National Association of Manufacturers – Manufacturing Resurgence (by Joel Popkin and Kathryn Kobe, Jan. 2010)

[Module 1 – New manufacturing technologies]

[Module 2 – Spillover effects of manufacturing]

1. 
   Introduction
   

U.S. manufacturing has been expanding with declining rate for the past five decades and the decline in manufacturing production during the recent recession erased past gains. However, U.S. manufacturing exports grew at an average annual pace of almost 9 percent between 2002 and 2008, in response to the declining value of the dollar. In addition, the manufacturing sector itself has limited low-skill but great high-skill job creation ability as productivity increases, and the service sectors have benefited from manufacturing’s high multiplier effect on demand for their output. Furthermore, service sectors have relatively lower productivity, which means greater traditional job creation ability. Returning to the manufacturing sector, greater number of R&D related jobs has resulted in wage increase across the sector. This NAM report states that “manufacturing growth is one key element in a recovery’s pace”.

In 2008, U.S. manufactured goods composed 50% of $1.8 trillion exports (30% were services and 20% were resources based goods – agriculture, minerals, fuels),and 59% of $2.5 trillion imports. “Strong export growth is the vehicle by which mature economies keep their overall growth rate at acceptable levels. Research has found that exports help improve productivity growth and can play almost as important a role as R&D does.”

1. 
   R&D Activity
   
   1. 
      Incremental growth in the manufacturing sector “is likely to increase U.S. R&D activity by more than a like-size increase in any other major private industrial sector because of the high intensity of innovation in manufacturing. R&D, through the innovation process, boosts overall U.S. productivity growth, the source of improvements in its standard-of-living.”
      

Social returns of R&D are about 3.5 greater than private returns. Considering this large R&D spillover, policies that incentivize private investment in R&D should be adopted, such as tax credits. The paper outlines three types of spillovers: “market spillover”, “knowledge spillover”, and “network spillover”. These pathways often intertwine and create a greater combined effect.

The first, “market spillover”, refers to the cost-free benefits accrued to the consumers and suppliers when the prices of newly created or improved products do not capture all the improvements from R&D in their new prices. The second, “knowledge spillover”, refers to the transfer of knowledge from R&D activities to other sectors that can use it almost cost-freely. Finally, “network spillover” occurs when the development of a related technology enhances the benefit of R&D; consider the development of Wi-Fi and computer use. Wi-Fi has allowed user to experience greater benefits from computer use, and greater number of computer users expand the Wi-Fi network.
One of the outcomes of spillovers is the regional clustering of hi-tech companies that take advantage of each other’s “spillovers”. However, this advantage can disappear if R&D activities move overseas. In addition, clusters of high tech firms emerge from research universities, implying that academic universities play a major role in facilitating spillovers. “One important role for universities in the process is to help increase the magnitude of the human capital in an area both by concentrating well-educated academics and by training new researchers.” To capitalize on this relationship, some states have invested heavily in research universities. Texas, for instance, invested $300 million in University of Texas’s engineering program. This investment helped Texas Instruments to build next generation chip facility in Texas, “because it would have access to the highly skilled students and faculty at the university, but the infrastructure investment also benefited other Texas high-tech firms and generally increased the country’s investment in a skilled workforce.”
A 2007 Bureau of Labor Statistics analysis of R&D literature showed that “while government can play a role to promote spillovers and increase investment in riskier types of research, government cannot replace private sector R&D [largely the development stage] as the back-bone of the innovative process.”
C. Sustaining vs. Disruptive Innovation and Business Size

Larger, more established businesses tend to favor “sustaining” innovations, “ones that improve a product or process along the general trend that the company and the market has expected.” Small businesses tend to be better at disruptive innovations, ones that may go against traditional company or market trends but may evolve into productivity leaps in technology. These small firms perform 11% of manufacturing R&D and 40% of technical supporting R&D, while 85% of their research funding are from non-federal sources such as sales and profits.

Due to the lack of adequate science and engineering talent supply in the U.S., tech companies have been expanding overseas to tap into other nations’ talent pools. “An NSF study shows that in 2007, almost 43 percent of the 31,801 students awarded science and engineering doctorates were non-U.S. citizens, a 6 percent increase from the previous year.” It is important to enact policies that encourage U.S.-trained scientists to stay in the U.S.

U.S. productivity, which R&D increases, is crucial to U.S. economic growth. By an OECD analysis, countries (Norway and Luxembourg) with higher productivity levels than the U.S. had greater GDP per capita, whereas countries with lower productivity levels had lower GDP per capita than the U.S.

A. The Classification of Manufacturing

The establishments in the manufacturing sector are currently defined as activities relating to “the mechanical, physical or chemical transformation of materials, substances or components into new products.” However, this paper calls for a different classification structure that encompasses the full extent of the manufacturing sector. “Consideration of services affecting goods reveals the demand generated by manufacturers outside their own sector. Some services to goods producers, such as the legal, accounting and scientific, are labor intensive. Others, such as distribution networks, like freight transportation, are more capital intensive. The classification is not so much about what label to put on activities as it is about the data that are collected about a sector and the transparency with which linkages are revealed to enhance analysis.”
B. Issues for the Future

New fields must emerge, such as health sciences and nanotechnology and especially new energy technology. Two forces in the manufacturing industry propelling future advance development in clean energy technology are the rising cost of current energy use and the increasing emission of greenhouse gases.

A. The recent recession - provides a unique opportunity to regenerate the U.S. manufacturing base

B. How Government Can Both Spur and Support Liftoff

Partnership between government and business to support basic as well as applied research, provide R&D tax credits, enact policies that commits to clean technology, improve STEM education and general k-12 quality, strengthen legal immigration

• Reduce the corporate income tax rate on profits

earned from production in the U.S. to match those of

our major trading partners.

• Eliminate one important uncertainty in private

decisions to undertake R&D by making the R&D

tax credit permanent.

• The National Science Foundation should hasten its

efforts to identify the most promising areas for basic

R&D so that companies can increase the share of

such research they undertake.

• Make the commitments now that will guide private

decisions on R&D investment for cleaner energy

technologies and more varied energy sources. Findings

from that research will help mitigate energy price

spikes and make domestic manufacturing production

more attractive to both U.S. firms and foreign investors.

• Assure the health of small businesses. They are niche

suppliers of components and parts for finished goods

manufacturers. And they are also important investors

in, and initiators of, high-risk, ground-breaking

innovative endeavors.

• Governments at all levels should make investments in

infrastructure and facilitate its expansion to encourage

the R&D, production and academic clustering that

maximizes spillovers and increases the public and

private returns to R&D investment.

The Association for Manufacturing Technology - The Manufacturing Mandate: A National Manufacturing Strategy to Help Rebuild and Strengthen the U.S. Manufacturing Sector (August 2010)

[Module 7 – Policy inputs]

· Support reauthorization and full funding of the America COMPETES Act

· Improve the R&D tax credit and make it permanent

· Fund targeted, sustaining economic growth technologies

· Revise SBA/government lending requirements for manufacturers - qualifications should consider economic conditions

· Use the expanded Defense Production Act Title III lending authority to provide credit to defense-critical manufacturers

· Provide incentives to banks making and maintaining capital loans to qualified manufacturers

· Modernize U.S. export control policy · Strengthen intellectual property protection · Streamline the business visa process with major trading partners

12Minimize structural cost burdens

· Lower business taxes and avoid any new tax increases on U.S. manufacturers · Avoid excessive regulations · Encourage investment in retooling plants and new equipment

· Coordinate Government support and utilization of the existing national network of Manufacturing Innovation Clusters

· Create a standing Interagency Manufacturing Structure made up of Cabinet officials, industry leaders, and academics

· Support and sponsor targeted technology challenges

· Develop a national manufacturing skills certification program

· Support grants, scholarships and/or incentives for Science Technology Engineering and Mathematics (“STEM”) degrees

· Utilize MEPs as centers of manufacturing excellence to train and support local manufacturers

[Module 4 – Challenge of scale-up]

• 
  Establish a manufacturing investment facility to leverage private capital for domestic manufacturing
  
• 
  Expand and make permanent clean energy manufacturing tax credits and industrial energy efficiency grants to allow America to lead on green job creation
  
• 
  Link federal loan guarantees for new energy infrastructure projects, including nuclear, wind, solar, other renewable energy sources, as well as the smart grid, with expanding domestic supply chains
  
• 
  Adopt immediate, up-front expensing rules for plant and equipment to spur capital expenditures
  
• 
  Enforce our trade-legal Buy America and other domestic procurement requirements to prevent leakage of tax dollars overseas
  

• 
  Create a National Infrastructure Bank to finance high-value, long-term infrastructure projects, such as roads, bridges, high-speed rail, and other needs
  
• 
  Enact a robust, multi-year surface transportation infrastructure program of at least $500 billion financed exclusively by fuel taxes
  

• 
  Refocus on technical and vocational education, providing a seamless program that bridges high school and post-secondary education to produce the next generation of highly skilled manufacturing workers
  
• 
  Reward companies that are investing in effective skills and training programs for their workers Make Trade Work for America
  
• 
  Keep America’s trade laws strong and strictly enforced to provide a level playing field for our workers and businesses
  
• 
  Penalize and deter mercantilist nations such as China that manipulate their exchange rates and implement non-tariff barriers to gain an unfair trade advantage
  
• 
  As the Administration works to double exports, expand the goal to include balancing our trade account so that gains in exports are not overwhelmed by increased imports
  

• 
  Make permanent the research and development tax credit and enhance it to incentivize commercialization and production in America
  
• 
  Focus federal investments in new technology and workforce training on promoting regional clusters of innovation, learning and production
  

[Module 3 – Cross Border Production Issues]

[Module 6 – Skills and education]

[Module 7 – Policy]

[Module 7 – Policy inputs]