Capitalism’s Future Lies in Networks and Cooperation

NEWARK: The global financial crisis has increased protectionism in some countries, raising questions about whether international business and global cooperation will recede. This year is also the 200th anniversary of the birth of British naturalist Charles Darwin. Darwin theorized that individuals in a species that are a better “fit” with their environment would out-compete and replace those less fitted. Notions of cooperation or altruism bear only a passing mention in Darwin’s works.

The past 25 years celebrated a culture of corporate triumphalism based on competition and profit-seeking. But, beneath the veneer of such a popular, mainly Anglo-American, corporate ideology, a different economic trend has taken root – one that makes a return to protectionism or isolationism unlikely. Cooperation, as much as competition, is slowly being recognized, by evolutionary scientists and behavioral economists, as an engine of progress.

Cooperation among companies is an integral part of the new model for business in a globalized economy. Today, the largest economic grouping is not the multinational corporation, but the global industry network consisting of companies that simultaneously compete and cooperate. The “fittest” corporation of the 21st century and beyond is one that masters the art of competition, when acting alone, and the art of collaboration when part of a worldwide network.

The new knowledge and service economy of the 21st century relies on a model of corporate “alliances” and “networks,” by breaking down the sequence of research, production and distribution – previously done in-house within the same company – over separate enterprises that take joint risks and share rewards over longer periods of time. Boeing used to build entire aircraft themselves, with parts purchased from thousands of suppliers with whom their relationship was adversarial.

Today it is a cooperative process. While Boeing guards proprietary technologies, the 787 “Dreamliner” is built with major inputs from partners in seven nations, all part of the research and development team from the beginning, sharing in development costs and providing specialist knowledge that Boeing did not have. Each network “partner” incurs R&D costs based on faith and trust, with no assurance of recouping these outlays for a decade or more.

Foregoing immediate gain, good ideas and technology are altruistically shared within the “network” of suppliers, even though there may be no immediate gain for that partner. However, the whole network gains. The altruistic member firm, sharing good ideas or incurring costs, does not demand immediate recompense, anticipating eventual reward because the other companies remember its contributions. The new network economy is based on forbearance and trust among cooperating firms, long-term memory and social networks, rather than formal contracts or directed hierarchies.

Three decades ago companies believed in doing it all themselves, under a hierarchical, internally controlled, management. Rather than accept the Indian government’s mandate to accept local partners, IBM withdrew its entire operation from India in 1977. Today,

IBM alone claims to have more than 90,000 business partners.

Cooperating networks range from strategic to operational to tactical, with hundreds of thousands of cooperative relationships worldwide.

For many industries, a global scale of operations is mandatory for efficiency reasons. The huge costs of R&D or production in high-tech sectors make it too difficult for a single company to develop the product or brand, bear the risk and span all segments of the value chain on a global basis.

The new alliance network economy provides more flexibility, lowers risk for each member company, and speeds response to changing markets or fashion conditions, more than is possible within a single firm. The value chain is outsourced over several companies, in different nations.

A Nike sneaker may have components produced by independent suppliers in nine countries, which are then assembled under Nike’s coordination in Asian factories. Nike is “merely” a designer, a coordinator of a global supply chain encompassing 800,000 workers worldwide, and a weaver of dreams whereby the user derives satisfaction through subliminal association with Tiger Woods.

Consequently, the basic model of business is being revised. Where Ford Motor Company once occupied every part of the value chain – from making the steel to marketing its cars – the predominant model today is for each firm to find its core competence while collaborating with partners occupying other parts of the value chain. Each partner specializes in a function it does best or cheapest. For example, Nike specializes in design and marketing, outsourcing the production of shoes to its partners.

Most outsourcing is not an arms-length transaction, but entails an intimate, cooperative relationship between the managements and engineers of the network firms. The better managed the relationship, the greater the performance of the alliance. The behavior, quality standards and reputation of foreign prospective partners is easily discerned in a connected world. While outsourcing in manufacturing is a 200-year-old phenomenon, business-services outsourcing has exploded recently, aided by reduced data-transmission costs and an increase in absorptive capacity in emerging nations.

The cooperative revolution is also being aided by sweeping changes in the global regulatory environment such as the liberalization of foreign direct investment rules, the international spread of intellectual-property enforcement, the harmonization of standards and the codification of business functions. Hence, ultimately, any business process or task that can be codified or digitized is amenable to outsourcing.

“Codification” simply means that companies make a concerted effort to document management processes and engineering techniques that formerly resided in the minds of their engineers and managers in the semiconductor, steel, chemical and many other industries.

Another form of cooperation involves partners pooling resources for the same business function or piece of the value chain. More diverse talent is thereby tapped, costs are lowered and good ideas are gleaned – especially if the research is done abroad. Another motivation is simply to spread risk. The cost of a semiconductor fabrication factory, being as much as $4 billion, few single firms can justify the investment. The entire pharmaceutical industry is evolving in that direction with ideas, costs, benefits and risk shared between large firms and their smaller biotechnology partners. Buying options for potentially good ideas outside the company also motivated Microsoft to invest in small-equity stakes in Facebook and other startup companies.

To a degree unimagined just two decades ago, development risks are driving more industries to recognize that global returns are mandatory for competitive survival. Budgets for Hollywood movies are never set without an estimate of the non-US market proftit potential. Few single companies can today market to all potential customers – or all end-applications – to maximize return on R&D. Applied Materials, Inc., a leading provider of manufacturing equipment for chip makers has accumulated expertise in nanotechnology, which has potential applications in fields as diverse as solar energy, flat-panel displays, energy-efficient glass and fuel cells. But Applied Materials does not have in-house expertise in the production or marketing in these other areas. The solution is alliances in those business areas.

Besides increased codification of corporate knowledge, the capacity to absorb technology better in emerging nations, and the IT revolution, a series of global institutional developments have also fostered international corporate alliances: Increased patenting makes technologies more visible to prospective allies. Better patent enforcement reduces fears that allies may engage in opportunistic behavior. Of course, several emerging markets are a long way from effective enforcement of intellectual property rights, but this is bound to improve. All in all, the global spread of intellectual property rights will increase cooperation.

Liberalization of the world’s investment climate continues, a trend going back to 1975. For the 16 years, 1992 – 2007, of 2,788 regulatory changes, as many as 91 percent were liberalizing, and 9 percent or fewer were more restrictive toward incoming FDI. Governments now voluntarily, even eagerly, subscribe to treaties such as that of the WTO that circumscribe their internal economic freedom. This applies even to authoritarian governments such as China that loathe outside scrutiny.

The old industrial economy of objects emphasized mass production and ownership, control and vertical integration within a single company. An economy of ideas favors flexibility, customization, rapid response and risk, reward and idea sharing within networks of companies. Cooperating entities in a network attract more members into the network, which in itself increases value, reduces costs and promotes common standards.

As we question, in 2009, the shape of future global capitalism, a cooperative model has already evolved without much fanfare. In the evolution of life on our planet, cooperation has been as essential a theme as competition. A planetary-scale economy and civilization make cooperation indispensable.