The Accumulation of Human Capital Is An Art – It Requires Special Care In Nurturing Talent – The Importance Of Innovation Friendly Eco-Systems


By Paolo von Schirach

December 1, 2007

WASHINGTON – “A free market in brainpower”. This is what Fortune magazine advocated in an important article on high value human capital. Brainpower encompasses the valuable (but, apparently not universally valued) educated people who, often congregating in clusters of researchers, innovators and entrepreneurs, constitute the strongest asset that an advanced knowledge economy can have. And this precious brainpower is, of course, at the foundation of the ability to discover and invent; and, in so doing, open new horizons, create new value and, ultimately, more shared prosperity.

Human capital is key

Highly developed human capital is absolutely crucial to success and to retain success. Many students of the phenomenon, such as Richard Florida, have noted that, assuming unimpeded freedom of movement, the innovators tend to move where there is a receptive environment whose main pillars are quality research universities that truly encourage and sustain new thinking and cross pollination with new enterprises. Overall, in these clusters there is an open, tolerant space where dialogue and exchange is not only possible, but really interesting and vibrant, so that it will act as a magnet for fresh talent to pour in. Professor Florida and others have described how cities like Austin or Seattle or Vancouver have become such magnets. And all this is good.

Free flow of talent

The problem is in the fact that we do not have a system that guarantees the absolute free flow of talent so that it will congregate in suitable cities. At least the flow is not as free or as sustained as it could be in optimal conditions. For instance, in the US case we have a major “upstream” problem constituted by a mediocre to bad secondary education system that is simply incapable of producing the numbers of new quality students who will go and repopulate the universities and graduate schools in the magnet centers, or elsewhere for that matter; thereafter becoming the innovative entrepreneurs. We have many such centers, of course; but not enough. Bill Gates of Microsoft appeared in front of the Senate Labor Committee pleading for radical reform of the entire US high school system, bluntly indicating that the likes of Microsoft cannot employ the products of this outmoded, under performing education system.

Of course, lacking domestically grown brains in sufficient quantity, we could import them, as we have done in the past. Indeed. And here it is important to notice, as Richard Florida pointed out, that, on average, if we lump together all the immigrants coming to America, we discover that they are more educated than the native population. While we tend to think of immigrants as mostly low cost manual laborers, “11 percent of foreign born adults in the United States –states Florida–have a graduate or professional degree, compared to only 9 per cent of natives “.

Quality immigration

It would appear that this quality immigration has made a real difference in the past, giving a significant edge to America on an intellectual, research, innovation and ultimately economic level. Today, any casual observer cannot fail to notice the significant percentage of Indian, Chinese and other immigrants at the top of high tech and other firms in the United States. These highly skilled individuals add value and help America retain the edge that the native population alone could not secure by itself.

Too many talented immigrants?

But these facts notwithstanding, amazingly today the debate is not on how to create a system that will help us secure this advantage brought about by high quality immigrants by encouraging more of them to come here. In fact, just the opposite. The debate is on how to prevent educated would be immigrants from “stealing” American jobs from Americans. The main argument for protectionism in intellectual and academic jobs is now exactly the same as the one regarding opposition to openings to low skilled laborers. Opponents maintain that, by flooding the market with foreigners, employers inflate the labor supply;  thus they can keep wages or salaries artificially low for all. While there may be some truth in this, it would be very simple to establish and police a level playing field, whereby all people would compete on skills only, and not by willing to accept below market compensation.

The inability to attract fresh talent is a very serious issue. Of course, after 9/11, we had a truly anomalous situation in which security overwhelmed any other concern as to the desirability of feeding the old pipeline that led foreign highly educated people to the US. While things have changed a bit, the damage has been enormous. While the US pipeline was reduced to a trickle because of new security obstacles, (and also by the perception that talent from many countries was not wanted, due to political reasons), other pipelines have been fed, primarily leading to other Anglo-Saxon countries, but not exclusively.

All this notwithstanding, to date, the US still retains an enormous built in advantage in the many centers of excellence already established that can keep attracting talent, assuming no artificial impediments to this flow. Thus the, relaxation of the post 9/11 restrictions, combined with more aggressive recruiting should see the increase in the flow of foreign talent.

Cluster formula can be replicated

Of course, the US formula is not unique. With many variations, it can be replicated. Given the right mix of ingredients, vibrant research and innovation communities can be established, and have been established elsewhere. Just to name one of the most obvious examples, Nokia did not come about in Finland accidentally. It  could get established and thrive because it benefited from a vast connective tissue that starts with excellent secondary education and continues with world class academic centers such as the Helsinki University of Technology, located in Otaniemi, along with research facilities in Oulu, in the north of the country. Add to this mix a fairly cosmopolitan English speaking population and a public sector willing to invest heavily in the future, through pro-innovation agencies such as Tekes, and one can see why Finland has many first rate innovations centers that make it one of the most competitive economies in the world. 

Immigration not benefiting Europe

Having said that, Continental Europe overall is in worse shape than the US. Many new immigrants are settling in Europe. However, the vast majority of the newcomers flowing into Europe are under educated, compared to the averages of the native population. Unless current demographic trends that point to a rapid shrinking of the native Europeans are reversed, Europe in the future will rely proportionally more on the value of the contribution of under educated immigrants. Given significant cultural and religious obstacles to full integration for many of the new arrivals, many of them will live at the margin of society. They will be incapable of making significant contributions to cultural and entrepreneurial advancements in their adopted countries; at least not comparable to the contributions made to the US economy and society by many of the “high value” immigrants to the US.

While the US and Europe do seem hesitant about launching bold policies aimed at attracting more international talent, others try; but success is by no means guaranteed.

China lacks the eco-system

China, the world’s workshop, thinking about its future competitiveness, may certainly want to transform its enviable edge in low cost manufacturing into high margins derived from innovation and original entrepreneurship. But, for the moment at least, China still lacks the open, tolerant environments necessary to nurture innovative minds. Its universities are still largely hierarchical, bureaucratically organized structures; a far cry from the nimble, decentralized model prevalent in the most innovative western counterparts. Given time, of course, all this will probably change and the Chinese innovators may very well find optimal homes to test their ideas in their own country.

In India, a far more open, liberal country, at least compared to China, this is already happening, to some degree. Many expatriate Indians, seeing the emergence of islands of excellence in their native country, now see the value of going back to their roots and contributing to their growth. This amounts to both a net drain from the places in which these expatriates had previously established themselves, as well as a cut in the future flow of talented people who now are finding adequate outlets for their creativity in centers of excellence closer to home.

Can we buy our way into innovation?

Elsewhere, we observe the desire to leapfrog decades, perhaps centuries of backwardness through bold moves. Understanding that the future will belong to those who innovate, Saudi Arabia is now deploying a sizable chunk of its oil wealth in a bet aimed at creating a brand new center of excellence in science and technology, that hopefully will open new vistas for the country in future times when the oil rent will have been depleted.

The King Abdullah University of Science and Technology, or KAUST, opened for business in 2009. It is willed and funded directly by the sovereign who has devoted to this effort 10 billion dollars; thereby, in one day, reaching the endowment level that took MIT 142 years to create. For the time being, the effort is shepherd by Saudi Aramco, the national oil company, arguably the most modern, technologically savvy Saudi corporation. 

This higher education enterprise, along with the parallel venture of Alfaisal University, due to open in September 2008, represents a very concrete attempt aimed at transforming a culturally backward country into a nimble, innovative society. The intentions are serious and sincere. The open question is whether, vast amounts of money notwithstanding, Saudi Arabia and similar places can create that unquantifiable atmosphere, well described by Richard Florida and others, that makes places productive because they are attractive and vibrant. As Mr. Al-Kattan, Dean of the soon to be opened medical College within Alfaisal University put it, referring to life in Saudi Arabia for the mostly expatriate faculty that will be necessary at least at the beginning to get things started: “This environment will not suit everybody”.

Indeed. Let us say that, unless life in the kingdom changes dramatically, it will suit mostly those expatriates who are willing to make sacrifices for the sake of attractive compensation packages. While these individuals will provide a starting point for what should be high quality education, it does not follow that these richly endowed universities will be able to create an environment that will make them true centers of excellence. There is a correlation between a cosmopolitan, open culture and innovation. Saudi Arabia may need more than gigantic infusions of money in order to catch up with other advanced societies.

Human capital needs care

Given the formidable obstacles on the way to bridge the gap in the formation and nurturing of human capital, it is astonishing that the West, the US in particular, which spent decades and decades to build it, is not sufficiently concerned about its preservation and upkeep. At this stage, waiting for a renewed pipeline of scarce domestic talent, (whose flow will depend on drastic public education reforms), one way of guaranteeing the future viability of centers of excellence is in welcoming those who would like to come but who are prevented by current cumbersome security screenings (they are necessary; but there must be ways to expedite them) or by measures aimed at protecting the home grown human talent.

Human talent, as anything else, should thrive from being tested against worthy competitors. As long as we can ensure a level playing field for all, Americans should not fear the new comers. But if the real reason for restricting this competition is that we want to ensure that the home grown talent will be guaranteed the best slots, we may do some people a favor; but a great disservice to a society that will not be truly aware of what others can contribute. In the long run, protectionism, pursued for its own sake, in whatever area, is a defensive measure, a rear guard battle that is always lost.

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