Organizational Learning and International Competition: The Skill-Base Hypothesis

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Abstract
Since the 1970s a persistent feature of the U.S. economy has been increasing income inequality, to the point where the United States now has the most unequal distribution of income among the advanced industrial economies. Sustainable prosperity--the spreading of the benefits of economic growth to more and more people over a prolonged period of time--appears to have become an elusive objective. At the same time, in the late 1990s, after more than two decades of intense competitive challenges, the United States retains international leadership in a range of science-based industries such as computer electronics and pharmaceuticals as well as in service sectors related to such things as finance and food. The U.S. economy appears capable of innovation but incapable of sustainable prosperity. Are innovation and equality inherently in opposition to one another? In a previous report to the Levy Institute, co-authored with Mary O'Sullivan, we hypothesized that the coexistence of innovation and inequality in the U.S. economy in the 1980s and 1990s reflects a systematic bias of major U.S. corporations against making innovative investments in broad and deep skill bases. Rather, these corporations, which exercise inordinate control over the allocation of resources and returns in the economy, are choosing to invest, and are best able to innovate, in the production of goods and services that use narrow and concentrated skill bases to develop and utilize technology. The skill-base hypothesis views both international competition and technological change as important determinants of the distribution of income. But the hypothesis is embedded in a theory of innovation and economic development in which the impacts of international competition and technology on income distribution depend on corporate investment strategies. Across U.S. industrial corporations, these strategies, and the investment in skill bases that they entail, are in turn influenced by American institutions of corporate governance and corporate employment. The rise of powerful international competition based on investments in broader and deeper skill bases may lead U.S. corporations to seek to remain innovative by investing in technologies that only require investments in narrow and concentrated skill bases. Powerful support for the skill-base hypothesis can be found in the experience of Japanese-U.S. industrial competition over the past few decades. Japan has taken on and surpassed the United States in many industrial competitions over the past few decades. Japan has taken on and surpassed the United States in many industries in which it was the previous world leader. The foundations of Japanese success in international competition, I shall argue, were investments in broad and deep skill bases to generate organizational learning. The problems of both innovation and equality in the United States in the 1980s and 1990s have not been inherent in technology. Rather the problems derive from corporate strategies to develop and utilize technology. U.S. corporations, I contend, have been investing in narrow and concentrated skill bases in a world of international competition in which innovation has increasingly come from investing in broad and deep skill bases. If the skill-base hypothesis is correct, the problem of reversing the trend toward income inequality in the United States goes much deeper than growth policies or industrial policies. It requires transformation of the way industrial corporations are governed and the way people are employed.

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