Month: July 2017

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

JULY 12 , 2017

 

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

 

We complete a series on “Technology and Connectivity” in this issue of  IntelDigest.  Last week, we looked at the China-led megaproject, “One Belt, One Road,” and the increasingly more distributed Global Economy.  We posited that Globalization is more of an unstoppable force than a trend, and asserted that America should be leading the Global Economy into the future, NOT retreating from it.

In future issues, we will come back to specific topics in Technology, such as artificial intelligence, robotics, and cryptocurrencies.  But, we will complete this series with a more general look at technological development.

 

How Technology Advances in the 21st Century

Over the centuries, scientific and technological advances came incrementally, from the days of Galileo and Gutenberg through the Industrial Revolution, and began to pick up speed in the late 1800s with discoveries in physics, chemistry, electricity, sound waves, and electromagnetic radiation (light).

Since World War II, growth in science and technology has come exponentially, occurring at breathtaking speed.  And, the pace of change accelerates.  We can look forward to life-changing advancements, in just a few more years, in nanotechnology, materials science, and additive manufacturing;  battery technology and autonomous vehicles;  biotechnology, gene-editing, and medicine.

These advancements will certainly be “disruptive,” and will radically transform the lives of most of the inhabitants of this planet.  Emerging technologies in areas such as robotics and additive manufacturing, for example, are expected to be highly disruptive of labor markets around the world, inviting backlash from many workers.

However, technological changes do not affect all equally, because geopolitics plays a determining role in the diffusion and adoption of new technologies among cultures and societies.

 

 

 

Geopolitical Constraints

The ability of a society to prosper from developments in science and technology is dependent on numerous factors, from geography to natural resources, from infrastructure to defense strategy, from demographics to labor markets, from availability of capital to education policies.  Determining factors can vary widely from one country to another, and will create significant differences in each country’s ability to accept and utilize the type of advancements which we can anticipate in the very near future.

For example, Israel is a country which can be expected to embrace new technologies.  It has a highly-educated workforce, a culture which encourages education, and a history of advances in scientific and medical fields.  And, because of the perils of living in a dangerous neighborhood, Israel is a leading developer of weaponry and defense systems.

In addition, because of its harsh geography and scarce water resources, Israel has been at the forefront of developments in conservation, reuse, and desalinization of water resources.  Israel would most likely be among those countries which are early-adopters and beneficiaries of technological advancements.

Russia’s history has been dictated by military concerns. Russia (and the old Soviet republics) comprise a vast territory with substantially indefensible borders.  The susceptibility to invasion has been a primary concern of the society for centuries.  As a result, Russian priorities in science and technology have been devoted substantially  to military and intelligence applications.

This is not to say that Russians are not interested in being early-adopters of new technologies.  However, the state’s bastion-mentality tends to crowd out other interests, so that Russia tends to lag behind in technological fields (with the exception of cyber warfare, of course).

Japan is a country which shifted from a war-footing to leadership in consumer electronics in just a few decades. Then, recognizing a coming demographic disaster, it shifted again to become a world leader in robotics.

Japan faces a dwindling population and smaller workforce in the 21st Century.  Its inflexible labor markets are designed to protect existing workers’ rights, limiting the country’s ability to adapt quickly to shifting labor requirements.  So, Japan must be an early-adopter of new technologies … robotics and advanced manufacturing techniques … to compensate for an aging population and lost labor productivity.

The Japanese have had a historical aversion to immigration, so the social acceptance of humanoid robots, medical robots and related technologies is higher than most other countries.  Japan is a likely early-adopter of new technologies for use in the service sector.

 

 

 

The development of the China economy over the last 25 years has been no less than astonishing.  However, managing A Billion People over an enormous land mass is difficult and daunting.  China’s financial system and inflexible labor markets tend to hold back China and much of its population from the benefits of scientific and technological advancements.

Chinese technology has matured over those 25 years, from importing products and processes … to reverse-engineering foreign designs and manufacturing in its own facilities, with the help of Western companies.  The next step … mastering research, development, and manufacturing in home-grown industries which can compete in the Global Economy … will probably be accomplished over another 25 years.

Still, for a developing nation, China is relatively advanced in technologies that support national security initiatives, including aerospace, quantum-based technologies, biotechnology, and cyber security.

 

American Advantages

To this point in history, the U.S. has stood out as the unprecedented leader in the Global Economy.  Starting with the blessings of geography and the foresight of the Founding Fathers in establishing the Rule of Law, our country could stand on that solid foundation and grow into the leadership position which we have enjoyed for most of our lifetimes.

Americans have amassed abundant capital over close to 200 years since the beginning of the Industrial Revolution, enabling our country to take the lead in technological innovation, development, and deployment over much of that time.  Since World War II, the U.S. has stood at the forefront of research and development in almost all areas of science and technology.  Our academic institutions attract researchers from around the world, and our labor markets and regulations are flexible enough to support the invention, development, and integration of new technologies.

As the most developed capital market on the planet, the U.S. is in a position to deploy substantial amounts of capital to research and development in many different fields.  And, we have nurtured a startup and venture capital culture which drives innovation, particularly in the computer hardware and software industries.

Our national wealth exceeds 33 percent of global wealth … more than the next five countries combined … enabling the United States to continue to outspend our competitors in research and development.  And, unlike much of the rest of the developed world, the population of the United States is expected to keep growing.

With all of these accomplishments, our country should be poised to extend our leadership of the Global Economy far into the future.  But, we are in danger of taking backward steps … ceding dominance to others … because of the actions of short-sighted politicians.

It is in the best interests of our country, and the world at large, that our leadership in science, technology, and connectivity continue unabated into the future.

 

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

JULY 5 , 2017

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

We continue a series on “Technology and Connectivity” in this issue of  IntelDigest.  Last week, we discussed the Global Forces … Trade, Technology, and Demographics … affecting the Global Economy;  the evolution of China as an economic power;  and, the coming Transformation of Jobs by a new Information Technology paradigm.

We began this series in the June 21 issue by decrying the Trump Administration’s policy of “Economic Nationalism.” Herein, we set out the reasons that the United States should NOT be ceding its leadership in the Global Economy.

Effects on the American Middle Class

In the U.S. and in many parts of the developed world, manufacturing industries have been fundamentally altered by shifts in technology and global trade.  The Middle Class has been contracting, and is at serious risk in the decades to come.

This is a matter of great importance for both the global economy and for democracy.  Middle Class families are the primary drivers of consumption, which fuels economic growth.  Consumption accounts for more than two-thirds of economic activity in the United States.  The American Consumer derives great benefit from the lower cost of consumable goods made possible by global trade and automation.

At the same time, the American Middle Class is at great risk of contracting further as technological advances and automation eliminate millions of jobs, for skilled and unskilled workers alike.  And, this will have a significant impact on American Democracy.

The growth of an American Middle Class in the early decades of the 20th Century changed American Politics.  We became a nation where a growing cadre of hard-working and educated citizens formed a large and influential bloc of voters between the very rich and the poorer classes.  We are in danger, as our Middle Class contracts, of regressing to a 19th Century-style body politic, where the rich have both the money and political power to dictate to the rest of the citizenry.

Emerging Markets

After World War II, global trade had been carried by the American Consumer for several decades.  However, that has been changing over the last 25 years.  Emerging Market nations now conduct the bulk of their international trade among themselves, not with the United States.  In 1990, emerging economies sent 65% of their exports to developed countries, such as the U.S. and Europe, and 35% to other developing nations.  Today, those figures are substantially reversed.

China’s annual trade with Africa is nearing $400 Billion per year, more than U.S.-Africa trade.  China’s trade with Latin America is almost $200 Billion, about the same as trade between Latin America and Europe.  As Emerging Markets connect more with their peers, they become less reliant on the developed world.

Most of the world’s oil now flows between the Middle East and Far East, across the Indian Ocean and through the Straits of Malacca to China, Japan and South Korea.  A full 80% of China’s oil and natural gas imports traverse this route, along with roughly 66% of China’s imported and exported goods.

Asian economies have been steadily expanding domestic consumption and services, so that the growth in global trade is decelerating relative to the growth of global gross domestic product.  Consumption in China now represents two-thirds of China’s output and contributes 75% of its growth.  Still, China has continued its investment binge in infrastructure and real estate, keeping commodities imports steady.

As societies grow wealthier, they tend to import more, borrow more, spend more, and travel more.  Asia’s rising Middle Class will likely be a driver of international trade even as its companies reduce their dependence on the West.

China is now developing the largest coordinated investment and construction program in history … “One Belt, One Road” … a MegaProject meant to weave many new and sturdy Silk Roads across the Eurasian landmass.  This project will include high-speed railways, pipelines, ports, bridges, and much more infrastructure development.  The overall goal is to increase trade and international cooperation by facilitating the passage of goods and services across borders.

Since the collapse of the Soviet Union, Europe has been steadily rehabilitating its former Warsaw Pact and Soviet Republic neighbors with modern infrastructure, while China has begun to do the same with the countries on its western periphery.  Central Asia has become the passageway for the supply chain between Europe and East Asia.  In the coming decades, these supply chains will solidify under “One Belt, One Road,” fusing the Eurasian supercontinent into an integrated commercial zone encompassing over two-thirds of the world’s population.

In the meantime, Europe’s trade with The East … China, Japan, India, Australia, and the Association of Southeast Asian Nations … already amounts to over One Trillion Dollars per year, exceeding Trans-Atlantic trade.  It is no wonder that the Europeans were eager to join the Chinese-sponsored Asian Infrastructure Investment Bank, despite objections by the U.S. Government.

Germany’s record trade surpluses will not be absorbed in the sluggish Eurozone, or by a protectionist America. Europe and Asia are brushing aside America’s unpredictability and getting on with the business of building a new Global Economy.

Global Opportunities

This should not be read as our trade partners aligning against us.  They will continue to use the American financial system (where necessary) and American technology (when convenient).  This is a simple matter of Supply and Demand.

The global economic system no longer relies on the United States of America.  It simply craves connectivity and opportunity.  It no longer matters where they come from. But, the most connected power will have the most leverage. It will supply the security, infrastructure, and other public goods desired around the world.

China has become a welcome and popular power in Africa and Latin America because it has sold them (and often built for them) the foundations of better connectivity.  They have demand for infrastructure, and China supplies it.

This is a more distributed Global Economy.  There are many major regional anchors, including the U.S., and more positive interdependence among economies.  Nations now have the benefit of exploiting comparative advantages with one another.

A more distributed globalization provides more opportunity for non-U.S. economies.  America is a debtor nation, but Japan, Germany, and China have the largest economies among the world’s creditor nations, generating profits from global lending and trade finance.

Emerging Markets’ faster growth rates and weaker currencies have inspired some of the world’s largest pension funds, from Canada to Norway, to expand their portfolio allocations to Asia, Latin America and Africa.  The Norwegian pension fund recently switched its focus from bonds to equity, meaning it is investing more in multinational corporations with exposure to Emerging Markets.

Betting on Globalization

So, the “long money” is still betting on globalization. America should be leading the Global Economy into the future, NOT retreating from it.

The U.S. remains (for the time being) the most powerful and most connected state in the international system.  We are the world’s largest oil producer, increasingly exporting oil to China and liquefied natural gas to Europe.  The U.S. Dollar provides liquidity to the global financial system, and American foreign investment drives capital formation in Emerging Markets.  The American network of military alliances provides security guarantees.  And, American Technology is craved worldwide.

American competitiveness is NOT enhanced by isolating itself.  American companies rightly favored the Trans-Pacific Partnership (TPP) and other trade agreements because they’ve long since outgrown our giant domestic market.  Without substantial margins abroad, they will have to cut investment at home.

Donald Trump’s punitive measures are self-defeating because they hinder America from competing in a world of growing opportunity.  The U.S. should be aggressively opening markets for American goods, services, and investment around the world.

Domestically, the Congress and Trump Administration should get down to the important business at hand, namely:

1. reforming the tax code to improve the position of American businesses in world trade

2. rebuilding infrastructure in the United States, which will make foreign investment in the U.S. more attractive

3. encouraging free markets for American technology

4. remodeling and enhancing educational and immigration programs to provide more job opportunities for our rising young workforce in a 21st Century Global Economy

We will complete this series on “Technology and Connectivity” next week in  IntelDigest.