Fortune Favors the Bold

1. Fortune Favors the Bold Lester Thurow MIT

2. Global Trends • - A general increase in the development of technology – The Third Industrial Revolution • - Low cost country (LCC) manufacturing - seeking the lowest costs area to manufacture / assemble products (Globalization) • - Overall decline in personal savings rates • - Increase in output per hour worked (productivity) • - Capitalistic Inequality - Widening of the economic status gap

3. Global trends • - Life expectancy in developing world has gone up rapidly and is not far behind that of developed countries. • - IMF has historically been successful at restoring financial stability, but poor at restoring domestic prosperity • - IMF predictions are always too optimistic regarding how much IMF austerity policies will cut local growth rates

4. Global Trends • - Wage inequality expanding within various social groups (Men/Women) • - Increase demand for higher skilled jobs as we transition into a knowledge based economy • - shift from manufacturing focus to a services focus • - Increase in protectionist political policies regarding Agriculture • - Increase in third world economic crisis (Southeast Asia, Argentina)

5. US Economic Trends • Increase in general household debt • Decline in the savings rate of the average American Household (from 9% in 1992 to • 2% in 2001) • Overall decline in the number of jobs available due to increases in productivity • Decline in the value of the US Dollar • Increase in Federal Spending to support a vigorous continued economic recovery • America has had an increasing trend of importing its oil consumed.

6. US Economic Trends • Inflation rates in the US (less healthcare) are approximately 0.3% • Inflation rates are masked by the declining costs of electronics • Deregulation, privatization, increased competition, global supply chains have all been suppressing inflation • Over 25yrs, real wages have fallen in the US at about 1% per year for the bottom 60% of US Male workforce.

7. US Economic Trends • Increase in persistently large trade deficits • 2006 second highest on record • Since 1965, imports plus exports have gone up from 5% to 30% of America’s GDP. • America imports 60% of its oil, representing 10% of its overall imports • Per capita GDP in US grew at 2.1% annually in last decade

8. US Economic Trends • The “rest of the world” has come to rely on US Trade Deficit and the inward capital flows from it to sustain growth and development • Almost 50% of US imports come from offshore production facilities of US companies • Mfg. goods account for 80% of all trade

9. Social Trends • social welfare benefits instead of payroll (corporate tax) • Increase in Export of US entertainment (games, movies, music, TV programming) • A new, global culture is being formed in parallel with the new global economy • Increase in global communications (television, internet) • Foreign born (non-US) nationals playing a larger role in global business

10. Legal regulatory • Americans demand for oil is becoming more and more inelastic • Property rights lie at the heart of today’s knowledge based economy • In most developed countries, government spending on R&D is falling as a fraction of total R&D spending • Private companies are being looked to provide innovation • In the US, patent applications have doubled in a decade

11. Regulatory • Demand for int’l patents at the WTO was up 25% from 1999 to 2001 • Half a million movies a day are being downloaded from the internet • Since WWII, Pharmaceuticals has been the most profitable industry in America

12. Regulatory • Of the top 100 drugs, 53 are set to come off patent protection in 2005 • Budgets for R&D for replacements drugs of those coming off patent has skyrocketed to find placements • In developed countries, per capita income is rising at 2% per year • Increase in kidnappings and robberies (corruption) impacting second and third world countries ability to sustain economic development

13. Cultural trends • Sales of music CDs down 10% in 2001 and 13% in 2002 • CD burner ownership up from 14% to 40% in two years, blank discs now outsell music discs.

14. 2. Predictions • Continuous fiscal scandals as a healthy way of capitalism to purge itself • Continued pressure on output to keep up productivity growth to show positive growth • Lower wages in Japan to counter act the deflationary pressure • European Stability Pact will require taxes to be raised, or spending to be cut, to wipe out deficits by 2005 • A shift from higher cost countries to lower cost countries until there is an equalization in skill sets, and thus prices – factor price equalization – a good gage for globalization

15. Predictions • Overall shift to capitalization, globalization and the 3rd industrial revolution creating a feeling of economic insecurity. • European firms, such as BMW, cutting costs dramatically by moving manufacturing to the US • Upscale firms (Bloomingdale’s) and downscale firms (Wal-Mart) boom due to the inequalities that exist in society

16. Predictions • Since the globalization model is based on US economical model, the rest of the world resents the US for not having to change, whereas they will have to • The world should expect more financial and economic crisises as the Global Economic Structure continues to develop/morph • Foreign Exchange crisises should be expected • Allowing Asian currencies to float would devalue the dollar

17. Predictions • US Current Account deficit is expected to rise from its current 4.5% of GDP level to 7 or 8 % (levels historically that have gotten countries in danger) • Competitive advantages in the future will come from IP, not price, location, ECT. • 30 of the worlds 40 million cases of AIDS are in Africa…that numbers is expected to double in the next five years • AIDS in Africa will have a tremendous economical effect on development in that continent.

18. Predictions • - Drug companies could be blown away due to demand to provide life saving drugs AFFORDABLY to AIDS patients and others having life threatening needs • - Revenues will plunge when the drug companies lose the patent protections • - Innovative drug companies will cut back on investment in new drugs • - Private companies will not invest in new vaccines for preventing disease if there is no money in it for them

19. Predictions • Chinese banking system could implode due to the bad loans it’s extending to defunct state owned businesses. • Outsourcing will continue to drive costs down • CD sales will reach 0 by 2011

20. 3. Scenarios • Government bailouts in Japan, similar to Savings and Loan crisis (Japan Resolution and Collection Corp. vs. US Resolution Trust) • The Japanese system will have to be rebuilt to deal with Capitalistic recessions and meltdowns • The Global economy would be better off if Japan and Europe took a lead role instead of a follower mentality in the global economy

21. Scenarios • Overall shift to a knowledge based economy – skills becoming more important and raw materials becoming less important • “Globalization augments the effects of shifting to capitalism and shifting to a knowledge based economy” • Response to rising income inequalities and economic insecurity lead to larger Gov’t programs to reduce market inequalities and uncertainties. • If the dollar was to plunge, OPEC would have a huge incentive to shift pricing for oil from dollars to other currencies; Should this occur, Oil prices for US imports would increase substantially

22. Scenarios • Globalization has “ended” forcing the standard of living down in the US and SIGNIFICANTLY down in second and third world countries as borders are shut • Oil cut off would mean shift to electric rail and bus • to produce the electricity required, coal or nuclear would be need to be expanded.

23. Scenarios • A big global disaster where the value of the dollar plummets • The gradual erosion of intellectual property rights, the economy would sink into stagflation as no one wants to invest in technology • A crashing dollar would have the potential to eliminate nearly 9 million US jobs, but would further impact those countries that export to the US at a level of 20-25 million jobs.

24. Scenarios • There will come a point where the US will not be allowed to run a trade deficit • whether it is hard or soft landing will dictate whether or not we’ll see enormous repercussions or not. • Should we have a hard landing from a dollar crash, suddenly loss of international demand (US imports) would send the world into a recession. • Should a hard landing occur, US would require a 1/3 increase in output of MFG goods to recover. This would require large expansion in capacity that does not exist is US today

25. Scenarios • It would take substantial time to rebuild the skills and competencies to meet this demand for manufactured goods. • To correct the current US trade deficit with slower growth (Soft landing) • US would have a huge recession. Rebalancing trade would require a more than a 20% drop in US GDP. • If everyone gets cheap drugs they want, the current system of paying for the development of new drugs collapses

26. Scenarios • If human population were to grow at 4% per year in the US, the US per capita GDP would have to fall. • With higher population growth rates, it is harder to raise the per capita GDP and standards of living. • The first world opens up its agricultural markets to third world countries to assist in alleviating poverty • Agriculture is the one industry where globalization is in retreat • World Bank established as a global department of education

27. Scenarios • Export led growth strategies in developing countries force them to become efficient • Massive investment in third world infrastructure would pull the economy forward • Rise in spending on adult education during a recessionary period. Perfect time to retrain workforce • Countercyclical revenues sharing programs to stimulate growth • Eliminate the US Trade Deficit • Fee schedule for using patents worldwide – starting at zero for poor countries • Rich countries buy the patents for life saving drugs and let the citizens use them

28. 4. Opportunity Recognition • Chief Knowledge Officer – Traditionally the CFO got the #2 position by creating real • financial competitive advantage for the company • today the CKO will do the same, but with knowledge. CKO tracks technology / trends. CKO defines patent strategies. • Ensures Technology is moving around the company and gaps are being filled where needed. • Ensuring the business is agile and able to adapt to changing markets. • Point out realities as products move through their technical and economical life cycles.

29. Opportunities • A national CKO – Taking CKO to a national, economic, political level. • US Department of Knowledge – responsible for creating new knowledge and figuring out how America can organize itself better to succeed in knowledge based economy. • The third industrial revolution requires societies willing to play god - The Bold! • 4G communications networks

30. Opportunities • To produce the electricity required to support in country development, coal or nuclear would need to be expanded should globalization shut off external oil supply • Infrastructure required to support hydrogen economy • Increase in overall patent litigation, as knowledge becomes more of a differentiator amongst competitors. • New business model required for “new” music industry