In his January State of the Union address, President Obama discussed tax incentives aimed at helping America regain its competitive advantage. That kind of strategy has been used before—with mixed success—to help businesses, but using it to ramp up an entire nation may be another matter, according to Thomas M. Smith, an assistant finance professor at Emory University’s Goizueta Business School. In the aftermath of Obama’s speech, Smith spoke with Knowledge@Emory about the challenges and opportunities involved in revitalizing America’s competitive advantage.
The following is an excerpt from that interview. Click here for the rest of the article.
Knowledge@Emory: When we speak of competitive advantage, we’re usually referring to corporations, not national economies. What does competitive advantage entail?
Smith: For a company, competitive advantage is about things like technology that gives the firm the ability to produce goods less expensively or with more quality at a good price, or it could be about lean manufacturing, supply chain development, or other strategies that offer manufacturers cost and quality at an advantageous price. For service companies it might mean having timely access to information and instituting rapid, accurate workflow arrangements that let employees operate steadily with some degree of independence.
Knowledge@Emory: What about for a nation?
Smith: For a country, competitive advantage means encouraging research and enabling workers to acquire advanced and efficient skill sets, production techniques, and information across industry lines. It also means training workers to understand complex systems so they can see how their job relates to the entire facility and to the entire firm—how their actions will affect total quality and profitability.
On a larger scale, we all need to understand how our actions affect the broader economy.
Knowledge@Emory: You mentioned that for companies, competitive advantage means producing goods and services at a competitive price. Nationally, how can the U.S. compete with low-wage countries like India and China?
Smith: A better educational program, and making more information available to everyone, would help, but the fact is we can’t compete with India, China, and other low-wage nations on pure cost. As a nation, we may have to be willing to give up on some industries—stop propping them up and just let them wither away, and concentrate on the value-added areas, like research and development, where we can compete.
Knowledge@Emory: President Obama called America’s need to promote economic competition a “Sputnik moment,” a reference to Russia’s October 1957 launch of a satellite that started the space race and prompted America to ramp up its educational system and the national space program. Do you think the U.S. has the will and the economic ability to respond to this ‘Sputnik moment’?
Smith: Back then there were two superpowers, and in addition to the perceived military threat, the United States’ pride was on the line—we didn’t want Russia to one-up us. The concept was so distasteful that we initiated a lot of educational and other programs that targeted a broad range of areas. My dad, for example, got a Ph.D. in English through a program called the National Defense Education Act that basically paid for his undergraduate and graduate studies. Back then the country recognized that everyone benefits from increased educational opportunities.
Knowledge@Emory: What’s different now?
Smith: As a society we take the short-term view. Look at cars; manufacturers used to dismiss Japan’s attention to quality and demand for small, fuel-efficient cars. Eventually, U.S. automakers paid the price.
Knowledge@Emory: Will tax breaks help?
Smith: Tax breaks rarely have clear-cut results. There’s no doubt they increase the disposable income of the companies or individuals who qualify, but whether they in fact align with the stated public policy behind their creation is another story.
Tax incentives may be aimed at getting companies to hire more people, but right now they’re not doing much of that; instead, companies seem to be spending the additional cash on equipment and technology that are designed to reduce the need for workers.
Knowledge@Emory: What other solutions might be more effective?
Smith: It’s not simple. First, the government has to carefully design tax breaks in a way that ensures that the behavior they stimulate will align with public policy.
Then on a broader scale, the nation has to decide if it’s willing to make the investments in education, technology, and industry that will yield long-term gains.