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Globalization and the New Luddites

ELECTION YEAR ATTACKS on CEOs have started. Democratic presidential hopeful John Kerry is targeting “Benedict Arnold CEOs” who move jobs overseas.

As we have long argued, American CEOs need to be doing a better job explaining globalization. Just as corporate leaders are recovering from a period of nasty scandal, they are at risk of being tarred and feathered for outsourcing jobs abroad.

The right place to start is the historical context, dating back to the early 1800s when English workers incited by Ned Ludd destroyed machines that were part of the Industrial Revolution. When the automobile threatened the horse and buggy industry, whip manufacturers complained bitterly about the new mode of transportation. When computers and robots came along, there were howls of outrage that they would replace millions of jobs taking dictation and screwing in bolts. The consistent pattern is that yes, jobs disappear and that’s painful in the short term. But new jobs have always emerged, usually more satisfying ones.

In many ways, globalization represents abrupt technological change. If companies couldn’t send designs over high-speed communications to China and then schedule Boeing 747s to carry goods to market, fewer companies would source there. And if the Internet didn’t exist, the current rush to outsource information technology and service sector functions to India would never be occurring.

One challenge for CEOs is to demonstrate that globalization isn’t about jobs and jobs only. By seeking new manufacturing platforms, companies have driven down the costs of many products. Just take a walk through a Wal-Mart. By offering products to Americans at prices they can afford, companies have made money, and that benefits their shareholders. That matters to millions of Americans because their retirement funds are major owners of shares. At the end of the day, workers, consumers and shareholders are the same people.

There’s also a moral element of this argument. Traditional economic development has largely failed in much of the world. By creating jobs in India or China or Brazil, U.S. companies are helping to create wealth and improve living standards. Since when is creating jobs for poor people a bad thing? In this respect, CEOs have the moral high ground, if only you would use it.

Perhaps the best single way to explain globalization is the “value chain.” If a company designs a computer mouse and has it manufactured in China, yes, the factory jobs are in China. But design, marketing, financing and other jobs remain in the U.S. The Chinese workers might make $100 a month. The higher-end functions in the U.S. obviously offer far greater compensation-and their continued existence is defended by the availability of the lower-cost labor.

There’s even a value chain in services. As we describe in our story on human resources outsourcing (“Vital Functions,” page 46), CEOs are concentrating on taking processes that are administrative in nature and moving them out. Yes, some jobs disappear, but HR departments can concentrate on more important strategic functions and companies as a whole are more profitable.

The hardest single question is timing. “Okay, Mr. CEO,” the critics might say, “when will the new jobs appear?” The only honest answer is that no one knows for sure. But it has happened after every other period of change and it is typically small and medium-sized businesses that create the most jobs. It is far more useful to concentrate on creating innovation than it is to attack CEOs of large companies for doing what they traditionally do best, which is driving for efficiency. If the political environment in the U.S. were to deteriorate, that might have the perverse effect of encouraging CEOs to move many more jobs to more receptive climates.

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