For almost 200 years, America has enjoyed global leadership in science, commerce, and government. As a consequence, the United States has become one of history’s greatest economic powers, dominating the 19th and 20th centuries. The ability of Americans to “think outside the box,” their courage to challenge conventional thinking, and their confidence to persevere despite numerous setbacks has inspired generations and continues to change lives around the globe.
Leaders understand that greatness is more than building personal wealth or power, but creating products and services that improve the lives of individuals and the overall human condition. But as trade barriers between countries have fallen, leaders are faced with new challenges, and America’s preeminent status as the world’s dominant economy has been and will continue to be challenged as never before.
21st Century Challenges for America’s Businesses
There are a variety of factors that may negatively affect the competitiveness of American firms in the coming years, including three identified in McKinsey Quarterly:
1. Dynamism in Emerging Markets
The world has become “flatter” with the disappearance of natural and artificial borders that protected local and regional markets. As a consequence, markets are worldwide and more competitive, as economist and “New York Times” columnist Thomas L. Friedman predicted in 2005.
Within the next decade, China will be home to more large companies than either the United States or Europe, with almost one-half of the companies on Fortune’s Global 500 list of major international players hailing from emerging markets – a 900% increase in 20 years. The emergence of nearly two billion consumers in the emerging markets will create markets in their home countries to support aggressive international growth.
2. Technology and Connectivity
Moore’s Law – a computer term professing that overall processing power doubles every two years – is alive and well, and may prove to be conservative. According to SingularityHUB, many computer scientists project that the world’s first “exaflop” computer will be available before the end of this decade. An exaflop computer will perform a quintillion operations a second – the inputting power equal to the human brain.
As a consequence of the anticipated quantum leap in computer power, businesses can start and gain scale with stunning speed while using little capital, value will rapidly shift between country and industry sectors to reflect the constant changes, and entrepreneurs and startups will have new advantages over large established businesses. The life cycle of companies is already shortening and decision making has never had to be so rapid fire.
3. Aging Populations
Many developed countries have seen their birth rates decline even as their population ages. This trend is now moving to the emerging economies so that by 2050, the world population will plateau and perhaps fall. For example, according to Pew Research, the U.S. birth rate is at a record low, one-half of the rate in 1957. Germany’s Federal Statistical Office expects that by 2060 the country’s population will shrink by up to one-fifth and that the number of people of working age will fall to 36 million (from roughly 50 million in 2009).
In the emerging economy of Thailand, the fertility rate has fallen from 6.1 in 1960 to 1.4 in 2012, according to The Wall Street Journal. A smaller workforce usually portends lower consumption and lower economic growth. In non-economic terms, those trends mean that the size of the pie will get smaller and competition between businesses will become more intense for the smaller pieces.
Two other factors are likely to negatively affect America’s competitive position:
4. Rise of Multinational Corporations
While multinational corporations – global enterprises that operate in several countries – have been present for years, their numbers have exploded since the end of World War II. According to a 2012 report in Globality Studies Journal, multinationals now number more than 63,000 firms, with hundreds of thousands of subsidiaries around the world.
In addition to economic power, these companies exercise enormous political power. For example, ExxonMobil, one of the largest, is thought to have greater influence in the Middle East than the United States Congress. According to a 1998 article in the journal Foreign Policy, many observers believe that the multinational companies are becoming “stateless,” acting solely in the interest of shareholders who are globally dispersed. The lack of loyalty to no country is accentuated by the promotion of foreign nationals to top management positions. The effects of multinationals and their global thinking is apparent in the decades of outsourcing and offshoring American manufacturing jobs to other countries, and the weakening of the country’s influence on the world stage.
5. Excessive Financial Sector Influence
Wall Street, especially hedge funds and investment firms, have begun to wield enormous influence upon the management and direction of publicly-traded firms. According to Harvard Business Review, the financial sector’s influence has become so powerful that more than one-half of chief financial officers would cancel a project with a positive net present value – in other words, willingly harm their companies – to meet Wall Street’s targets and fulfill its desire for “smooth” earnings. In plain language, public company managements are prone to sacrifice long-term value opportunities to satisfy Wall Street’s demand for short-term profits and high stock values.
Though American businesses have long dominated global markets, obstacles and changes such as these will challenge them to maintain their leadership position.
Keys to Future Success
The need for true leaders – visionaries who can think creatively, as well as pragmatically – has never been greater in American history. A number of changes are needed for the U.S. to remain competitive in a global market – and it’s not too late to implement them.
1. Renewed Emphasis on STEM Education
Education has always been the foundation for personal and societal progress. Studies have shown that at least half of the economic growth of the United States is attributable to improved productivity resulting from innovation. In particular, STEM (science, technology, engineering, and math) knowledge, skills and abilities are expected to improve the competitive position of U.S. industries, drive export growth, and create high-quality jobs.
According to the Office of Science and Technology Policy of the White House, the United States will need approximately one million more STEM professionals than are expected to graduate over the next decade. Unfortunately, fewer than 40% of students who enter college intending to major in a STEM field complete a STEM degree.
To fulfill our needs in the coming decades, we need to improve our public educational system since, according to STEM Education Coalition, fewer than half of U.S. high school graduates are ready for college work in math, and only 30% in science. The World Economic Forum ranks the United States 52nd in the quality of mathematics and science education.
STEM education benefits individuals as well as the country. According to the U.S. Department of Commerce, in the past decade, growth in STEM jobs has been three times as fast as non-STEM jobs and now represent more than 5% of the workforce. Over the next 10 years, STEM jobs will grow more than twice as fast as non-STEM jobs. In short, improving math and science education in our nation’s elementary and secondary schools is a prerequisite to achieving the economic gains to be had from technological innovation.
2. Reduce the Influence of Wall Street
The 2008 mortgage security crisis illustrates the problem of a system where risks are spread across the society – resulting in the financial bailouts – while the gains are concentrated in the hands of a few Wall Street executives with outsized compensations. While a strong financial system is crucial to the economy, the power of the current U.S. financial system distorts the economy negatively.
Several reforms detailed in the Harvard Business Review should be considered:
- Enforce/Strengthen the Capital Requirements for Commercial and Investment Banks. In 1995, the assets of the six largest U.S. banks were equivalent to 17% of the country’s gross domestic product. By 2013, the ratio had grown to 53%. Even with the new Dodd-Frank requirements, a study by economists at New York University projected a $340-plus billion shortfall in the six banks in the event of another crisis.
- Limit the Deduction for Interest While Reducing the Corporate Tax Rate. The loss of the deduction would be compensated by the lower rate while decreasing the influence of the financial sector over the operations of the companies. With no deduction, companies are more likely to utilize equity, rather than debt in their balance sheet, reducing leverage.
- Tax Financial Transactions. Initial proposed by economist John Maynard Keynes, the U.S. had such a tax from 1914 to 1966. By slowing down the pace of transactions, emphasis will return to the underlying investment values, rather than short-term price movement.
- Treat Investment Income as Ordinary Income. Studies by economist Leonard Burman and the Congressional Research Service show no meaningful relationship between U.S. economic growth and its favorable capital gains rate.
3. Increase Investment in Leadership Training
John P. Kotter, professor at Harvard Business School, declared in 2013 that few organizations have sufficient leadership, a condition that renders them “vulnerable in a fast moving world.” While corporations continue to invest in Leadership Training – spending on average $1,169 per learner in 2013, according to The Corporate Learning Factbook 2014 – more than 60% of all companies cite “leadership gaps” as their top business challenge.
Fortunately, leadership is a trait that can be learned, not a genetic gift. Marshall Goldsmith, writing in Harvard Business Review, proposes that the role of leaders is to “encourage and support the decision-making environment, and to give employees the tools and knowledge they need to make and act upon their own decisions.” Simply stated, an empowered, engaged workforce is essential to success in the new world marketplace.
John Kennedy once said that leadership and learning are indispensable to each other, no doubt wisdom gained from his own transformation from a spoiled, wealthy son of a politically powerful man into a beloved president who inspired his generation. Harry Truman, the president best known for embracing the philosophy “The buck stops here,” once said, “Men make history and not the other way around. In periods where there is no leadership, society stands still. Progress occurs when courageous, skillful leaders seize the opportunity to change things for the better.” A leader in the right time and place can transform a company.
The challenges for American corporations are clear. It is also evident that “business as usual” no longer works. Our workforce is disengaged, the benefits of the economy are unequally distributed, and our markets are open to competitors around the globe. The opportunities for an invigorated national entrepreneurial effort, with an educated workforce and freed from the short-term focus of Wall Street, are greater now than ever before.
What do you think? Are our current business leaders up to the task?