Quid pro Globe
The US tech industry is the greatest capital extraction machine since the spice trade
The geographic distribution of the global tech industry is peculiar. The USA is responsible for about 33% of the value of the technology business worldwide, but only about 4% of the world’s population lives in there. In other words, the United States is producing more than eight times as much value in tech as its population would suggest.
Let’s say this peculiarity serves to transfer capital from bus drivers in Buenos Aires and secretaries in Ankara to tech companies in Silicon Valley and the VCs that fund them. Would that be a feature or a bug? An unwanted side-effect or the actual purpose of the treatment?
Seeing Like a Country
Perhaps the answer becomes apparent if we change perspective and think about it like a country would.
Let’s say that our country was a titan of the Industrial Age, with manufacturing responsible for about a third of all jobs and more than a quarter of GDP in the middle of the last century. But both of those figures have since dropped by over half. And in the last 40 years, our country’s small trade surplus has transformed into a consistent trade deficit, which has lately stabilized at around 3% of GDP per year.
The global economy has changed fundamentally in the last half century, and the USA is now hemorrhaging cash. That is the American predicament. The rest of the world is eating our (parents’) lunch. How has the American economy responded? Simple: make a new lunch.
Silicon and Software
Faced with creeping economic collapse, many countries would fall apart. The United States, however, has adapted admirably. As so often, the key has been to pivot the country’s business model to focus on industries with fatter margins and richer synergies. In a word: tech.
The first step was to build and disseminate the hardware, which was a resounding success. Between 1984 and 2010, the percentage of US households with a computer increased almost tenfold from 8.2% to 77%. In fact, this step smoothed the transition between manufacturing and tech: the first IBM home PCs were built in Boca Raton, Florida, and Apple was the leading computer manufacturer in the USA in the age of the Apple II, with a big factory in Fremont, California.
Once these devices were widespread, the software offensive could begin. The transition from hardware manufacturing to software development was momentous for two reasons. First, developing countries were going to take over the manufacturing business in tech sooner or later. It was inevitable. Second, software requires no factories or physical inputs, just a few smart, well-educated, ambitious people. Its high value and low marginal costs mean high marginal returns.
Synergies are the other reason the overall shift to tech was a boon. Tech changes every industry it touches: from real estate and farming to mobility, advertising, and finance (obviously). Sure, there is a so-called “productivity paradox,” relating to trouble economists have in isolating tech’s positive effects on productivity, but anyone doubting such effects is welcome to stop using all digital devices. Immediately.
The Great Sucking Sound
With a combination of luck, a vibrant culture of innovation, and nearly half the top tech universities in the world, the USA has managed to turn its tech and finance industries into perhaps the world’s largest capital extraction machine. Samsung may not be an American company, but Google is. Nintendo and Philips may not be American companies, but Amazon, where their goods are increasingly sold, is.
And many are American without further qualification: Apple, Facebook, Microsoft, etc. Ten of the top 18 tech companies worldwide are American (counting Amazon). The top 11 American tech companies have revenues of $1.2 trillion annually ($1.6 trillion counting Amazon). Since the early 1980s, when the tech industry as we know it started to gain momentum, the S&P 500 index has grown from around 132 to around 4300.
Much of that growth is, of course, domestic. Apple’s 147,000 employees and Microsoft’s 163,000 employees have to buy phones and streaming subscriptions too. But a lot of it comes from elsewhere. Thirteen percent of phones in China are emblazoned with an Apple, as are nearly 40% of those in Germany. Over 90% of web searches worldwide are performed over Google. Accountants in Asia and hairdressers in Europe use American phones to buy American headphones that they found with an American search engine on an American ecommerce site.
How many countries are able to extract capital and attract consumption and investment from farmers, bus drivers, and bankers on the other side of the planet? (Even if we were only talking about California, neglecting the other 49 states, the figures would still be impressive.) The world managed to ween itself off of American manufacturing and source their physical purchases elsewhere, but America found something new to sell that is even more irresistible.
Thanks to its rapid development and attractive products, the US tech industry harvests a decent portion of all our paychecks, whatever we do, wherever we live, from puberty to past retirement.
The Buck Stops Here
With its robust regulation and policies (especially compared to, say, China), America’s tech industry is uniquely tuned to the VC financing model. It generates many ideas, few of which will succeed, but those that do yield astronomical returns. That’s VC. Barely perceptible capital gains taxes encourage the wealthy to deploy their money on investments that grow their capital and provide productivity advantages to society. VC is simply in the fortunate (but not easy) position of intermediating between big-time investors and promising startups.
Because our tech-friendly industrial policy has been so successful, it attracts even more money from abroad. It’s become a virtuous circle of success and reinvestment with a global reach. While VC activity is picking up in unconventional markets, like Europe and Africa, VCs already active in the epicenter of the world’s tech industry can continue to follow the money all the way home.