Steve Jobs’ decision to step down as head of the Apple empire caused a lot of commotion. Analysts scurried to quantify the impact of Jobs’ departure on Apple’s stock price, the psychological effect on the stock market, and which tech competitors stand to gain. But the bigger question, and perhaps the most important, is what Jobs’ departure means for the broader economy.
We already know that the kingdom of Apple, which Jobs dreamed up in his dinky garage, now has more financial ammo than most sovereign countries. Apple’s market cap, at $390 billion, trumps the GDP of Denmark, Thailand, and Greece, making the company a “true superpower in today’s world of sovereign downgrades,” according to the Big Picture’s Barry Ritholtz. No wonder markets barely blinked when Japanese Prime Minister Naoto Kan stepped down in the wake of Jobs’ departure. Of course, anyone following Japanese politics knows that country gets a new prime minister practically every other week, so that news wasn’t exactly a shocker. But still, Kan was running a $5 trillion country. So how does a leadership handover for a company valued at less than one-one hundredth of global market cap carry more weight than a power change in the world’s third-largest economy?
The answer is in the numbers, or rather, what the numbers don’t show. In the U.S. economy, the fruits of Apple’s labor come from its ideas and innovations. Even though we gripe and groan about losing manufacturing jobs to cheap labor in China, the bulk of profits from Apple’s creations still come back to the U.S. That’s because the real value of the iPhone isn’t in the manufacturing process; it’s in the design and the development of its components. Over the past decade, globalization and outsourcing have forced companies to focus less on brick and mortar capital spending and more on innovation and creativity. The share of companies’ investments in research and development have ramped up accordingly.
But the government’s growth statistics don’t account for those outlays, and neither does our trade balance. Gross domestic product, the ubiquitous measure of a country’s worth, includes business investments in brick and mortar assets like equipment, buildings, and software. But it doesn’t capture what companies, especially high-tech companies like Apple, spend on getting an edge on big ideas and spreading them around. Michael Mandel in Business Week explains the folly well:
It is [Apple's] great design, technical innovation, and savvy marketing that have helped Apple Computer sell more than 40 million iPods. Yet the folks at [the Bureau of Economic Analysis] don’t count what Apple spends on R&D and brand development.
Rather, they count each iPod twice: when it arrives from China, and when it sells. That, in effect, reduces Apple – one of the world’s greatest innovators – to a reseller of imported goods.
Not only does this accounting blip underestimate Apple’s contribution to GDP. It discounts the knowledge Apple imparts on the global economy. High tech companies spread their business know-how and brand equity when they operate abroad. Employee training programs for plants overseas, for instance, transfer valuable insights and advances that boost the productivity and growth of other countries. According to work by Ricardo Hausmann of Harvard’s Center for International Development, U.S. multinationals on average get higher rates of return on their overseas operations, at roughly 6%, than foreign multinationals, at roughly 1.2%. The knowledge imparted by U.S. firms doesn’t count as an export, even though the cost to the company of building the plant abroad counts as foreign investment.
Where this knowledge economy more often gets captured is in the stock market. Unlike the statisticians who prefer sticking with cold, hard capital assets when valuing U.S. companies and country growth, a stock analyst’s job is to suss out how much of a company’s value isn’t on its books. So when Steve Jobs steps down and the market drops 5%, that 5% is a good indication of the outsized impact of Jobs’ brain on the overall economy. Likewise, when it doesn’t budge for the prime minister of Japan, well, that just tells you how little Kan’s leadership meant to Japanese growth.