Narayana Murthy

Globalisation

November 17, 2018 / ZURICH
Narayana Murthy - Globalisation
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In 2009, Bill Gates stated ‘Through his vision and leadership Murthy sparked a wave of innovation and entrepreneurship that changed the way we view ourselves, and the way we view India.’. He was of course referring to one of India’s leading industrialists, N.R. Narayana Murthy – principal founder of technology giant, Infosys. This statement by Bill Gates appears on the rear cover of Murthy’s book, “A Better World, a Better India”, published in 2010.

As we prepare for next Tuesday’s Asia Leaders Series event in Zurich with Murthy himself, we wish to make reference to a chapter of his book which has particular relevance today. The chapter is titled: “Do We Need a Flat World?”.

Do We Need a Flat World?

By Narayana Murthy

Murthy opens this chapter by referring to Thomas Friedman, who coined the phrase “Flat World” to popularise the power of globalisation. Murthy states that globalisation is about sourcing capital from where it is cheapest, sourcing talent from where it is best available, producing from where it is most efficient, and selling where the markets are, without being constrained by national boundaries.

‘A globalised corporation is not to be confused with a multinational corporation (MNC).’, Murthy explains that whilst an MNC generally starts a subsidiary to produce and sell in that country alone, a globalised corporation will choose to develop products where human talent and innovation are best; produce products in factories situated in countries where it is most cost-effective, and make sales in countries with high disposable incomes. He offers the computer industry, investment banking, hospitality and the education sector as examples of industries in which the USA has secured itself prominent market-share globally, thanks to the strong brands which have been established in its home market.

Reebok and Nike are good examples of such corporations, which have leveraged the low-cost production of shoes in Taiwan and South Korea to create a compelling advantage for customers in developed markets. Of course, Murthy also places his own company, Infosys, in this category. ‘In 1981, we realised that the demand for software in the developed world would skyrocket. [] At the same time, we saw a tremendous shortage of skills in the developed world.’

Murthy recognises that outsourcing is one industry which has received a great deal of attention, and that there have been numerous passionate arguments for and against it. He goes on to emphasise that outsourcing benefits a nation and its people, and that data shows that it is not the cause of wage declines or job losses.

Quoting David Ricardo, “even if a country could produce everything more efficiently than another country, it would reap gains from specialising in what it is best at producing, and trading those products with other nations”.

Before delving into the concerns of globalisation, Murthy offers five benefits:

1. The flat world is a powerful platform for leveraging the global intelligentsia towards enhancing innovation. At the time of the writing of the book, China was producing 600,000 engineers, while India produced 450,000. In comparison the USA saw only 70,000 engineering graduates per year. Murthy describes how General Electric (GE) set-up its largest R&D centre outside the USA to benefit from this talent. He states that Cisco, IBM, Intel, Motorola and Texas Instruments filed over 1,000 patents in 2004 as a result of their centres in India. It is clear how Western corporations are benefiting from the vast pools of highly-educated talent outside of their main markets.

2. Demographics in the West will soon result in a shortfall of labour, even for basic services. Murthy states that almost a third of the US population comprises Baby Boomers. He states that countries like India, which is home to a fifth of the world’s population aged under 25, can provide many such services, such as accounting, legal services, tax advice, travel and hotel bookings, medical appointments, and even medical analysis – all remotely and at a fraction of the cost in the USA.

3. Globalisation enhances the competitiveness of corporations. India, and other countries in Asia, are geographically located to enable the “twenty-four-hour-workday”, where productivity begins in Asia when it ends in Europe and the USA. This reduction in cycle-time increases the firm’s productivity vis-à-vis local competitors.

4. Globalisation helps a nation overcome its supply challenges. A country like the USA which has always been at the forefront of innovation, has fewer and fewer enrolments for disciplines such as computer science. Murthy was informed that between 2001 and 2005 the number of enrolments in this field declined by 2,150. In addition, over 40% of the enrolments were from students abroad, particularly China and India. Murthy draws a parallel between the number of skilled immigrants, and the number of patent applications, emphasising that a rise of 10 per cent of immigrants, results in a rise of 0.8% in patent applications.

5. Globalisation creates new markets. A by-product of globalisation is an increase in purchasing power in emerging economies. This newly generated wealth expands market opportunities for global corporations. Murthy offers the auto and airline industries as examples, stating that BRIC countries (Brazil, Russia, India, China) represented over 50% of the auto industry’s global capacity increase between 2005 and 2010.

Murthy proceeds to tackle some of the common concerns about globalisation.

1. Concern #1: Short-term job losses.

Critics argue that globalisation favours outsourcing and an increase in immigration, both of which result in job losses and lower wages. Recognising that these are important views, Murthy refers to Robert Feenstra and Gordon Hansen, who have examined the impact of outsourcing on labour-intensive components of US manufacturing firms. Their conclusion was that outsourcing raised the real wages of US workers.

Murthy refers to Philippe Legrain, who wrote a book titled “Immigrants”. Legrain looks at how cities like London, New York, and Toronto have benefited from the diversity of immigrants, concluding that the influx of immigrants does little or no harm to the wages or employment prospects of local workers.

Murthy’s view is that short-term job losses are inevitable if a nation wants to create new opportunities for a larger number of people in the medium term. He presents an example, beginning by stating that he uses a Toyota car to reach his office. Elaborating, he describes how prior to the entry of Toyota, Honda, Ford, GM, Suzuki and Hyundai to the Indian market, the choice of cars was very poor. Shortly after these foreign car manufacturers entered the Indian market, Indian car companies closed down, resulting in a large number of job losses. However, the competition between these players soon meant that India became one of the fastest-growing car markets in the world. The result of this was a boom in the auto-component manufacturing industry – which subsequently created jobs.

2. Concern #2: A lower quality of life.

According to the Economic Policy Institute, US trade with China has eliminated production that could have supported over two million jobs during the period 1997-2006. However, during the same period the per-capita GDP of the USA increased from $31,011 in 1997 to $43,500 in 2006. Murthy states that this is because the US corporations have used innovation to move up the value-chain, creating new products and services which other countries have not been able to. Using the iPhone as one example, the USA has been able to export several high-end innovative products which have resulted in higher revenue per person.

Famous economist Paul Samuelson has referred to the issue of short-term job losses from globalisation. Murthy acknowledges his findings, and emphasises the importance of equipping new entrants to the workforce with the tools to respond to changing demands. Murthy states that it is important to provide industry-oriented education, and to improve the skill levels of the labour force.

Murthy emphasises the need for a flat world, because it spreads the American beliefs in free trade to the rest of the world. This benefits consumers all over the globe and helps create a world with better opportunities for everyone. Perhaps most importantly, the flat world brings global trade into focus, which shuns terrorism and creates a more peaceful world.

Written in 2007, Murthy explains that he is a great admirer of the USA, and that he is optimistic that the country will continue to be the unquestioned leaders in prosperity in the flat world through its scientific and technological innovation.

On Tuesday evening, we shall see where his optimism stands today.