May 23, 2004

Every global company in Israel should carry out extensive R&D.We’re living at the height of a revolution. If two experts, who are constantly jetting about, talking to world leaders, and analyzing trends daily, say so, then it’s probably true. The New York Times op-ed contributor Thomas Friedman, author of From Beirut to Jerusalem and The Lexus and the Olive Tree, among other books, says we’re now undergoing “Globalization 3.0”. Prof. Lester Thurow talks about the third industrial revolution.

What do they mean? And what does it mean for Israel?

Thurow says the first industrial revolution was driven by steam, pure and simple. The second was driven by the electrical dynamo, assisted by modern industrial R&D. The third is driven by microelectronics, computers and software, advanced materials, biotechnology, robotics, and telecommunications. He says some countries are leading the revolution, leaving the others behind.

As in every revolution, the existing order is being upset. Those who join the revolution get rich, while those who oppose it lose their heads, unable to adapt and adjust.

In his column, Friedman recently wrote that “Globalization 1.0”, from the late 18th century through World War I (1914-1918), was driven by lower prices for transportation and the consequent flourishing of world trade. “Globalization 2.0”, 1980-2000, was based on the plunge in the cost of telecommunications and PCs that shrank the size of the globe.

“Globalization 3.0” has now landed on us. Friedman says three forces drive it: fiber optic and undersea fiber cable-based broadband (created by the “bubble”), which enable us to transmit vast amounts of data at astonishing low prices; the worldwide spread of PCs; and programs that allow global workflow patterns.

The result, says Friedman, is that if you’re an American, Jerry Rao can prepare your tax returns without you even being aware of it. He prepares thousands of such reports. Jerry resides in Bangalore, India. US accountants outsource bookkeeping: US tax figures are scanned and transmitted to Indian accountants trained in US tax law.

India is part of Globalization 3.0. It has found a way to profit from outsourced services. China is exploiting Globalization 3.0 by becoming a magnet that attracts outsourced manufacturing.

China and India are operating on the same wavelength. They analyzed the “value chain” – the links in operations that provide $40 trillion a year in goods and services to the people of the world – and realized that they could “own” some of these links. As a result, China has had 9% growth a year for 25 years. It’s GDP doubles every seven years. Direct foreign investment in China totals $1 billion a week.

Business Week reports that if India succeeds in achieving rapid growth, it will become the first developing country to do so using brainpower, rather than natural resources or the musclepower of its factory workers. India’s power lies in services, which account for 60% of the US economy and employ two-thirds of the US labor force. Indian IT workers are climbing the new economy food chain by specializing in tasks that require analytical abilities, market sense, and commercial creativity.

We know that China and India have won a place in the global value chain. What about Israel?

If your expertise is of the kind that can be outsourced, such as preparing tax returns, something that Jerry Rao can do so well, you’re in trouble. You must upgrade your skills, ensure that your children learn not only expertise, but also how to constantly change and improve it, because they’ll have to so five or six times during their lives.

As for setting a national policy for Israel, I have a proposal. One of the essential factors for global success is innovation. Multinational corporations increasingly wrestle with this: the size and diversification needed to compete in global markets strangle their creativity, because creativity mainly thrives in small groups where people feel that they have a free hand and influence.

Israel is a country with very creative people. It can win a respectable share of the innovation link in the global value chain by becoming a global R&D center, alongside China as the global outsourced manufacturing center and India as the global outsourced services center.

If we join the revolution instead of resisting it, we can make Israel into a country in which every global company will carry out extensive R&D. By the way, a good living can be made from R&D, because some international corporations have concluded – we can hope – that it’s worthwhile manufacturing Israeli inventions in Israel, close to the people who invented them, simply because it make business sense. There are already many examples of this.

The vision is there. Now the government, industry, workers, and academics must cooperate to make it happen. Either join the revolution or it will pass us by.

(Reprinted from Globes)

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Jason Harris

Jason Harris

Executive Director

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