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President Bush’s newly announced “American Competitiveness Initiative,” as well as two new industry reports, shows that American innovation and competitiveness, once having had great promise, appear to be languishing. Here we provide telling information on the current state of U.S. virtuosity.
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Of late, there has been a flurry of furor regarding the current state of the United States’ competitive standing in leadership and innovation, particularly since President George W. Bush’s recent State of the Union address. In it, Bush announced the creation of an “American Competitiveness Initiative,” therein proposing to double research in physical sciences in the next decade, train 70,000 teachers to lead high school Advanced Placement math and science classes, hire 30,000 scientists and engineers to work as teachers, and make permanent current tax breaks for research and development.
All of this has been proposed, accordingly, due to the U.S.’ lagging in innovation investment while the rest of the world invests heavily. As such, manufacturing must innovate if it is to stay competitive.
Indeed, one day after Bush spoke to the U.S. Congress, the Council of Manufacturing Associations (CMA) and the Manufacturing Institute of the National Association of Manufacturers (NAM) released a report purporting that “downward trends in U.S. manufacturing innovation pose a serious threat to America’s long-term economic growth and living standards.” The report, prepared by economic consulting firm Joel Popkin and Company, warned that America’s position as a world leader in manufacturing innovation and high-value production is at risk amid slowing research spending and skill shortages, and thus called for greater focus on education and new skills, more attention to fundamental research and greater productivity-enhancing investment. And even though the report stressed the U.S. retained its leadership in R&D, it outlined “five clear warning signs”:
1) Manufacturing output since the last recession lags that of earlier economic recoveries — its 15 percent growth is only half the pace averaged in recoveries of the past half-century.
2) Manufacturing capacity remains underutilized, slowing investment in new plants and equipment. Since the last recession, total plant and equipment investment has risen at half the pace averaged in recoveries of the past half-century. Manufacturing capacity has grown at less than 1 percent annually (compared with 5 percent in the 1990s).
3) The U.S. share of global trade in manufactured products has shrunk, falling from 13 percent in the 1990s to 10 percent in 2004. The U.S. now runs a trade deficit in Advanced Technology Products, and the U.S. share of global trade in some of the highest value-added export industries such as machinery and equipment is falling.
4) U.S. manufacturing offers rewarding and desirable careers for highly skilled workers. Yet the widespread perception that manufacturing employment is unstable and lacks job opportunities discourages new worker entry. While manufacturing continues to pay better than other industries, the sector is experiencing a broadening shortage of skilled workers.
5) America’s long-standing leadership in R&D is being challenged. While the U.S. continues to spend more than any other country on R&D investment, U.S. growth in R&D has averaged only about 1 percent per year in real terms since 2000. (See below.)
Similar, a report from the National Academy of Sciences in October noted that “the unmatched vitality of the United States’ economy and science and technology enterprise has made this country a world leader for decades [...] But in a world where advanced knowledge is widespread and low-cost labor is readily available, U.S. advantages in the marketplace and in science and technology have begun to erode. A comprehensive and coordinated federal effort is urgently needed to bolster U.S. competitiveness and pre-eminence in these areas so that the nation will consistently gain from the opportunities offered by rapid globalization.” The report further said that “corporate research provided the disruptive technologies and technical leaps that fueled U.S. economic leadership in the 20th century.” Now, however, “most corporate R&D is focused on short-term product development rather than on long-term fundamental research.” Of these statements, Scientific American commented:
The emasculation of the great industrial labs […] is just the most prominent example of what most of us experience on our jobs every day. Most companies adopt neither the incremental nor the entrepreneurial approach to innovation. They adopt the no-innovation approach. A fixation on cost-cutting has made it very difficult to try out new things, especially because most innovations require some start-up investment.
The CMA/NAM report on national innovation, summarized a recent IndustryWeek article, “makes several policy recommendations, many long-advocated by NAM and other manufacturing trade associations, to strengthen U.S. innovation and improve productivity. Among them: renewing the federal R&D tax credit that expired at the end of 2005, improving math and science education, encouraging workers to pursue lifetime training, and improving the speed and efficiency of U.S. transportation and communications.”
Bipartisan legislation in the U.S. Senate also is on a parallel track with Bush’s new initiative. The State legislation was based on a National Innovation Initiative produced by a Washington think tank called the Council on Competitiveness, which is led by CEOs, university presidents and labor leaders. In a recent interview with MIT’s Technology Review, Deborah Wince-Smith, president of the council, said this:
The core point is that today, America finds itself at a unique and delicate tipping point, characterized by two unprecedented shifts. First, the world is becoming dramatically more interconnected and competitive, and second, innovation itself — where it comes from and how it creates value — is changing. We can’t compete on low wages or standardized commodity products or services. The only way we can succeed in the future is through innovation — creating the high-value products and services that people are willing to pay for in global markets.
U.S. Ships Out Innovation
American outsourcing, according to the recent CMA/NAM report, has reached the highest level of the manufacturing supply chain: R&D. Indeed, R&D investment is rapidly being shifted overseas; and while outsourcing is a tremendous opportunity for related cost savings, there very well is a downside to all of this R&D reshuffling. “Some economists say the outsourcing of manufacturing — and now design — is the leading edge of a longer-term trend toward reduced innovation and competitiveness among U.S. companies,” noted a CIO article late last year.
“Funds provided for foreign-performed R&D have grown by almost 73 percent between 1999 and 2003, with a 36 percent increase in the number of firms funding foreign R&D,” the CMA/NAM report stated.
The growth of R&D overseas is among the chief concerns of the report. “Even if U.S. firms weren’t sending their R&D work offshore, ‘recent trends in manufacturing output growth overseas and the relatively modest growth in domestic manufacturing output [make it] inevitable that the U.S. share of worldwide R&D will shrink,’” noted Manufacturing & Technology News of the study. “As foreign R&D grows, there will be increased demand for the inputs to the innovation process in those countries,” the published study’s two economist authors have predicted. “They will develop more advanced educational systems and turn out increasing numbers of trained workers in the science and engineering fields as well.” Further, rapidly growing economies, by their very nature, “are the site of new plants using many of the latest technologies available.”
“Things Aren’t As Bad As All That.”
A New York Times op-ed column earlier this month, written by neoconservative commentator David Brooks, argued that U.S. science and technology leadership is not as endangered as many people have claimed. Indeed, many people agree with Brooks’ perspective. The following are some of the pundit’s arguments that the promise of U.S. leadership, on a worldwide scale, is OK.
Has the U.S. lost its vitality?
“No. Americans remain the hardest working people on the face of the earth and the most productive. As William W. Lewis, the founding director of the McKinsey Global Institute, wrote, ‘The U.S. is the productivity leader in virtually every industry.’ And productivity rates are surging faster now than they did even in the 1990s.”
Has the U.S. stopped investing in the future?
“No. The U.S. accounts for roughly 40 percent of the world’s R&D spending. More money was invested in research and development in this country than in the other G-7 nations combined.”
Is the U.S. becoming a less important player in the world economy? “Not yet. In 1971, the U.S. economy accounted for 30.52 percent of the world’s G.D.P. Since then, we’ve seen the rise of Japan, China, India and the Asian tigers. The U.S. now accounts for 30.74 percent of world G.D.P., a slightly higher figure.”
What about the shortage of scientists and engineers?
Vastly overblown. According to Duke School of Engineering researchers, the U.S. produces more engineers per capita than China or India. More important, the American workplace is so competitive, companies are compelled to promote lifelong learning. A U.N. report this year ranked the U.S. third in the world in ease of doing business, after New Zealand and Singapore. The U.S. has the second most competitive economy on earth, after Finland, according the latest Global Competitiveness Report.
What about partisan gridlock and our dysfunctional political system?
Well, entitlement debt remains the biggest threat to the country’s well-being, but in one area vital to the country’s future posterity, we have reached a beneficent consensus. American liberals have given up on industrial policy, and American conservatives now embrace an aggressive federal role for basic research.
Tell us your thoughts. Is the promise of American leadership in innovation and competitiveness fading? Is it safe? See our most recent Burning Question to include your thoughts on the topic.
References
U.S. Manufacturing Innovation at Risk: A Study by Joel Popkin and Kathryn Kobe
NAM Council of Manufacturing Associations, The Manufacturing Institute
February 2006
Broad Federal Effort Urgently Needed to Create New, High-Quality Jobs for All Americans in the 21st Century
The National Academies: National Academy of Sciences, National Academy of Engineering, Institute of Medicine, and National Research Council
Oct. 12, 2005
The Nation of the Future… If Only
by George Musser
Scientific American blog, Feb. 2, 2006
U.S. Innovation Lead At Risk
by John S. McClenahen
IndustryWeek, Feb. 3, 2006
Can U.S. Still Compete?
by David Talbot
MIT Technology Review, Feb. 9, 2006
Innovation Ships Out
by Christopher Koch
CIO Magazine, Jan. 15, 2005
NAM Finds U.S. Innovation Engine Is Shifting Offshore
by Ken Jacobson
Manufacturing & Technology News, Feb. 6, 2006
The Nation of the Future
by David Brooks
The New York Times, Feb. 2, 2006
Additional Resources
Manufacturers Must Innovate To Remain Competitive
IndustryWeek, Feb. 6, 2006
U.S. Manufacturing Innovation Leadership at Risk
National Association of Manufacturers (NAM) announcement/press release
Feb. 1, 2006
U.S. Manufacturing Innovation at Risk
by Bill Canis
NAM blog, Jan. 31, 2006
Can Manufacturing Survive?
by Michael Evans
IndustryWeek “Economic Outlook” forum, Jan. 24, 2006
Labour: “the battleground of globalization”
New Economist blog, Feb. 6, 2006
The future of Japanese business: Competing through innovation
The Economist, Dec. 14, 2005
What Innovation Advantage?
by Roger L. Martin
Business Week, Jan. 16, 2006
China Design
Business Week, Nov. 21, 2005
Tech Embraces Bush Call For U.S. Competitiveness
by Roy Mark
Internet News, Feb. 1, 2006
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Well, let’s see. There are so many things going wrong here that is hard to discern which issue is the most important to start with.
I would make the case that, historically U.S. economy was the strongest when the government stayed out of it. In retrospect, one can look at communism’s fall as a failure of their economy, caused by Government control and interference. Nowadays, U.S. Government is “helping” manufacturing by paving the way to China, India even North Vietnam (go figure).
I think that we all have to realize that these countries have no system to protect intellectual property, and they have a very low (nonexistent) level of respect for patents, and are famous for copying our technology. We are investing in R&D here, and the product Made in China knocks at our doors one year later. Look at Mr. Bricklin bringing the Chinese-made car in U.S. in 2007 while Ford and GM have difficulties home. We moved part of our automotive over there, they copy the technology and make a product that will get us out of the business of making cars. We invest in education to have engineers become paper pushers that coordinate product development in China.
I think that this World Trade looks at times just like United Nations: a bad deal for the American people. We should maybe remember that our Government is supposed to work to OUR benefit, since is elected by OUR people and not by the Chinese people. Heck, the Chinese don’t even elect their Government. Maybe we should remember that we were at one time opposed to communism, that we use to condemn human-rights violators, that we used to stand for freedom and free speech, sanctioning countries like China. I guess the mighty dollar can blind a lot of people and kill a lot of principles that used to guide us and give us the moral ground.
However this is the world we live in, and we should better look at careers in Real Estate and Insurance for our kids.
President Bush can throw as many teachers as he likes into the pot, but it will solve nothing. The problem with American innovation and competitive edge has nothing to do with an imaginary lack of skilled labor. The problem is with American corporate executives whose only concern is with profit margins.
If President Bush wants to do some real good, he should come up with some business incentives designed to curtail the current trend in offshoring. Education is not the answer, as we already have an over-abundance of highly skilled mechanical designers and engineers in this country that are un-employed or working in other fields because American manufacturers are unwilling to pay a fair wage simply because it’s cheaper to offshore the R&D as well as production.
America is experiencing a shortage of American manufacturers who are willing to put Americans first. American labor is still highly trained and educated. It’s the manufacturing executives responsible for offshoring who need to be educated.