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“Recoupling” Manufacturing and Innovation

August 07, 2014

Between 2000 and 2010, about one-third of U.S. manufacturing employment – approximately five million jobs – were lost as a result of new technologies in the manufacturing process or competition from abroad, according to The Brookings Institution. The decoupling of innovation from manufacturing,” as described by Harvard Professor Venky Narayanamurti, where “Americans brought great ideas to light, but then left the execution – manufacturing, and jobs – to others” has left the United States in a job crunch throughout the supply chain. In recent years, however, U.S. companies are increasingly moving their manufacturing stateside.

Earlier this year, Whirlpool announced the addition of 400 new jobs for its Greenville, OH, KitchenAid plant. Caterpillar, which revealed plans to shift its production of small construction machinery to a new plant in North America in 2011, opened a $200 million facility in Athens, GA, in October 2013 with the potential to hire thousands of workers.  While other companies, ranging from Apple to crib maker Stanley Furniture, are moving back – or “reshoring” – for their own reasons, others are choosing to manufacture in the U.S. to begin with, such as watchmaker Shinola, whose luxury made-in-Detroit watches are gaining worldwide appeal.

Rising labor costs in once cheap markets, political and economic instability, difficulty in quality monitoring or supply chain management, or losing out on the brand appeal associated with “Made in USA” are all potential externalities with outsourcing manufacturing abroad. But could manufacturing offshore also limit innovation back home?

New research from Carnegie Mellon University researchers made available by the Social Science Research Network suggests that there is indeed a relationship between moving manufacturing operations offshore, as measured with public firms’ offshoring information made available by Securities and Exchange Commission (SEC) filings, and innovation, as measured by USPTO patent data.

Ultimately, the authors find that moving all manufacturing offshore (both assembly and fabrication) is associated with a decrease in innovation in the emerging technology. When controlling for firm revenue, firm R&D spending, the burst of the telecommunications bubble, and the total integrated optoelectronic patent activity in the U.S., each additional year a firm has both assembly and fabrication activities offshore is associated with a 0.59 decrease in monolithic patenting. This complements previous research that shows manufacturing overseas reduces the economic viability of producing the emerging technologies. Firms not only lose incentives for producing the emerging technology, but they also reduce their own innovation activities back home in the same technology.

Perhaps most notably, this statistically significant relationship is only found once fabrication capabilities are moved offshore, suggesting that within fabrication there is an important relationship between R&D workers and the manufacturing line. Although the authors do not discuss this relationship in great detail, it seems pivotal to explaining the inverse of their findings – organizations that do not offshore have the opportunity to retain their innovative spark.  

This relationship would suggest that employees can contribute to innovation regardless of their position. As a result of close proximity, for example, line workers would be able to make more direct comments to R&D workers about potential product or assembly improvements. With outsourcing, however, the gap – both physically and metaphorically – between these workers is far greater. In Technology+Policy, Harvard Professor Venky Narayanamurti states that the reason R&D tends to follow manufacturing, regardless of where a company is located, is that “you can’t do R&D offshore from a distance. The “look-see-do” of innovation depends on close ties to the manufacturing process. Proximity to manufacturing is the key to other higher value activities – design, engineering and R&D.” Because innovation benefits from proximity, the offshoring of manufacturing oftentimes means offshoring innovation as well. For this reason, Narayanamurti is fond of the vertical supply chains in innovation centers such as Silicon Valley, Austin, or even Albany, NY, where a combination of small and large firms, universities, and research centers have spawned numerous innovations and jobs.

In some instances, it will still be more affordable for some American companies to manufacture their goods overseas. In others, it may be beneficial to reshore and gather the value added that comes from a closer proximity to R&D or from the Made in USA branding. “Next-shoring,” a perspective that emphasizes proximity to both demand and innovation, offers one potential, albeit highly theoretical, solution. Next-shoring strategies encompass elements such as diverse and flexible production locations, expansive networks of innovation-oriented partnerships, and a strong focus on human capital.

It is extremely unlikely that every U.S. manufacturer that has moved jobs overseas will move them back, and given the nature of the hyper-globalized world market, this may not be advisable. But as Americans continue to bring great ideas to light, they should feel comfortable viewing the U.S. as a place to adapt, partner, and execute – a “recoupling” of innovation and manufacturing.  

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