The emphasis on government action, however, masks the crucial role that business plays in driving U.S. competitiveness. Ultimately, decisions by business leaders determine whether the skills of American workers are upgraded on the job, whether new facilities are built in the U.S. or elsewhere, whether companies in America invest in the latest technology, and so on. A distinctive goal of Harvard Business School's project on U.S. competitiveness, which we co-chair, is to complement "What must government do?" with "What must business do?" What are the roles and responsibilities of business leaders in restoring U.S. competitiveness?The current discourse on U.S. competitiveness is dominated by the question, "What must government do?" To some extent, the emphasis on government action is fitting. Many steps toward a more competitive America lie in the domain of policy. For instance, only the government can lead in putting the country on a sustainable fiscal path, reforming the corporate tax code, or countering distortions in the international trading system.
Business leaders contribute to U.S. competitiveness first and foremost by vigorously pursuing productivity, profitability, and growth in their own enterprises, within the framework set by government and society. Some argue that the role of business stops right there — as Milton Friedman famously put it, "the social responsibility of business is to increase its profits."
We take a broader view, that business leaders also influence U.S. competitiveness by shaping the underlying business environment — the playing field on which all businesses compete. That influence can be positive, as when companies partner with schools and community colleges to ensure that graduates have the skills they need to be productive in the workplace. Or the influence can be negative, as when corporate lobbying for special treatment makes the tax code more convoluted.
This brings us to a central issue in the current challenge to U.S. competitiveness: The way that business leaders engage with the wider business environment has changed fundamentally in the past 30 years. Increasingly, business leaders can, or believe they can, step away from their local business environment rather than invest to make it more competitive.
In a nutshell, the story goes like this.
Traditionally in the United States, companies were bound to the communities in which they operated. Communication and transport costs forced most firms to sell relatively close to where they produced. Geopolitics and cultural distance limited the range of location options available to companies.
Because they were bound to their communities, many companies naturally invested in public goods where they operated — public goods that boosted local competitiveness. They put time and resources into local schools and colleges, developed regional supply networks, and upgraded the local skills base. Their leaders engaged with civic organizations focused on local prosperity. In short, companies committed themselves to the competitiveness of their communities.
It was in their interest to do so. Within each community, companies benefited from the commons they helped to create. For instance, the schools they supported produced graduates who became their workers and their customers. In economic parlance, the externalities were largely internalized. Social norms developed that put pressures on business leaders to support the local commons and not to free-ride on the investments of other companies.
During the past three decades, revolutionary changes in technology and geopolitics have broadened the range of location options available to firms, improved the ability of companies to operate far from their markets, and increased the mobility of business. The ensuing globalization has brought enormous benefits to business and society.
But it has also weakened the connections between companies and communities. Newly footloose, many companies in the United States have taken for granted the public goods they helped to create. Commitments to local competitiveness have waned, and public goods related to competitiveness such as schools, supply networks, skills pools, and civic organizations have deteriorated — to the detriment of communities and, importantly, to the long-term detriment of the companies themselves. As each firm has withdrawn its support of the commons, it has become more tempting and acceptable for others to do so.
The key question now is whether business leaders in America will allow this trend to continue or act to reverse it. Will they exit or exercise voice? Will they step out or step up?
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