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Did you see it coming? Some thought they did.

Switzerland is now the most competitive economy in the world. According to the World Economic Forum’s Global Competitiveness Report just released on September 8, 2009, the US is now the world’s second most competitive economy followed by Singapore. Sweden and Denmark complete the top five.

I could say there’s some consolation that we were edged out by only a tenth of a point, but the long predicted decrease in our nation’s competitiveness as reflected in its rank in the Global Competitiveness Index (CGI) should give us reason to take stock of both cause and effect. Have the predictions of the National Academies' Rising Above the Gathering Storm report finally come true? Does the Rand Foundation really wear rose colored glasses as reported by the Information Technology Innovation Technology Foundation? Or can we disregard these warnings and assume that when the global economic crisis subsides the US will once again be the most competitive economy in the world? How important is our competitive rank? Like an athlete, is competitive success about training harder, or as I do on my bike, is it about going back to basics?

The GCI is just one indicator, but the research is well done and a close look at its pillars reveals very useful information about current US competitiveness. The most striking changes are in Basic Requirements and Financial Markets. The US dropped six points in Basic Requirements to 28th out of 133 countries surveyed. Basic Requirements is a sub-index of the GCI associated with low-innovation, factor-driven economies. Its four pillars are Institutions, Infrastructure, Macroeconomic Stability and Health and Primary Education. The global financial crisis resulted in a loss of a full 33 points in Macroeconomic Stability which brings the US down to 93/133. Can you imagine that puts us right between Gambia (92) and the Dominican Republic (94)?

Indicators within each pillar reveal more of the details. Strength of Auditing and Reporting Standards fell by 19, Efficacy of Corporate Boards by 8 and Protection of Shareholders Interests by 14. Troubling losses also occurred outside Basic Requirements. Soundness of Banks fell by 68 points. That puts us at 108/133, just behind Tanzania! Rounding out financial markets, Regulation of Securities and Exchanges fell by 27 points. Two other noticeable changes were a 15 point drop in Business Impact of Rules on Foreign Direct Investment and a 9 point drop in Foreign Direct Investment and Technology Transfer. Whether or not one agrees with these specific measures, it is clear that weak financial markets have taken a toll on U.S. competitiveness.

Despite these losses, the US retains its competitive advantage in the Innovation and Sophistication Factors sub-index. So we can coast, right? No, it’s actually in this pillar that we get our best indicators of how to assess US competitiveness against the National Academies and the ITIF predictions. Overall we lost some ground, but we did gain in one key indicator. We’re now fifth, up one since last year, in Availability of Scientists and Engineers. We lost the top rank to Switzerland in Quality of Scientific Research Institutions. We lost two places in Company Spending on R&D and we’re down one to third place in Utility Patents.

So did we see it coming? Well, we didn’t expect the financial crisis and that’s where the numbers seems to have affected our rank the most. On what we did see, the work of the National Academies and ITIF provide solid indicators of what may become long term trends if not properly addressed through science and technology policy. The good news is that’s already taking place. We haven’t lost much ground yet on these important indicators, but when it comes to competition losing ground is a serious issue. Whether riding my bike, or in national competitiveness there’s usually one safe bet: go back to basics.

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I recently wrote about the SmartGrid. Did you know the US is not the only country planning a SmartGrid? The European Union (EU) is also planning a SmartGrid. In fact, the European Commission, the executive branch of the EU, is taking some very important steps to update its electrical transmission and distribution systems. The European Commission sponsors the European Technology Platform for the Electricity Networks of the Future (ETPENF) and leading investors in ten EU member countries sponsor the Desertec Foundation.

When it comes to the production, transmission and distribution of electricity, sustainability matters. ETPENF aims to increase the efficiency, safety and reliability of EU transmission and distribution systems. Efficient, safe and reliable electrical systems means better managed systems. Desertec plans to harvest wind and solar energy from the deserts of North Africa for transmission and distribution to the EU. And for tomorrow, sustainability will require well managed electrical transmission and distribution systems supplied by renewable resources.

A nation's abililty to produce, transmit and distribute electricity has become recognized as part of its global competitiveness. You might remember I previously wrote about the World Economic Forum's (WEF) Global Competitiveness Report (GCR) and Global Information Technology Report (GITR). Both the GCR and GITR include electricity supply in their assessments. GCR in Institutions, Infrastructure where the US ranks 16th for quality and the GITR in Environment, Infrastructure where the US ranks 8th for production.

In July the WEF in partnership with Accenture released Accelerating SmartGrid Investments, a new report that nicely defines the SmartGrid and discusses barriers to implementation and their solutions. The report indicates that electricity production, transmission and distribution require better alignment of regulatory and policy frameworks. Today, the regulatory environment lacks incentives for private sector investment in carbon capture, reliability and security on electrical grids. Tomorrow, the regulatory environment will need to reward risk for investment in emerging technologies that help make the grid smart and distribute that risk among producers and consumers. SmartGrid investments under the American Recovery and Reinvestment Act help to reduce that risk.

Cities will serve as as catalysts for SmartGrid investments too: Boulder, Colorado and Austin, Texas are already smart grid cities. And GSA's Public Building Service Office of Sustainable Design leads Federal agencies with investments in high performance green buildings that meet the LEED standard and incorporate sustainable design into Federal workplaces because Sustainability Matters.

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On the afternoon of Thursday August 14, 2003 some 50+ million people in eight states and the province of Ontario lost power. Known as the Northeast Blackout of 2003, this event was the largest blackout in North American history. According to Scientific American, the blackout caused 11 deaths and cost approximately $6 billion.

The events that caused the blackout have been investigated and we've learned that the electrical power grid on which we depend for necessities like lights and heat is really quite fragile. The grid barely meets our current needs and, because it is based on 20th century technologies, our ability to manage it is limited.

As a response to what we learned from events like the Notheast Blackout of 2003 and as a key step toward energy independence, the American Recovery and Reinvestment Act contains funding for the SmartGrid Investment Grant Program under the Department of Energy's Office of Electricity Delivery and Energy Reliability. The SmartGrid is an update of the 20th century power grid with 21st century technology. Smart metering, reliable and secure transmission and clean energy generation are all part of the SmartGrid.

So how do we create the SmartGrid with updated 21st century technologies? As Federal CTO Aneesh Chopra remarked in his recent speech at the Churchill Club in Silicon Valley, while there's a lot of work to be done, the government's most appropriate level of influence is to support a collaborative approach to standards that will ensure we have a level playing field to deliver game changing innovation.

Standards serve as both a mechanism to constrain costs and as a platform for innovation. Although this statement may seem to be a paradox, collaborative, or open, standards can achieve both by creating the right kind of competition. That is, competition based on delivering better features that give consumers choice in products as well as encouraging mobility and interoperability across producers. Broad participation by producers, both social and economic, as well as the transparent nature of an open standard drives game changing innovation. And open standards bodies remove or reduce barriers to entry (like membership fees) and publish standards openly so social producers can compete with economic producers on a level playing field.

Smart consumers will benefit from standards. IEEE 802.15.4-2003 is one such standard. It is used to specify the physical layer and media access control for low-rate wireless and personal area networks used in home automation devices. On the SmartGrid, home automation devices using smart metering based on IEEE 802.15.4-2003 will inform smart consumers when they can save money on their electrical bill. Imagine a consumer who uses their mobile phone to display smart metering information from their personal area network to avoid peak load costs. Smart!

As a CIO, standards are all around me. They are the DNA of our operations. When applied well, open standards allow Federal agencies to reduced costs and as a platform for innovation.

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In recent posts I mentioned two benchmarks of national innovation and competitiveness: the World Bank's Knowledge Economy Index (KEI) and the World Economic Forum's Network Readiness Index (NRI). Each of these benchmarks serve as useful indicators of national competitiveness. But, how do we interpret these benchmarks? There's no doubt that the rank a country receives gets a lot of attention, but interpreting benchmarks means much more than rank. In this post I'll examine some of the assumptions underlying another important benchmark, the World Economic Forum's Global Competitiveness Report (GCR).

The GCR, produced since 1979, ranks national competitiveness according to the Global Competitiveness Index (GCI). The GCI defines competitiveness qualitatively as "the set of institutions, policies and factors that determine the level of productivity of a country." Like the NRI and KEI, the GCI ranks nations quantitatively according to a weighted index of pillars. GCR defines twelve pillars: institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication and innovation. And if that's not enough each pillar is comprised of a set of indicators!

To better assess national competitiveness I'll first examine how the pillars fit into the GCI index, then look closer at how a few key pillars and their indicators cause certain countries to rank as the most competitive. The GCI partitions each of the twelve pillars according to three stages of a nation's economic growth: stage one growth is factor-driven, stage two is efficiency-driven and stage three is innovation-driven.

Factor-driven economies are typical in countries that compete on the basis of unskilled labor and natural resources. Chad, the lowest ranking country in the GCI, with its estimated one billion barrels of oil reserves is a good example of a factor-driven economy. The pillars associated with factor-driven economies are: institutions, infrastructure, macroeconomic stability, health and primary education.

Efficiency-driven economies are typical in countries that compete on the basis of production processes and increased product quality. Countries in this stage of development typically have well established higher education and training, efficient goods and labor markets, sophisticated financial markets, a large domestic or foreign market and the capacity to harness existing technologies, or technological readiness. Unlike the NRI, the GCI differentiates technological readiness, a stage two pillar, from technological advancement as embodied in stage three, innovation-driven growth. Brazil with a per capita GDP of about $7,000 is a good example of an efficiency-driven economy.

Innovation-driven economies are typical in countries that compete on business sophistication and innovation. The U.S. with about $46k per capita GDP ranks first overall in the GCI with the largest domestic market size and the second largest foreign market size (pillar 10). The U.S. also ranks fourth in business sophistication (pillar 11) and first in innovation (pillar 12). To really understand how the U.S. ranks so highly in GCI, we need to look more closely at the indicators that comprise business sophistication and innovation.

Business sophistication is comprised of nine indicators. I'll comment on two – value chains and clusters - because they say so much about how to interpret the GCI as a benchmark. Value chains were first introduced by Professor Michael Porter, Bishop William Lawrence University Professor, Harvard Business School, in his 1985 best selling book Competitive Advantage: Creating and Sustaining Superior Performance. A value chain is a set of activities in which value accrues to a firm at each stage of producing its outputs. Porter's value chains are well known, so I won't spend more time on them here other than recognizing their close relation to five of the other Business Sophistication indicators: local supplier quantity and quality, control of international distribution, production process sophistication and the extent of marketing. Business Sophistication also depends on Porter's more recent work on clusters. Clusters are geographic concentrations of firms, their interconnected suppliers and supporting institutions in a particular field that are known to increase productivity. There's strong evidence that a high ranking in business sophistication implies geographic proximity, specialization, dependency and complex relationships among firms in a cluster.

Innovation is comprised of seven indicators of a nation's science and technology maturity. Indicators include legal (number of patents and intellectual property protection), investment in research and development (private and public sector), knowledge related activities (quality of scientific research institutions, availability of scientists and engineers, and university-industry collaboration). Recall that the KEI measures the number of scientific articles published, which serves only as a proxy to GCI's knowledge related indicators.

So what do we make of all this? It's a lot of detail, but the detail tells us how the GCI determines a nation's rank and why the U.S. ranks so highly. The GCI benchmarks technology readiness differently than the NRI by better separating technology adoption from new technology creation. It also better separates primary and secondary education as well as research and development according to the stages of a nation's economic growth than the KEI. To rank highly in national competitiveness, nations must rank highly in both business sophistication and innovation. Porter's value chains and clusters influence a nation's rank as well as a nation's science and technology policy.

Where will the U.S. rank in 2010? Last week in his speech on the Necessity of Science, President Obama stressed the importance of science and technology policy and set a national goal to devote more than 3 percent of our GDP to research and development. This bodes well for innovation. But the global financial crisis will surely affect soundness of banks and regulation of securities and exchanges (pillar 8) as should the troubles of the Detroit automotive cluster.

Stay tuned!

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