more effectively adapt to the radical uncertainties and discontinuities of
global market competition than larger, more rigidly organized companies. The emphases in these
discussions are the horizontal connections, the connections within the community or region of
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peers, as distinct from the vertical or hierarchical connections of the dominant Japanese
companies. The flexible specialization model hinges on local institutions, such as chambers of
commerce, vocational training systems and public research facilities, which permit the continuous
combination and recombination of local activities. Thus, the two innovative challenges to
American production dominance each featured distinct roles for policy and the state.
The Transition to a Digital Age and the American Comeback: Wintelism and Cross-National
Production Networks
The first chapter of the digital era can be best characterized by the emergence of Wintelism as a
strategic stance and the rise of Cross-National Production Networks (CNPNs) (Borrus and
Zysman 1997). Wintelism is a short-hand term representing the transition from an electromechanical
to a digital era. It reflects the sudden importance of the constituent elements and
components in defining the terms of competition in the markets for the final products. This
meant a consequent strategic shift in competition away from the vertical control of production by
final assemblers. The prominent examples from the computer industry, the Windows operating
system and Intel processors, have given the name to this new production and competition regime.
Cross-National Production Networks was the label first applied to the consequent disintegration
of the industry’s value chain into constituent functions that can be contracted out to independent
producers wherever those companies are located in the global economy. CNPNs are associated
with an increasingly fine division of labor. The networks permit firms to weave together the
constituent elements of the value-chain into new production systems that facilitate diverse points
of innovation. They also turned large segments of complex manufacturing into a commodity
available in the market. The rise of CNPNs marked the arrival of a truly global economy, one in
which competition and the critical final markets were in the advanced countries, but production –
while organized by firms from these same advanced countries – was spread across borders,
principally through Asia.
Wintelism emerged as a strategic response by American producers to the Japanese production
challenge during the 1980s. As the semiconductor industry joined consumer electronics and
automobiles as sectors under intense competitive pressure in the late 1980s, it seemed that the
fabric of advanced electronics was unraveling. At that time, the erosion of equipment suppliers to
the semiconductor industry was making it more difficult for American semiconductor producers
to hold market position. With the weakening position of the semiconductor makers, many feared
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that final-product producers would not have access to the most innovative chip designs needed in
their final products. However, suddenly, American producers rebounded. They had not reversed
the loss of production advantage in electro-mechanical products, but rather, a new sort of
consumer electronics product had emerged, defining a new segment of the industry. The then
‘new’ consumer electronics, as Michael Borrus (1997) argued at the time, were networked,
digital, and chip-based. The have included products from personal computers to mobile devices.
The nature of production changed dramatically from the complex mechanical or electromechanical
assembly to electronic chip production, board stuffing, and packing the boards into
boxes.
Wintelism involved both new terms of competition and a new model of production. Consider the
PC; what part of the value chain confers the most value added and leverage in the market? It is
not the producer of the final product, the metal box we call the PC, even if – like Gateway or
Hewlett Packard – the box carries the company logo. Much of the added value is in the
components or subsystems: the chipset, the screen, and the operating system. This has several
implications:
1) Producers from different nodes in the value chains compete over control of the evolution
of technology and final markets. Some component companies succeeded in shaping
market segments. Prominent examples are Microsoft and Intel, which set the pace of
technological evolution in the personnel computer segment, and the independent
networking equipment provider Cisco, which drove the emergence of internet technology.
2) Competition in the Wintelist era tends to be a struggle over the setting and evolution of de
facto product market standards. Components and subsystems are built to generally agreed
standards that emerge in the marketplace, with the market power over those standards
lodged anywhere in the value chain, including product architectures, components, and
software. Open but owned standards create de facto intellectual property (IP)-based
monopolies or dominant positions.
3) As the fundamentals of Wintelism have evolved, the constituent elements of the product
value chain have become modules. While distinctive intellectual property might remain in
the modules, the knowledge about how they inter-connect becomes codifiable and will be
diffused.
4) With products being built as modular systems with clearly defined components and
subsystems, the actual production/manufacturing can be outsourced. Outsourcing evolved
from a tactical response aimed at cost reductions by procuring a particular component
from outside the organization into cross-national production networks that can produce
the entire system or final product.
5) The core engineering skills moved from mechanical to chip-based systems that are given
functionality by software. The range of production skills to produce an optical film camera
is much greater than to produce a digital camera, whether in a cell phone or not.
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The Wintelist era of the 1980s and 1990s – the moment of the American comeback in electronics
– turned, politically, on domestic deregulations and international agreements that created an ever
more open international trade system. At home in the United States domestic deregulation and
competition policy in a variety of sectors – especially telecommunications and computers –
contributed to significant market competition among, and a shift in market leverage toward,
component makers. These initially domestic phenomena eventually reshaped the electronics
industries worldwide. Ever more extensive and dispersed networks of investment, trade and
production were the first step in an evolution of complex production networks and supply chain
management. The emerging production and trade structure contributed to, if not drove, the
expansion of something we might loosely call Globalism.
Globalization with Borders
The classic version of the globalization story stresses how the internationalization of business –
enabled by lower “transaction costs” associated with technological change – has severely
constrained active government policy. In contrast, the evolution of production paradigms
sketched out above suggests a different take on globalization. The paradigms’ power in
international competition rested on their national bases and/or explicit government action. From
this alternate vantage, globalization is a story of national innovations played out on a larger stage.
A sequence of new competitors, new and often unexpected loci of innovation and production,
bring new processes, products and business models to the international marketplace. Indeed, the
world has witnessed a “globalization with borders” (Borrus and Zysman 1997).
In the following section of the paper, we will turn to the chapter of the digital era that the world is
currently entering. Again, as it was true in earlier periods, dramatic marketplace developments
are cooking inside of national systems of innovation and competition, largely unobserved by the
outside. They burst onto the global marketplace as unexpected competitive challenges at a
seemingly increasing pace.
Value Creation in a Digital Erav
The current phase of the digital era is best characterized by possibilities associated with a new set
of distinctive tools, tools for thought. These tools amplify brainpower by manipulating,
organizing, transmitting, and storing information in the way the technologies of the Industrial
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Revolution amplified muscle power (Cohen, Delong, and Zysman 2000, 7-8). The tool set rests
on a conception of information as something that can be expressed in binary form, open to
subsequent manipulation (see Shannon 1993). It consists of the hardware that executes the
processing instructions and the software, i.e. the written programs defining the procedures and
rules, that guide how the hardware equipment’s information processing. In addition, it includes
the data networks that interlink the processing nodes, and the network of networks, which
together create a digital community and society.
The digital revolution is transformative, it has become conventional to observe, changing the
character of products, processes, marketplaces and competition throughout the economy. The
capabilities to process and distribute digital data multiply the scale and speed with which ideas
and information can be applied. It affects both traditional goods, communication sectors, and
services. Information technology has moved both inside of machines, controlling their
functionality, and into the communications networks, altering not only how and at what price we
talk, but how we share, store, and use information. Because the expression and manipulation of
information is now possible in a common digital electronic form, a range of previously separate
information and communication sectors merge or become more intimately entangled.vi Just as
important, the knowledge component of much of industrial activity, and indeed an array of
service activities, can now be formalized, codified, and embedded in equipment.
The logics of cost and functionality change. The cost of creating digital information remains fixed
at often high cost, while the cost of reproducing and transmitting content in digital form drops
toward zero. The consequences of often non-existent replication costs are amplified by the very
nature of information goods. How do I price and value what you know and want to sell to me
without me seeing it? But if I see it, and thus possess it, how can you still sell it to me? And if I
can reproduce and distribute that knowledge widely at low cost, what happens to your market?
New business models have to be invented; the forms of distribution and IP of older models have
to be defended through contracts and courts.
All of this tells us that information technologies alter the product development, production and
competition throughout the economy. It does not tell us how companies might take advantage of
these changes, or how governments might support IT development and diffusion to benefit their
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societies. One might list the mechanisms through which the digital tools affect business strategy,
noting in turn network effects and the changing character of content products. But this approach
is rather limited. Information-based tools and goods have a distinctive logic, “information rules”
to use the clever phrasing and insightful arguments by Shapiro and Varian (1999). But when does
that logic apply? Certainly the logic applies in the competition over internet browsers. It may
apply in the case of search engines. But which elements of information goods, or digital tools or
network economics apply in the case of the automobile industry? And how do we decide which
issues matter in a particular setting? If we can’t deduce the answers from first principles, we need
an alternative strategy to understand value creation in a digital era.
Of Products, Commodities, and Differentiated Assets
These basic features of digital era profoundly affect the dynamics of competition and strategy in
the global market. They change profoundly what must be done to assure real rising incomes for
the community. Created market value, oversimplified, is price minus cost.vii
If we are to locate
the influence of digital tools, there are two obvious questions about value creation. First, how do
digital tools and information products change the task of generating something for which
consumers will pay a premium? In other words, how does a company avoid having its products
become commodities? How does the company create unique or differentiated goods so that a
premium price can be charged? There is an array of means: the creation of distinctive products,
early market entry, and ownership of product design standards. Second, how do these tools affect
the cost of providing a product or service to customers; if you cannot charge a premium, can one
generate distinctive margins by being a low cost producer? The argument here is that for a firm
the points at which it can exercise competitive leverage to create strategic advantageare now
constantly shifting and moving.
To address these questions we need to define explicitly three notions we are generally familiar
with: product, commodity, and differentiated asset.
- A product, whether object or service, is an item that can be bought and sold in the market.
- A commodity is a good or service that is exchanged in competitive markets with little
advantage to any particular buyer or seller. A product becomes a commodity when it is
generally available from a number of suppliers on common terms in the market
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- A differentiated asset creates the basis for premium price, distinctive sales advantage, or
cost advantage in production or distribution.
There is a constant reshuffling among products, commodities, and differentiated assets. As
reshuffling occurs, business models must change as well. Globalization accelerates the
reshuffling, and digital tools often are the means of accomplishing the reshuffle. Globalization
represents new competitors who may transform a premium good into a commodity with low cost
production or generate advantage by adding value to what seemed to be a commodity good as
when the Japanese made quality a “free” good. Digital tools change the levers of advantage and
value creation.viii The continuing reshuffle includes the transformation of internal company
functions into products available on the market. There is a constant question of whether the
function is a commodity that should be sourced in the market or a strategic asset that must be
developed in house or in carefully nurtured supply relationships. R & D and production provide
examples of internal company operations becoming either a strategic asset or a vulnerable
commodity.
Traditionally an internal function differentiating a company’s products from its rivals, R & D can
now be sourced outside the company. The original presumption has been that product
development, and the research to support that development, is at its core a strategic asset, the
foundation of innovation and a powerful antidote to commodification. But even as innovation and
continuous product/production improvement become more critical, major corporations are
shrinking their core research departments. They are choosing to buy in R & D from universities
or start-ups and spin-outs.ix In addition, they source from joint product development projects and
technology development outposts.x A wide range of countries are entering the development game
by investing into R & D in both public labs and in support of industrial labs, thus growing the
number of points of purchase for “technology” and “development” has grown. Major firms
become, at least in part, technology integrators, and not just technology developers. Firms cannot
be at the cutting edge in all the technology developments that affect them, and must look
outside.xi Firms have to decide, and continuously reassess, what elements of development are
effectively high-end commodities, which technologies are strategic assets best acquired, procured
on an exclusive basis or developed in house, and how to move to capture those distinctive
technological assets.
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Similarly, production has increasingly become a commodity in a digital era. Manufacturing firms
went offshore for cost reasons or to have access to local markets, but discovered abroad a widely
distributed capacity for technical and management innovation. Outsourcing led to cross-national
production networks and eventually skills of supply chain management, each step making the
next phase of outsourcing, i.e. the commodification of production, easier. Consequently, it may
be easier for services to move offshore today than it was for manufacturers to do so twenty years
ago. The required tool set consisting of computers, software, and communications are available in
the market and easily transported. These are largely general-purpose tools that can be adapted to
particular service tasks. How far, we may ask, will this geographic dispersion go? Can all
activities be placed just anywhere? Is there any geographic stickiness to production? While
acknowledging that not all production is a commodity, we need to ask these questions, both in the
context of the entire production processes and each individual element of a potentially segmented
process. In turn, a nation/region should ask what it could do to make itself attractive as a location
for world-class manufacturing.
In a world in which services as well as manufacturing are being outsourced and old distinctions
between services and manufacturing are breaking down, we need to be clear on definitions. We
propose to talk of production as the general case, the organized action of making goods and
services for sale, and of manufacturing as the specific case of physical production.xii In that case,
production – the know-how, skills, and mastery of the tools required – is absolutely central to the
products in the digital sector. Furthermore, we can now ask corporate strategy questions – such
as what should be produced or built in house and which can be outsourced – for the new digital
context.xiii There are at least three circumstances when in-house control of production, or
elements of production, can be a strategic advantage: first, if the in-house control of production
provides advantage in cost, timing of goods to market, quality, or of distribution that cannot be
obtained by outsourced production; second, if knowledge about existing production processes is
required to develop “next generation” product entry, whether design of the products themselves
or of the processes to produce them, or put differently, in-house production mastery may be
required for rapid product innovation; third, if critical intellectual property about the products
themselves is so tightly woven into the production process that commodity outsourcing is
tantamount to transferring product knowledge to competitors.
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As noted before, the rapid entry of diverse new competitors into global markets contributes to the
process of commodifying production and the transformation of “innovation / R&D” into a
product that can be purchased in the market. The new entrants into markets and the ever-evolving
competitive position of others, globalization, represent new opportunities, challenges and threats
that come from unexpected directions. Following the early challenges posed by Japanese
producers and the later rise of other Asian producers (e.g. Korea, Taiwan, Hong Kong and
Singapore), now India, China, and the countries from the former Soviet Bloc all find their
position in world markets. The new entrants represent both new markets and new competitors
representing not only new sources of production and R & D but often new product, production,
and management strategies.
Creating Differentiated Assets: Segmentation Strategies
How, then, can firms escape from the world of commodities, escape from new competitors from
new places nipping at their heels? A traditional analytic approach to strategy will only be a
starting point in the process of corporate adaptation. Companies will have to look at their
initiatives as “experiments,” attempts to find their way through a maze of uncertainty. They will
need to learn how to evaluate their own experiments and interpret experiments of others. Doing
so, of course, creates dilemmas. We address them in turn below.
The increasing importance of the classical approaches, branding and design, to differentiation
needs to be acknowledged. They become critical, because in the digital era many electronic
products are constructed from very similar modules achieving very similar functionality.
Branding, the creation of an identity for a product or set of products, serves as a critical
instrument to differentiate branded products from a pool of commodities. For example, amongst
an array of similar products tending toward commodity, the question of whom you trust matters.
Hyundai’s efforts to establish the once low-end Korean cars as high quality, or GM Saturn’s
efforts to establish a no-trickery sales identity, are examples of an effort to create trust through
branding.xiv Additionally, ever greater arrays of products are fashion/identity products that give
expression to a customer’s sense of self (often through the perception of the product through a
third party). The “brand” identity in part states the “presentation of self” that the client chooses.
Similarly, design takes on ever-greater importance in differentiating products that might
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otherwise be fundamentally commodities. The Danes for decades have been selling the Bauhaus,
the source of Danish modern product style. An extreme example of value created by design is the
Danish company Bang and Olufson, which sells high-end commodity technology at
extraordinarily high-price as a lifestyle good. The “brand” identity is based on its exceptional
electro-mechanical characteristics and pure design.
In contrast, alternative, “new” segmentation strategies involve digital tools, the “tools for
thought” that underpin the digital revolution. It remains on open – and critical – question how to
use their underlying capacities to their fullest potential and capture competitive advantage or
generate productivity gains in the process. Investments in training, in reorganization, and in
strategic reorientation are likely to be required (Brynjolfsson and Hitt 2004). Some of the new
approaches to creating value and to differentiating products have become very well known. First,
and now widely understood, are those to segment the market and then attack specific segments
with functionally varied, and usually distinctively branded, products. A fundamental feature of
the digital era is that analytic tools of database management permit the consumer community to
be segmented into sub-components, each with distinct needs and wishes. At an extreme,
individuals and their particular needs can be targeted. Early on, the insurance industry moved
from using computers exclusively for back office operations to using them to create customized
products for particular consumers (Baran 1986). Thus collecting detailed information about
customers as groups or individuals in a variety of forms, credit cards or grocery store purchases
are obviously very important to companies having chosen this particular strategy.xv Once the
market segments are defined, then digital tools help firms create functional variety in products.
Standard products can be given diverse functionality. The coffee maker that automatically turns
on at a particular time in the morning depends on simple digital functionality. The difference
between many higher speed, higher price, printers and their slower, lower price, brethren is in the
software that tells the printer how to operate (Shapiro and Varian 1999). Firms have new ways to
identify who will pay how much for what, and then create products or give functionality to
commodity products that people are willing to pay for.
Second, digitally rooted online sales/marketing and supply chain management alter the links
between a firm and its customers as well as suppliers. The Dell story tells how innovative uses of
the net that tie customers from sales through production can create dramatic advantage (Fields
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2003, Kenney and Mayer 2002). And, as development and production processes are woven
together to speed up the time to market and improve design choices, the lines between
production, design, and development blur even more.
Let us come at this problem of the changing character of business competition from a different
angle. It was long conventional to consider market competition within sectors -- defined market
segments with understandable sets of competitors, terms of market entry and competition. There
was the auto sector, the machine tool sector, the textile or apparel sector and the like. Then along
with the dot com boom the language changed and the supposedly clever and astute began to refer
to “spaces”, asking what “space” are you in. Many of us, myself included, dismissed this talk as
calling sectors by another name, as a clever linguistic differentiation of the dot com era from
predecessors. Perhaps we did so too quickly. “Spaces” turns out to be a transition word. Now one
hears of the talk of “value domains”, which at first glance might seem to be the notion of spaces
by a different vocabulary. But let us look more closely. The notion of “value domain” points to
the array of digital functions that can be embedded in a small chunk. Canon’s challenges go
beyond competition from camera makers, but to the very question of how photography is used
and how its tools are provided. In one sense Canon’s worst competitor is Nokia.xvi And Nokia,
which can provide music on its cell phones, faces competition from Apple iPod, expressed
concretely in a new Motorola phone. That bloc of electronics encased in plastic can be a PDA, a
phone, a camera, a music device, a television. It is a “value domain”, in which the products, and
their functionality and design, can be defined in a whole variety of ways. But how to address that
value domain? Which functionalities should be given priority?
This captures an important catch with using digital tools in addressing value domains. It is just
not always evident what needs to be done, what strategies and organizations are required to create
value or generate productivity. What matters for productivity increases and growth is the capacity
to imagine how the underlying digital technology can be used. The imagination and the
applications evolve as an array of experiments, both in technology/tools and also in the
organizations that employ the tools and the business models to establish new ways of creating
value. Undoubtedly, many of those experiments will fail, but some will succeed. Rather than just
adding up anecdotes of success and failure, we will proceed by considering three categories of
experiments: work organization, the use of knowledge, and business strategy.
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Reinventing Production: Work Organization and Knowledge Management
In the continuing reshuffle of the levers of advantage, the reorganization and reinvention of
production represents a first category of experimentation. The introduction and application of
networks that permitted easier communication and exchange of data, even in the years before the
Internet, followed a clear three-step pattern. Bar and Borrus (1993) pointed out that first existing
processes were automated; secondly, from the initial but automated base experiments in the use
of the new networks were launched; finally, work processes were reorganized. Critical in their
story is the question of where, and by whom, experimentation and learning takes place. The same
processes are evident now. Consider production and the drive to outsourcing work in the service
sector. Evidently the digital capacity to store and transmit information means companies can
segment and distribute work geographically and organizationally. And in the current round in the
United States of outsourcing service functions offshore, lower wages have been the primary
driver. Kenney and Dossani (2004) have argued in the case of India, although lower costs drove
the initial move offshore, which largely meant reproducing existing activity at lower cost as it did
in the early days of offshoring manufacturing, many companies found that possibilities for higher
quality emerged abroad. Yet management capacity of the contract producer to manage outsourced
offshore projects is as critical a variable as cost in explaining the location of tasks.
When an Indian company such as Wipro opens outsourced production activities in the United
States, it is clear that management skill and experience with outsourcing, experimentation with
automation of existing processes, rather than the cost of labor alone underlies the move. The
conclusion must be that the service sector reorganization afoot is only partly about cost, but more
fundamentally about imagining and implementing new approaches to the organization of
production. Sometimes for the buyer of outsourcing services, outsourcing is an excuse to avoid
tough internal choices about product strategy or internal organization. Sometimes, as in finance,
outsourcing obscures the possibility of delivering distinctive services. Sometimes, as in software
development, outsourcing creates risks of losing intellectual property or propagating competitors.
Hence the issues of who experiments and learns, what should be done in-house, what outsourced,
all re-emerge with each step.
But, of course, there are also radically new production systems, such as lean production systems
in the 1980s and perhaps open source software in the digital era. Open source as a principle of
16
organization hinges on distinct approaches to mobilization and coordination of work, not a vague
voluntarism but replicable rules of participation and gain. But the principles and rules on which it
rests are new. For example, it rests on foundations that turn notions of property from ones of
control of the use of an object, or an objectified body of code or knowledge, into control of the
processes of distribution. The collaborative work arrangements it points to are both about
production of software and made possible by the digital networks (Weber 2004).
Let us turn to question of knowledge management. Knowledge, particularly theoretical
knowledge, has been recognized as an essential element of the contemporary economy. Critically
though it is the expression of information, data, and knowledge in digital form that is truly
distinct, permitting the application of digital tools, the suite of tools for thought. In a digital form
information can be formalized, stored, searched, transmitted, and used to control the operations of
physical processes (Cohen, DeLong and Zysman 2000). We can put the Library of Congress onto
a single digital memory stick and transmit it in flash. The complex relationships on which engines
operate or planes fly can be stated as algorithms, represented in digital form. In one sense the
flood of data made possible by these tools can drown the recipient, but oddly the same “tools for
thought” make easier the creation of meaningful information and the generation of knowledge
from that flood of data. But codified knowledge, whether stored digitally or embedded in
equipment, is only a piece of knowledge that cannot stand alone. For example, how do we know
in an avalanche of facts and stated relationships which ones we care about? Analytically, there
are limits to both the value of piling up and searching documented knowledge and to formalizing
the tacit knowledge embedded in individuals and communities of practice. Experiments with
knowledge management in this information rich era force open the very fundamental question of
what knowledge is. According to Nielsen and Nielsen (2006), knowledge unfolds in the iterative
processes between tacit and codified forms, and optimizing knowledge in organizations is
essentially an issue of optimizing these iterative processes.
There is an organizational implication of this consideration of the nature of knowledge.
Internally, the company organizations required for most efficient manufacturing may not be the
same as those required for effective exploitation of knowledge. In the 1980s the Japanese
innovations of flexible volume production using lean, just-in-time techniques created distinctive
production advantage and rocked market competition. Is there a similar revolution afoot now?
17
Lorenz and Valeyre (2004) claim to have identified a new learning model of corporate
organization, that significantly departs from traditional craft organization, taylorist organization
and lean production systems; particularly, they see this distinctive organizational form emerging
in Northern Europe, principally the Nordic countries. We can only speculate as to why, pointing
to experiments in work organization in an era of mass manufacturing that may be paying off in a
knowledge era.
Experiments in Business Strategy
The tactical experiments – branding, design, versioning, production reorganization, and
knowledge management – have to find expression in new business models, the underlying
strategies for creating and capturing value. Those new business models must reflect the shifting
location of leverage in creating value. The mistakes of conception and execution in many of the
failed bubble-era business strategy experiments prove that this is not easy. Recall that the dotcom
investment wave hinged on the notion that the network tools would “disintermediate” traditional
distributors, that brick and mortar relationships would be replaced by electronic links, or that
wholesale intermediaries would be eliminated by electronic markets. Often the fantasy was that
new entrants, new companies, using these digital tools could displace established companies.
There are some evident successes; the travel industry from travel agents through airlines is being
reformed by online operations, but the venture capital community made a whole array of largely
unsuccessful bets.xvii
By contrast, consider IBM’s two fundamental shifts. IBM’s first fundamental shift is from a
product company wrapping its products in high value service support into a service company
selling solutions that embed its products. As IBM migrated from electro-mechanical to digital
information processing, it established itself as the dominant player in the market. Consequently
its per unit development costs were radically lower than its competitors, making its margins
substantial. That allowed “service” to be bundled into costs, offering a sense of certainty and
reliability to its customers. Its market share allowed it to keep its core software, operating systems
and the like, closed and privileged. That model of competition was no longer viable as the era of
the mainframe and even the mini computer passed. Networks emerged supporting business
services comprised of multiple networks and varied suppliers. IBM began to offer service
solutions.
18
More generally, the IBM story points to the blurring of the distinction between services and
products in a digital era. The distinction between service and product has never been very clear.
Once, national accounts categories obscured the relative importance of services and production in
an evolving economy (Cohen and Zysman 1987). A window washer at Nokia or G.M. is a
manufacturing employee; if Ace Window Washers contracts to outsource the washing of Nokia’s
and GM windows the same employees are counted in the service sector. Now the blurred line
between product and service becomes a matter of strategic importance. Consider accounting:
Accounting is a personal service provided by accountants utilizing tools from the original doubleentry
bookkeeping system to computers. But if you create a digital accounting program and put it
on a CD, put it in a box, call it Quicken, and allow its unlimited use by the purchaser, then you
have a product. If you put the program on the Web for access with support for use on a fee basis,
then you likely offer a service.xviii
IBM’s second fundamental shift was to support “open source” software, rather than proprietary
software and the development of frameworks and tools to implement solutions within that
framework. Microsoft and Unix provided common platforms through which competitors could
integrate their offerings, limiting IBM’s leverage. Selling solutions in a multi-vendor
environment suggested that a move away from closed proprietary systems might as well be to one
of hyper-openness in which a capacity to define solutions, provide an integrated offering, and
embed some distinctive proprietary modules would be decisive in keeping customers tied to IBM.
Assume business strategies to capture the evolving advantages of the digital era are experiments
or bets with uncertainty about their success, not investments with predictable returns. Then the
question is, of course, why some companies make better bets, or more effectively conduct the
process of experimentation that must carry them into the future. Possibilities must be seen as just
that, hypotheses about the future to be continuously evaluated.xix Each era, one must note, has its
own uncertainties and its own risks, whether it was the weather threatening ships or technical and
business concerns shaping the build-out of electricity and telephone. Entrepreneurs in each epoch
confront those risks and transform the possibilities into profits and growth. What is distinctive
about this era is the pervasive and continuous uncertainty, in technical terms across technologies,
19
infrastructures, sectors and products, and with respected to the competitive environment, as
competitors reach out for the strategy that will overturn the character of industry competition.
Towards the Experimental Corporation
In short, we conceive of digital-era corporations as fundamentally experimental in character.
They have to maneuver in a competitive environment, in which the “sweet spots” for corporate
success are constantly changing as company internal functions become products, products
become commodities, and the sources of differentiation for products and processes are constantly
evolving. To deal with this fundamental uncertainty, companies need to go beyond standard
planning techniques and conceive of corporate strategy as a portfolio of “experiments” akin to the
business model of venture capital firms, which succeed by managing a portfolio of investments to
spread risk. In their quest to create value and search for the levers of advantage as traditional
notions of stable “sectors” are dissolving, companies need to develop business cases on the basis
of different readings of the future’s strategic landscape. Investments into these business cases will
turn them into experiments. However, these experiments remain largely “contained”, because
they will only be pursued as long as their underlying assumptions have not been proven wrong.
Constant review procedures that monitor the continued viability of both the theoretical business
case and its early practical application are called for. Managers must cull and systematically
assess for evidence their own company’s efforts and those of its competitors. As experiments in
the face of quite fundamental uncertainty, these strategic choices are not bets and gambles.xx
Rather, the formulation of corporate strategy becomes a consciously emerging iterative process.
The European Social Model Challenged – And Sustained?
The ever-evolving marketplace of the digital era will require companies to frequently re-cast
themselves, what they produce, which markets they address, how they produce and deliver the
good or service, how they are organized, and indeed, with more difficulty, whom they employ
and where they employ them. The flexibility to move and to move quickly is key, but that puts
great pressure on communities and polities. The final section of this paper argues European
traditions of social protection can be consistent with the flexibility required for successful
adaptation to the global economy.
20
Certainly, the ability of wealthy nations to stay wealthy in the digital era turns on the capacity of
companies to adapt and adjust, to steadily increase productivity even as they remain competitive
in the marketplace. The capacity of the firms to create value, and to increase the value they
create, must grow if they are to remain capable of creating substantial and rising incomes.
What is called for from governments? Policy, of course, has a contribution to make to assuring
the resources and building the capacities for corporate experimentation and strategic adaptation in
the ever-shifting global era. Necessary policies range from the innovative to the obvious.xxi It is
conventional to stress the centrality of state action in providing the secure infrastructure of the
economy, both physical such as broadband lines, road and bridges, and in terms of the political
and social institutions of the marketplace. The latter is particularly important; it encompasses the
rules that permit companies to innovatively deploy resources and be rewarded for successful
implementation in the face of risk and imagination. Good protections of intellectual property are
basic provisions in this context. Furthermore, most analysts agree that state action can play a role
in supporting the availability of those resources that are important for companies’ experiments.
To that end, governments are often called to support the provision of a skilled workforce, i.e. the
talented, trained and educated people that corporations need. Ideally, governments would also
provide centers of technology development and diffusion, at which some of the valuable human
capital would work to reach out to companies and build – on the basis of public-private
partnership – effective centers of creative imagination in support of formulating effective
strategies of value creation. All this is, perhaps, obvious.
Crucial as well is the social flexibility and adaptability, the capacity to support and absorb the
continuous change that the competitive companies will require. In an era of constantly shifting
advantage and sustained experimentation, national performance in the digital economy
increasingly rests on the two social capacities, each of which require considerable flexibility.
They are a country’s ability to sustain individual and collective learning processes and to
implement – in a manner that assures real rising incomes – the business, social and technological
innovations generated by these processes.xxii
21
Public Policies for the Digital Era: Towards a Politics of Experimentation
But how do we achieve social flexibility? The fear is that the goal of social flexibility for
economic adaptation may require the destruction of social protections. Or can social protections
be the basis of flexibility? Let us consider the question by revisiting the long-standing policy
debate on the relationship of labor market flexibility and social protection. In the experimental
economy, high-skilled labor will be necessary but not sufficient. Importantly, it will need to be
sufficiently flexible to support the continuous corporate re-organization made necessary by
experimentation.
Simple economic models referenced in the policy debate tend to treat labor as a commodity, as
one of two or three key inputs into the production process. Policy recommendations formulated
on the basis of such models stress the necessity of increasing the efficiency of resource allocation
by removing rigidities that inhibit the matching of supply and demand through the price
mechanism. However, this set-up of the policy challenge as a primarily technical issue avoids
engaging with the central issues of the labor market adjustment in the digital era. To argue that in
the experimental economy, workers have to be ready to switch their focus (and potentially locus)
of activity at high(er) rates is one thing. To get workers to accept this reality and democratically
support those public policies that sustain such a labor market regime is quite another. A narrow,
technical conception of increasing labor market flexibility tends to produce analyses that fall into
one of two camps pitted against each other. On the one side, there are those that equate increasing
flexibility with the deregulation of the labor market, the removal of employment protection rules
and welfare state retrenchment. On the other side, there are those that want to protect the welfare
state as a cornerstone of postwar models of European democracy, which underwrites individual
rights to liberty and equality through its property of selectively de-commodifying labor (see
Schulze-Cleven 2005).xxiii
Do we need to make a choice between establishing the flexibility needed to adapt to the evolving
economy and sustaining social protections against the vagaries of the market that make economic
growth worthwhile? We propose that the mechanisms of social protection can be the foundations
of market flexibility.
22
Social Protections in Support of Labor Market Flexibility
Social protections against market dislocations, in some cases coming in the form of agricultural
protections and in others coming as welfare state programs, have played an important role for
legitimizing markets and facilitating resource transfers. Systems of social programs have often
facilitated the evolution of different country’s agriculture-based economies to the industrial
powerhouses they have become today. Particularly important, they have de-politicized the social
transformation associated with economic development and modernization. Social protections
have both pacified the losers of economic change and provided the population with an incentive
structure that supported the competitiveness of a country’s economy. Often, social protection
systems themselves enjoyed broad based political support. A prominent example is the set of
welfare state programs, which for a long time could offer something for all stakeholders. These
programs offered benefits (such as redistribution and/or insurance) for the entire population and
supported businesses’ attempts to adapt to changing market environments, either at the microlevel
of the firm or at the macro-level by de-radicalizing the national political game.
Many welfare state programs, which were originally conceived in a pre-digital era to support
older production strategies, have now become dysfunctional, undermining rather than boosting
current strategies of value creation. While the success of Fordist systems required Keynesian
policy buffers to offset systemic political and production rigidity, the digital era poses a new set
of political and production challenges. But the basic historical lesson for the public policy
challenge still holds: Systems of social protection can play an important role in supporting
economic adjustment. The processes of cushioning market shocks might, under certain
circumstances, facilitate the workings of the market; or, to invoke a metaphor, there is no doubt
that shock absorbers in cars do actually increase the cars’ driving performance. We believe that
systems of social protection continue to have a role in the current era. Of course, the displaced
may fear and resist, but accepting the necessities of the broader economic adjustment is always
easier if one see the possibilities of one’s own place in that future.
The level and distribution of social protection, who gets how much, is not the only issue. The
mechanisms of providing it have distinct consequences for the operation of labor markets and the
political dynamics sustaining economic adjustment. Take, for example, Japan, France and Spain.
In Japan, social protection is often embedded in private employment structures. One consequence
23
is that firm failure is “socially too expensive”, in turn often leading to continued bank financing
to prop up troubled companies. Achieving flexibility in the Japanese context would require
unwinding the nexus of company/finance/social protection institutions (Levy, Miura, and Park
2006). In France, apart from the formal system of government finance social protections, the
economy abounds with an array of “acquired rights,” situations that embed privileges from taxi
licenses through café licenses to protection of job locations. Social protection is embedded in the
defense of particular social and employment arrangements (Cahuc and Kramarz 2004). In Spain,
from the late 1970s onwards, the level of social protection and employment security has greatly
diverged between labor market insiders and ever-larger numbers of outsiders, such as the
unemployed and temporary workers. In the aftermath of Spain’s transition to democracy, the first
government introduced a set of wage-bargaining institutions that did not permit firms to set
wages reflecting firm-level differences in productivity. Combining with a legal system that
constrained firms from easily shedding excess labor, these institutions led to frequent company
bankruptcies, a fall in output and spiraling unemployment. When in 1984 the government made it
easier for firms to fire workers, these attempts strongly increased labor market segmentation, i.e.
reinforcing the bargaining power and wages of insiders while concentrating economic insecurities
among rising numbers of temporary workers (Watson 2006).
At the issue’s most narrow framing, we can distinguish between two fundamental ways of
protecting workers’ against uninsurable labor market risk, either preventing worker lay-offs
through employment protection legislation (EPL) or provide unemployment benefits (UB) (Boeri
2002). More generally, social protection systems can either substitute for the market, i.e.
discouraging structural change, or allow the market to allocate resources and provide security
through benefits post-allocation, i.e. encouraging structural change. In Continental European
countries such as Germany and France, social protection systems are structured so as to protect
the job-insiders with strict employment protection rules and shield the self-employed from
competition. Outsiders – while often recipients of public social assistance benefits – tend to
remain unemployed with little chance of re-integration into the workforce. In contrast,
universalist systems such as the Danish one, tend to allow the market mechanism to efficiently
allocate resources while “embedding” its workings within an environment that provides
significant levels of social security.
24
To gain analytic leverage on this diversity, we need to distinguish the different dimensions of
social protection systems. They diverge in at least four respects:
- Who is protected;
- The level and form of protection, an issue not just about the monetary amount but a matter
of whether particular jobs or positions are supported;
- The mechanism of delivery, i.e. whether services are administered or cash granted;
- The influence on the operations of adjustment in the economy.
The same level of protection for the same groups of people can be delivered in very different
ways with very different consequences. And the obvious aspects of these different ways are not
always the most important ones. The politically most difficult controversies are often about social
identity. Often what is in dispute is not just economic well-being, the level of support, but the
social place of particular groups and jobs in the economy that turns on the character and form of
protection. Social protection systems are not created equal, and while some definitely act as
barriers to labor market flexibility, others might actually increase both the legitimacy of a flexible
labor market regime and the actual mobility of the workforce. While particular systems of social
protection facilitate the social adjustment necessary for the experimental economy, others hinder
it. As a result, stripping social protections represents only one possible way of increasing labor
market flexibility.xxiv
Security, Flexibility and Skills
The capacity to reconcile market flexibility and the social principles of security hinges very
powerfully on how social protection is provided, not just who receives it or how much. This is
evident when we consider two different aspects of labor market adaptation. One, already noted, is
the question of providing social security to facilitate market functioning, the notion that labor
market flexibility can be achieved with and perhaps through social protection. The other related
matter is that of training, i.e. who is trained, in what form, and paid by whom as part of labor
adjustment. We use the Danish case to consider each in turn.
The Danish notion of “flexicurity”, i.e. combining the promotion of labor flexibility with the
provision of social security, has attracted considerable attention in Europe (Sapir 2006, Zysman
2006).xxv In Denmark, a Scandinavian country with a long Nordic tradition of providing social
protection as part of citizenship rights, the broad social foundation of protections seem to have
25
contributed to sustaining a political deal that makes it is easy for companies to adjust the sizes of
their workforce due to the relative lack of employment protection legislation or collectively
mandated rules. It is a system that is supported broadly by the various sections of society, not
least because easy firing often translates into easy hiring.xxvi As a result, Danish job mobility
levels match those of the United States and Britain, with median job tenure in Denmark at a
relatively short 4.4 years, compared to 10.7 years in Germany and 7.8 years in Sweden.
Interestingly, the Danes do not seem to fear the flexibility that companies expect from them. In an
OECD survey conducted in 1996, the proportion of Danish workers not strongly agreeing with
the statement “my job is secure” was considerably lower in all other sampled countries (OECD
1997, quoted in Madsen 2006). It thus seems clear that far from always acting as rigidities, which
hinder the workings of the market mechanism through distorting price signals and raising the
reservation wage, systems of social protection can – if designed correctly – underwrite a flexible
labor market regime by both increasing the legitimacy of the economic system and delivering
actual outcomes.
In our view, the Danish case can act as a demonstration for the possibility of combining economic
modernization with European traditions of social protection.xxvii In fact, the Danes might have
successfully updated the production paradigm of flexible specialization for the digital era.
Denmark seems to have leveraged both long-standing historical legacies and more recent reforms
of established systems of social protection for creating an environment that provides companies
with the flexibility to experiment and facilitates both individual and collective learning (Campbell
and Hall 2006, Lundvall 2002).xxviii Reforms in the mid-1990s updated a set of institutions, which
had sustained a high degree of fluidity in the Danish labor market during the last 70+ years,
through selective decentralization and the introduction of more competitive elements into a
highly cooperative system.xxix Consequently, the Danish policy regime has become widely known
as one delivering “flexicurity” (Wilthagen and Tros 2004), i.e. combining the promotion of labor
flexibility with the provision of social security.xxx
Encouraging Skill Investments in the Face of Labor Market Flexibility
The story, of course, is not just one of ‘protection from change’ but ‘preparation for change’. It is
well understood that the skills required by future workforces will evolve constantly over the next
years,. Lifetime jobs are giving way to careers of shifting position. The knowledge one has at
26
entry in the workplace will not suffice. Skills, and skill training, will become all the more
important as lifetime employments give way to a sequence of shifting positions.
Investment in skills is an important aspect of the ability of workers, of any sort, to adapt to
changes in job requirements. It is, as we all know, a real element of labor market flexibility.
Again, as with security against the dislocations of the marketplace, the absolute level of spending
is only one part of the story. Again, the questions relevant to labor markets include not just
whether there is investment in skills or what the level of spending is. Rather, it is important who
pays, what kind of training is provided, and which obligations might be involved. Our intent here
is not to propose a “correct” scheme of training, or explore the proper balance between “general
knowledge” and “firm specific skills”. The purpose is, rather, to emphasize that “how” training
or skilling are provided is a central matter.
As a means to emphasize the importance of the mechanisms, the how of delivery, let us consider
the balance between “general knowledge” and “firm specific skills”. Recent research has
pointed out that systems of social protection can provide workers with important incentives to
invest into skill sets that are specific to companies or sectors (Estevez-Abe et al 2001). Prominent
examples range from the study of certain engineering methods at the university level to the
completion of narrowly defined apprenticeships. In the absence of generous unemployment
insurance schemes, a rational worker would choose to invest in general skills, such as they are
provided in management training. The reasoning is simple: The more general the skill set, the
easier it is to find a job and minimize dependency on unemployment benefits; also, more general
skill sets are less threatened to become outdated by technological change (Iversen 2005).
However, the aggregation of these rational individual choices presents a collective action
problem. Economies, experimental or not, need workers with highly specific skills to develop
new products in support of economic growth.
Workers’ incentives for skill investments are arguably becoming more important than they have
always been, because employers’ incentives to invest in training are likely being reduced in the
new age of labor market flexibility. At least this is a possible and logical conclusion to draw from
the empirical findings of another body of comparative empirical research on the political
economic consequences of the positive relationship between employers’ incentives for human
27
capital investment and the stability of employment relationships. In the digital era, experimental
companies desperately need a high-skill workforce, but they continue to want their investments in
human capital to pay off for them and not their competitors to which their employees might well
move. A standard comparison has long been that between Germany and Britain. In Germany, a
high degree of employer coordination has long sustained both industry-wide collective
bargaining, which has encouraged longer job tenures through restricting the scope of worker
poaching by competing companies, and a vocational training system run jointly with unions and
state authorities, which provides even smaller companies with the capacities to train their new
workers. In contrast, companies in the flexible British environment never successfully solved
their collective action problem of investing into the broad up-skilling of the national workforce
(see e.g. Thelen 2004). The respective success of national business communities in generating
high-skill workforces have deeply affected the production strategies that individual companies
could adopt and the types of wages they were able to pay. While German companies could
embrace the strategies later described as diversified quality production and flexible specialization
(Streeck 1991), British companies have tended to go the low-skill, low-cost Fordist route that
very quickly brought them in direct competition with producers from newly industrializing
countries (King and Wood 1999).
With shorter job tenures in the digital era, employers’ human capital investment decisions are
made on the basis of shorter time horizons for potential amortization. This development can have
important consequences. An undesirable scenario would be the one that has played itself out on
the Iberian Peninsula. With strong incentives to reduce labor costs through using temporary
workers, Spanish companies are much more likely to adopt a low-wage/skill production strategy.
In turn, their productivity has slipped. In contrast to the Spanish trajectory of consolidating the
position of labor market insiders at the expense of ever-larger numbers of outsiders such as the
unemployed and temporary workers, Portugal adopted a set of policies that facilitated
employment adjustment rather than the maintenance of the wages and benefits of current
workers. Although Portugal’s ‘flexible’ strategy of low-wage economic growth has arguably
limited the spread of unemployment by maintaining employment in low-skill, labor-intensive
sectors such as textiles and ceramics, it has not provided a stable basis for growth in high valueadded
sectors. As a result, Portugal faces rising competition from new EU and other
industrializing countries, which have higher-skilled workforces and lower wages (Watson 2006).
28
However, the contrasts between high-skill and low-skill production strategies might at least be
partially over-drawn, and rather than reducing company-sponsored skill investment, shorter job
tenures might merely be associated with new forms of employer-sponsored skill investments. In
combination with the increasing pace of technological change that leads to accelerated outdating
of skill sets, shorter job tenure rates might make unsustainable the heavy reliance on intensive
skill investment at the beginning of workers’ careers of German-style two to three-year
apprenticeships. At the same time, efforts to frequently re-skill workers might remain viable and
indeed very important, in particular as these are focused on specific tasks in the spirit of
continuous employee and organizational learning. Interestingly, continuous re-skilling is another
area in which Denmark excels. In contrast to other European countries’ apprenticeship programs,
the Danish system does not concentrate on vocational education and training at the beginning of
workers’ careers. According to EU statistics, Danish workers spend more time in training and
skill formation programs than workers in any other member state of the European Union.xxxi
Again, Denmark serves to demonstrate that a tradition of social protection can be reconciled with
the necessities of market flexibility. Flexibility does not require removing social protections.
Consider that Denmark is the country with the highest labor market mobility and training rates on
the European continent and also the OECD country with the highest level of employment policy
expenditures. In cases of unemployment, the Danish system offers generous replacement levels
for limited periods of time, so that individuals can search for the most suitable job for themselves
rather than having to take the first available one for lack of personal financial liquidity.
Furthermore, individuals, who do not find new employment within this period, are required to
join training schemes to remain eligible for public support. Public expenditures for training and
unemployment benefits are high, but they constitute an investment into the future of the affected
individuals and the productivity of the country. In contrast to the mixed record of active labor
market policy in other countries, the Danish system seems to work well, not least because
companies can shape the programs to meet their local needs.
In turn, on the micro-level, Danish businesses seem to have an extended set of options for
organizing their activities. In comparison to their competitors, they can grant their workers more
autonomy, leaving them with more discretion for decision-making unconstrained by hierarchical
29
supervision systems (Dobbin and Boychuk 1999). Lorenz and Valeyre’s recent analysis of
European data demonstrates convincingly how a new corporate ‘learning’ model with these
organizational features is more prevalent in those countries with universalist systems of social
protection.xxxii Through tapping into individuals’ knowledge to provide organizational flexibility,
the learning model provides a good basis for experimental corporate strategy.xxxiii For instance,
Campbell and Pedersen (2005, 25) invoke the characteristics of the learning organization in their
explanation of the Danish success in niche market opportunities in the global economy. They
attribute Denmark’s position as a world leader in the production of wind turbines to the
“incremental innovations in wind turbine technologies that Danish firms developed through close
collaborations with their customers, production workers, and engineers who continuously
experimented with and developed improved blade and turbine technologies over the years.”
In Lieu of a Conclusion: The Agenda for Europe
This essay makes two arguments. First, countries and companies face an ever more volatile
competitive marketplace. They have to maneuver in a competitive environment, in which the
“sweet spots” for corporate success are constantly changing as company internal functions
become products, products become commodities, and the sources of differentiation for products
and processes are constantly evolving. This new “formula” for corporate success requires a social
capacity for flexibility and adaptation. Second, social protections often serve as essential sources
of social capacity for adaptation and change. There is not an inherent contradiction between
social protections and market flexibility. The essential issues are how those protections are
organized and delivered. The dilemma of many continental European countries to provide
“welfare without work” (Esping-Andersen 1996, Scharpf 2001) after a history of “adjusting
badly” (Manow and Seils 2000) is only one possible outcome. To the contrary, if adapted rather
than abandoned, European traditions can be the basis of continued growth and productivity in a
competitive marketplace.
It has always remained outside the scope of this paper to advance specific policy
recommendations. Writing in the United States, we feel hesitant to prescribe solutions – for that
task we defer to our European friends. In an insightful recent piece that appeared as we were
editing this essay, André Sapir (2006) advances policy recommendations on the basis of an
intellectual framework that seems compatible with ours. In his view, only the Scandinavian and
30
Anglo-Saxon variants of the European Social Model will in the end be sustainable, leaving those
countries that make up two-thirds of the GDP of the entire EU-25 with a list of necessary
reforms. Sapir seems to agree with us that Denmark might have valuable lessons to offer. While
reforms will in the end involve a fair share of deregulation and liberalization, we strongly believe
that one should not forget about the potential efficiency-enhancing benefits of pre-exiting
institutions such as the systems of social protection (see e.g. Ornston and Rehn 2006). Europe has
benefited from them in the past. Our analysis leads us to believe that reforming – rather than
scrapping – them will best support economic adjustment in the digital era.
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i This section is adapted from Cohen, DeLong and Zysman (2000).
ii This section is adapted from Zysman (2004a, 2006). See also Zysman (2004b)
iii The distinctive features of the Japanese lean production system were a logical outcome of the dynamics of
Japanese domestic competition during the rapid growth years, and this system was firmly in place by the time of the
first oil shock in the early 1970s. For example, Japan’s automobile and electronics firms burst onto world markets in
the 1970s and consolidated into powerful conglomerates in the 1980s. The innovators were the core auto and
electronics firms who, in a hierarchical manner, dominated tiers of suppliers and sub-system assemblers; the
production innovation was the orchestration and reorganization of the assembly and component development
process. The core Japanese assembly companies of the lean variety have been less vertically integrated than their
American counterparts. Rather, they have been at the center of vertical Keiretsus, loosely speaking, Japanese
conglomerates conventionally understood to be headed by a major bank or consisting of companies with a common
supply chain linking wholesalers and retailers, that have tightly linked the supplier companies to their clients. It
cannot surprise that lean production became a focus of American policy and corporate attention because it
represented a direct challenge to both mass manufacturing and assumptions of American global economic policy.
iv The argument is simple: The relationships of production and development in the Japanese production system are so
delicate that measures to steady and smooth the expansion of demand in sectors such as autos proved very important
for the success of the production innovations (see Tate 1995). In Japan, public programs generated domestic rivalries
35
that lead to over-investment and excess capacity. This excess capacity was then “dumped” off of on international
markets. Just-in-time delivery, subcontractor cost/quality responsibility and joint component development pushed on
to the subcontractor considerable risks of demand fluctuations. It remains questionable if Japan’s emerging auto
sector could have continuously absorbed the stops and starts of the business cycle that typified Britain in the 1950s
and 1960s. Would the trust relationships that are said to characterize Japan have held up? Could the fabric of small
firms have survived to support just-in-time delivery and contractor innovation? Techniques to continuously
reappraise demand levels and reduce unpredictability throughout the system as well as government and corporate
programs to reduce the capacity break-even point in small firms only go so far.
v This section is adapted from Zysman (2006).
vi For example, print, broadcast, and communications suddenly become integrated with the possibilities of search and
storage of information thrown in. Some argue that the moveable type contributed to the social revolution of the
Renaissance, with the obvious question of whether the social consequences of these radical information technologies
will be of similar historical scale.
vii Thanks to Stuart Feldman of IBM for his presentation at the Innovation Alliance: Succeeding in an Evolving
Global Economy conference, Berkeley Roundtable on the International Economy, Berkeley, August 27, 2004.
viii Consider finance where the application of sophisticated mathematical tools to the creation of financial products
and online transactions replace the ties to our local banker, transforming distinctive advantages into commodities and
creating a new basis for premium products.
ix Many of the engineering schools are rooted in science based engineering, solving engineering problems by working
with fundamental principles. The Bayh-Dole Act pushed universities into “marketable” technologies developed with
federal funding. An array of mechanisms, from licensing through facilitating “spin-offs” to institutions for joint
development, have been established at the major technology universities to facilitate ties to industry. In addition,
companies turn to the start-ups or spin-out the development of particular elements of products or services, because
they feel that many projects are best developed outside the traditional hierarchy of a major company. Firms from
Intel through Nokia to IBM establish mechanisms, including their own investment companies, support startups as an
approach to technology development and an alternative to internal development.
x Companies set up joint product development projects with other companies, basically combining technology
strengths. They also establish technology development outposts both to monitor developments and to tap into
distinctive pools of talent and technology around the world.
xi Often disruptive technologies, which are capable of supporting newcomer entry into the market, are difficult to
develop by established companies in-house (see Christensen 1997).
xii “Manufacture: To make or process (a raw material) into a finished product, especially by means of a large-scale
industrial operation. To make or process (a product), especially with the use of industrial machines. To create,
produce, or turn out in a mechanical manner. To concoct or invent; fabricate. To make or process goods, especially in
large quantities and by means of industrial machines.” Source: The American Heritage® Dictionary of the English
Language, Fourth Edition (Houghton Mifflin Company, 2000).
xiii The critical question, once we acknowledge that software production is a form of manufacturing, is what are the
most effective ways of organizing software production. For this discussion, the list begins with the conventional
questions of whether to outsource, of where, geographically, to locate software development. The story becomes
interesting when we ask whether to choose conventional hierarchical production structures typified by Microsoft or
new alternatives such as the commercialization of Linux products developed in an open source model.
xiv On-line the issue of trust is even more important. Here the possible anonymity of the market participants, the
difficulty of imagining recourse to a virtual participant, makes trust essential. It is that problem which E-bay has so
cleverly addressed.
xv The result, of course, is a policy struggle about what information can be gathered, shared and combined. The
wishes of companies and governments to assemble information from diverse sources into consumer profiles or threat
assessments is set against individual rights for privacy and community needs for the integrity of the individual.
xvi Thanks to Emilie Lasseron for this observation. She is currently developing these ideas further in her work on
user-centered design in a digital age.
xvii In the bookseller market, the Borders and Barnes and Noble chain stores in their brick and mortar form are more
of a threat to the local vendor than Amazon. Indeed, venture capitalists behind Amazon report that the original
investment was an “experiment” in the consequences of internet-based retail marketing by new entrants,
disintermediation. The conclusion they drew early on from Amazon was that there were sharp limits to the retail
possibilities the tools provided. Similarly, the telecom collapse hinged on faulty notions of how data networks would
be used. A most evident false notion was the asserted belief in the staggering and continuing expansion in the use of
bandwidth to carry entertainment content. The image was often that the consumer net would become a sophisticated
36
vehicle for centrally distributed content. However, the error is evident in the history of the American post office. The
post office in the United States was established to distribute newspapers, but the killer application that supported the
system was letters, peer-to-peer communication to use today’s vocabulary (Zysman 1998). Communication, not just
voice but messaging and video meetings, and peer-to-peer exchanges are likely to be the killer applications.
xviii Alternatively, consider pharmaceuticals. If NextGenPharma sells a drug to be dispensed by a doctor or hospital,
or sold in a pharmacy, it is producing a product. With gene mapping and molecular analysis, we are moving toward
the possibility of a service model of therapies adapted to particular physiologies. If NextGenPharma really is a
database company with a store of detailed molecular-level drug information and genome functionality, it could sell
an online service to customize drugs or therapy.
xix Certainly the dotcom era bubble reflected greedy projections of assumption rarely reassessed of greed and hope. In
fear that the “moment” would pass by, images that were projections of possibilities were taken as solid facts.
xx Op. cit. Eliasson. Note that this argument is consistent with and now draws on the framing argument of Gunnar
Eliasson (1991).
xxi However, state action is not the solution; indeed, it never was. It is an important part of a regional development
strategy that needs to span both the public and private sectors. The history of most crucial developments in the digital
era – the development of the internet being among them – is one of the interplay of both public purposeful action and
user-driven innovation enabled by deregulation. Private actors will (have to) continue to be the source of much of the
needed entrepreneurialism.
xxii See Cohen et al (1984); This argument is also being developed in work on regional growth by Stowsky, Nielsen,
and Zysman. A current take can be found in Zysman and Newman (2006).
xxiii Framing the debate about increasing labor market flexibility as one of maintaining-versus-retrenching the
welfare state is unfortunate, because it masks the real issues. Labor as a commodity has such special properties that
the existence of regulating institutions can actually increase the efficiency of labor allocation, especially in the
widespread presence of information asymmetries (Spence 1972). For example, it is a highly differentiated
commodity, because human beings differ greatly in both their accumulated skill sets and willingness to employ them
(Iversen 2005). Furthermore, Polanyi (1944) argues that labor is merely “fictitious commodity”, because it that is not
produced for sale. Neither from a theoretical vantage (Marsden 2003), nor from an empirical perspective (Freeman
2005), do deregulation and reductions in social benefits seem to increase labor market performance. The debate, as it
often structured, fails to recognize the positive incentives provided by many welfare state programs. Indeed, they are
incentives that will prove important for companies’ success in the digital era.
xxiv The academic literature on the different regimes of welfare capitalism provides a good starting point for an
inquiry into the different incentives for social mobility provided by countries’ systems of social protection (see
especially Esping-Andersen 1990). Importantly, in the process of studying this literature, we do not need to buy into
the literature’s frequent normative biases that prompted Philip Manow (2002) to invoke the title of one of Sergio
Leone’s famous Spaghetti Westerns for his characterization of the comparisons between the universalist Social
Democratic regimes of Scandinavia, the low-spending Liberal Anglo-Saxon countries and the high-spending but
stratifying conservative systems of Continental European countries as a competition between “The Good, The Bad,
and The Ugly.” Protecting current employment turns out to be harmful with respect to both efficiency targets and the
legitimacy of a flexible labor market regime, while protections against the negative effects associated with
unemployment can jointly enhance mobility and efficiency (Hall 2006).
xxv For a good overview piece on the Danish “flexicurity” regime, see Madsen (2006); for a more theoretical and
comparative perspective, see Wilthagen and Tros (2004).
xxvi The Danish Confederation of Trade Unions stresses that “Danish companies are more willing to hire new
employees in times of economic revival than their European competitors, who have trouble letting off workers when
the economy goes downhill again (Fuller 2004).”
xxvii The economic success of Denmark in the current market environment has come as a surprise to many analysts.
As recently as in 1990, influential business analyst Michael Porter predicted Denmark’s certain decline on account of
its outdated political economy. Now, with employment and growth numbers envied by many other European
countries, politicians and academics have started to speak of the Danish ‘miracle’ (Nielsen and Kesting 2003,
Schwartz 2001). Such talk is partially due to the relative inability of established frameworks to account for the
Danish success story. Denmark could not build on a legacy of high-technology industries or homegrown multinational
corporations such as neighboring Sweden. Rather, Denmark’s performance largely rests on small and
medium-sized enterprises in sectors that were originally seen as being mature, generating slow growth and exhibiting
low technological intensity. With the analytic framework developed in this essay, we can get a handle on
understanding why the country was able to weather the storms of the digital era.
37
xxviii Among the legacies being invoked by various analysts are the social cohesion stemming from the particulars of
the Danish history of nation-building (Campbell and Hall 2006) and the high degree of concertation flowing from
Denmark’s small-country size (Katzenstein 2006, Nielsen 2003). Kristensen (2006) stresses the role played by
Denmark’s worker training systems and the peculiar organization of the systems of social protection in creating the
high degree of fluidity that has characterized the Danish labor market for almost 75 years.
xxix In the process, the degree of strategic rationality displayed by Danish elites in their reflection on the Danish
performance in the digital era is most remarkable (see Innovation Council 2004, FORA 2005). On the basis of the
country’s small size and a strong corporatist tradition, Denmark’s policy networks display strong public-private links
and a high degree of coherence. In such a context, formulating a “national strategy” seems an entirely realistic vision,
an assessment shared by many Danish decision makers. This outcome has been achieved in an environment, in which
76 percent of Danish workers were union-members in the mid-1990s, and collective wage-bargaining has a very
strong tradition. Indeed, while recently yielding more scope for decentralized decision-making, collective agreements
have played an important role for delivering flexibility in another dimension of labor deployment. Since 1965, these
agreements have included provisions for flexible working hours, which – after further expansion in 1995 – also place
the Danish labor market among the most flexible in Europe with respect to work scheduling (Campbell and Pedersen
2005, 16-20).
xxx This outcome has been achieved in an environment, in which 76 percent of Danish workers were union-members
in the mid-1990s, and collective wage-bargaining has a very strong tradition. Indeed, while recently yielding more
scope for decentralized decision-making, collective agreements have played an important role for delivering
flexibility in another dimension of labor deployment. Since 1965, these agreements have included provisions for
flexible working hours, which – after further expansion in 1995 – also place the Danish labor market among the most
flexible in Europe with respect to work scheduling (Campbell and Pedersen 2005, 16-20).
xxxi Importantly, three changes in the 1990s have further increased the efficacy of these programs. First, the
vocational training system was opened to the unemployed with the goal of using the economic downturns to upgrade
their skills, making it in turn more attractive for companies to hire them during the next upswing. Second, unionemployer
negotiations over the organization of the blue-collar training curriculum were decentralized, so as to target
skill acquisition more effectively to local needs. Third, new skill upgrading programs were introduced to allow
workers to spend more time away from work. This measure increased the level of competition among technical
schools and raised the quality of the training provided (Campbell and Pedersen 2005, 21-26).
xxxii The analysis was conducted using data from the third European Survey on Working Conditions (Paoli and
Merllié 2001). To arrive at this conclusion, the authors distinguish between the ‘lean’ production model, originally
theorized by Womack et al (1991), and the newly conceptualized ‘learning’ model as corporate organizational
templates geared towards the competitive marketplace of the digital era. While both models display stronger learning
dynamics and higher problem-solving activity on the part of employees than either taylorist or pre-Fordist traditional
organizations, the learning model constitutes a distinct way of delivering flexibility and cooperation within the
company. Companies organized along the lines of the lean model display such attributes as the strong use of
teamwork, job rotation, quality management and multiple work pace constraints. In contrast, the uniquely socially
embedded learning model is more decentralized and grants employees a high degree of autonomy. According to
Lorenz and Valeyre, the learning model builds on local traditions in work organization, for example, the Swedish
socio-technical principles of the 1970s. For a review of Lorenz and Valeyre’s findings and a discussion of their
implication for research in Comparative Political Economy, see Schulze-Cleven (2006).
xxxiii For example, Sabel (1994, 136) reports that shop stewards in the metalworking industry invented new payment,
training, and job classification systems to increase the flexibility of production and the general skill level among
workers.