The Importance of R&D to the Manufacturing Industry

American manufacturers are responsible for more than two-thirds of all private sector R&D, which ultimately benefits other manufacturing and non-manufacturing activities.  More than 90 percent of new patents derive from the manufacturing sector and the closely integrated engineering and technology-intensive services.  The U. S. economy has been the innovator of virtually all major technologies developed since World War II.

Manufacturing R&D is conducted in a wide array of industries and businesses of all sizes.  The heaviest R&D expenditures take place in computers and electronics, transportation equipment, and chemicals (primarily pharmaceuticals.)

The competitive status of U. S. manufacturing is increasingly challenged by the state-of-the-art technologies being developed by established nations such as Japan, Germany, Korea, and Taiwan.  Emerging economies, such as China, are acquiring advanced manufacturing capability through R&D tax incentives, incentives for direct foreign investment, and theft of intellectual property.

According to the 2010 annual survey conducted by the Industrial Research Institute (IRI), 53% of the companies responding said they plan to increase R&D spending in 2011.  The managers expected this increase to be focused on new business projects while support of existing businesses and directed basic research would remain relatively flat.  This is the first increase since 2008 after a 30% drop in R&D spending during 2009-2010.  External collaborations through alliances and joint ventures continue to be an area of increased emphasis according to the managers surveyed.  The most disturbing trend is that about 70% of companies surveyed now have R&D facilities overseas.

However, federally funded R&D has declined over the past two decades, with only a slight increase during the Bush administration from 2002 – 2008.  In 1985, federal R&D funding represented 1.25% of U. S. GDP compared to only .80% of GDP in 2004.  In addition, federal R&D funding has shifted away from technology, engineering, physical sciences, and math and computer science, to life sciences.

America’s manufacturing innovation process leads to investments in equipment and people, to productivity gains, the spreading of beneficial technology to other sectors, and to new and improved products and processes.  It is an intricate process that begins with R&D for new goods and improvements in existing products.  As products are improved in speed, accuracy, ease of use, and quality, new manufacturing processes are utilized to increase productivity.  Education and training of employees is required to reap the benefits of such improvements in manufacturing processes.

Innovation is the hallmark of U. S. manufacturing, and it requires a certain mass of interconnected activities, which like a snowball rolling downhill grows in size as it proceeds towards end users.  Substantial R&D is required to keep the ball rolling to ensure more successes than failures.

Innovation and production are intertwined.  You need to know how to make a product in order to make it better.  “Most innovation does not come from some disembodied laboratory,” said Stephen S. Cohen, co-director of the Berkeley roundtable on the International Economy at the University of California, Berkeley.  “In order to innovate in what you make, you have to be pretty good at making – and we are losing that ability.

In his book Great Again, Hank Nothhaft, recently retired CEO of Tessera Technologies writes that “In our arrogance and our own naiveté, we told ourselves that so long as America did the ‘creative’ work, the inventing, we could let other nations do the ‘grunt’ work – the manufacturing.  We did not yet understand that a nation that no longer makes things will eventually forget how to invent them.”

Manufacturing is an incubator for technology and science, which require proximity to facilities where innovative ideas can be tested and worker feedback can fuel product innovation.  Without this proximity, the science and technology jobs, like customer service jobs, follow the manufacturing jobs overseas.

The ability to fund R&D comes largely from the profits that a company can invest back into its business.  Thus, the available cash flow of manufacturing companies is closely linked to their ability to conduct R&D as well as make capital investments.  The severe recession of 2008-2009 dramatically reduced corporate profits and resulted in a drop in corporate R&D.  In addition, when multinational companies keep their profits in offshore divisions in order to avoid paying  U. S. corporate income taxes, it reduces their funds for conducting R&D in the U. S. and encourages them to conduct R&D overseas.

The process through which R&D promotes economic prosperity is complex and multi-faceted.   First, there are direct benefits to companies from their own R&D investments.  Second, other companies derive benefits from the R&D of the innovating company in a “spillover” effect.  A “spillover” is where R&D performed by one company benefits other companies without direct compensation for the innovation. Third, the feedback from R&D and its spillovers improves other products, processes, and distribution networks.  Fourth, one industry’s investment has a beneficial effect on other industries and the U. S. economy as a whole.  “Spillover” effects are increased through sales transactions and knowledge transfers when the parties involved are interdependent and closer in geographic proximity. (Securing America’s Future:  The Case for a Strong Manufacturing Base, by Joe Popkin and Company, June 2003, prepared for the NAM Council of Manufacturing Associations)

The maintenance of an effective U. S. R&D network is essential for attracting domestic and foreign R&D funds and the subsequent manufacturing that results from the innovation process, which increases U. S. value-added resulting in economic growth.

The problem today is that with the offshoring of so much manufacturing, certain tiers in the high-tech supply chain are disappearing in the U. S.  This is the case for certain electronic components, such as capacitors and resistors.  When a tier in a supply chain has been moved offshore, domestic research and other supporting infrastructure are degraded, which can be a major problem for U. S. manufacturers transitioning to the next product life cycle.

In the past, technology would flow from the new domestic R&D-intensive industries into the remainder of the economy, boosting overall national productivity.  Today, such emerging technologies are flowing at least as rapidly to the innovators’ foreign partners or suppliers.

In a report titled, “Rationales and Mechanisms for Revitalizing U. S. Manufacturing R&D Strategies,” Gregory Tassey, Senior Economist at the National Institute of Standards and Technology, noted that the U. S. R&D intensity is the same as it was in 1960 while other counties have steadily increased their R&D spending relative to GDP.  In addition, U. S. manufacturing firms have dramatically shifted their R&D investment strategies toward an increasingly global scope and toward shorter-term objects rather than radically new technologies with greater long-term potential.  In order to reverse this trend and adopt a technology-based manufacturing strategy, Tassey recommends three major policy objectives:

  1. Increase the average R&D intensity of the domestic manufacturing sector by 30% to enable the breadth and depth of innovation to increase across the entire sector.
  2. Adjust the composition of national R&D to emphasize more long-term, breakthrough research and increase the amount sufficient to fund a diversified portfolio of emerging technologies commensurate wit the size of the U. S. economy.
  3. Improve the efficiency of R&D performance and subsequent technology by increasing the number of science parks and regional technology clusters and the use of research portfolio and stakeholder management techniques in order to facilitate person-to-person knowledge exchange critical to innovation.

Examples of policy instruments that could be utilized to achieve these objectives are:

  • Promote increased private-sector R&D through a larger and restructured R&D tax credit
  • Increase federal R&D spending on technology
  • Improve the efficiency of R&D, innovation, and technology utilization
  • Establish an innovation policy infrastructure

American consumers have benefited greatly from the large selection and quality of manufactured goods available as a result of the innovative new products resulting from R&D.  U. S. consumers now have a dizzying array of products from which to choose.  Quality improvements in manufactured goods have also reduced the frequency of repair and reduced the cost of operation.

This intricate process generates growth and higher living standards than any other economic sector.  But, it requires a critical mass to generate this wealth.  If the U. S. manufacturing base continues to shrink at its present rate, the critical mass will be lost.  The manufacturing innovation process will shift to other global centers, and a decline in U. S. living standards will be the result.

In an opinion article “How to Make an American Job Before it’s Too Late,” Andy Grove, former Intel CEO and chairman said, “… the imperative for change is real and the choice is simple.  If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.”  I recommend changing on our own before it’s too late.


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