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Saturday
Jan022010

Will we bring back manufacturing or outsource innovation too?  

Innovation must be located near manufacturing because so much of innovation is learning from and improving manufacturing, according to GE CEO Jeffrey Immelt on this CNBC forum, The Future of "Made in the USA." Others who understand the innovation process have made the same point. I think I first heard it about 30 years ago from Donald Firth after he left the UK's National Engineering Laboratory in Glasgow. This directly contradicts the naïve view that the US can be the global center of high-skill, high-pay "innovation" jobs and that it makes economic sense for low-skill routine manufacturing jobs to go to Asia. In reality, China can do everything the US can do to assemble the best and brightest in innovation centers, but increasingly only the Chinese can locate them near manufacturing centers.

During and after WWII, the US government provided numerous substantial financial incentives for innovation (favorable tax treatment, government contracts, grants to higher education, etc.), and the many resulting innovations created whole new industries and millions of jobs in the US. However, Government subsidies for innovation make much less sense now—and perhaps make no economic sense at all—because now the odds are that most of the jobs resulting from future US innovations will be created in Asia instead of here. This means that nations like China can get much more bang for their innovation subsidy bucks than can the US because a much higher proportion of the benefits will be in China.

Bad as that is, we're helping our competitor nations by educating more of their students and fewer of our own in America's best universities, and not many of them plan to stay here. Those who still believe the world sees the US as the land of opportunity should recalibrate. A survey of 1,224 foreign nationals from India, China, and Western Europe studying at U.S. universities and colleges - or who had graduated by the end of the 2008 academic year - primarily in engineering, business and economics, computer science and biological sciences, funded by the Ewing Marion Kaufman Foundation and reported here, found:

Just 7 percent of Chinese students and 25 percent of Indian students surveyed said the best days for the United States economy lie ahead.

Approximately 74 percent of Chinese students and 86 percent of Indian students said their home countries' economies will grow faster in the future than they have in the past decade.

Most foreign students said innovation will occur faster over the next 25 years in India and China than in the United States.

Some 76 percent of Chinese students and almost 84 percent of Indian students said it would be difficult to find a job in their field in the United States.

While 58 percent of Indian, 54 percent of Chinese and 40 percent of European students want to stay in the United States for a few years after graduation, only 6 percent of Indian students, 10 percent of Chinese students and 15 percent of European students said they wanted to remain permanently.

Circling back to Jeffrey Immelt, under his leadership GE has located its clean coal technology global innovation center in China. My advice to American teenagers who want to achieve big things in science or engineering: Become fluent in Mandarin and accept the idea of being part of privileged technocratic class in a politically oppressively and highly-polluted nation.

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Reader Comments (4)

Interesting points, however if the US really wants to stimulate innovation it needs policies that encourage innovation. Unfortunately, since 2000 we have passed a number of laws and regulations that are killing innovation in the US. The incredible innovation of the 90s was based on technology start-up companies built on intellectual capital, financial capital, and human capital. All three of the pillars have been under attack since 2000. Our patent laws have been weakened reducing the value of intellectual capital. Sarbanes Oxley has made it impossible to go public reducing financial capital for start-ups and the FASB rules on stock options have made it harder to attract human capital to start-ups. The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation http://www.amazon.com/Decline-Fall-American-Entrepreneur-Regulations/dp/1439261369/ref=sr_1_1?ie=UTF8&s=books&qid=1262124667&sr=8-1, explains these problems in more detail.

January 3, 2010 | Unregistered CommenterDale B. Halling

My friend Charlie sent the following comment by email:

I find the GE clean coal program an example of globalization at its best, including the potential benefits for American workers. It’s pretty typical of the advantages of technical globalization which brings together wide-spread expertise into a single product. Yes, the research center is in China but that's substantially because GE sees this as the largest and earliest market for its clean coal technology and is doing it there in part for political reasons; and because it already has a big China presence through roughly 25 commercial installations of its gasifier technology (Ex Texaco), mostly used on pet coke at refineries. My understanding is that the China center is mainly to integrate technology development being done elsewhere, primarily for purposes of the Chinese market. Note that GE recently entered a similar agreement with the University of Wyoming for joint clean coal R,D and D, including a US commercial demonstration.

GE’s clean coal R&D, and the eventual manufacture, is/will be substantially US-based:

*The main reason GE is in clean coal is to sell its turbines. (The main components of its IGCC clean coal setup are the gasifier, essentially a pressure vessel, and a combined generation cycle with both gas and steam turbines.) The turbines, by far the largest value added and labor intensive component, as with all GE turbines will be manufactured in the US.

*Much of the R&D is being done in the US. Gasifier work, including the ex-Stamet feeder technology acquired by GE two years ago, is mostly in Irvine, CA. Additional work, including control systems is in Schenectady and North Carolina. Turbines are in South Carolina Some R&D is being done in GE’s India center.

*Emission control work, including carbon capture and sequestration, I understand is also being done mostly in the US

*All of this is managed by GE’s clean coal group in Houston, which now employs several hundred people.

No doubt some of the manufacturing will be done in China or elsewhere in Asia, but this will be mostly the grunt stuff with low IP and value content, like the pressure vessels. My guess is that other components which have high value and substantial IP (like the Stamet feeder), yet can easily be knocked-off, will be made in the US or else in a way where final assembly can be tightly controlled.

GE is looking to hire more US engineers for this and other energy programs. Unfortunately, we’re not producing the talent.

January 4, 2010 | Registered CommenterSkeptic

Charlie seems to agree with my main point that the national strategy espoused by many of basing the US economy on a supposed “comparative advantage” of innovation is just plain unworkable under any suite of US policies remotely like the current ones.

I agree with him that there are many reasons other than collocation with manufacturing why this is so: Put innovation activity in the earliest and largest markets to learn from and influence the customers, yield to the strategic demands of governmental customers, accept local subsidies, tap local talent pools, reduce the cost of innovators, operate in a more relaxed regulatory environment, etc. Whereas my original post implied that revivifying manufacturing in America would enable us to reestablish dominance in innovation, it isn’t nearly that easy. The US government would have to become as strategic and tough as China and other mercantilist regimes, and even then innovation could not be contained.

On the other hand, Charlie seems to agree with Tyler Cowen, with whom I heartily disagreed above, that where innovation occurs doesn’t matter. Whether the “potential benefits for American workers” mentioned by Charlie are realized will depend in large part on the outcome of negotiations between GE and organs of the Peoples Republic of China. If history is any guide, GE will reluctantly agree to do more manufacturing in China than it would like for these “political” reasons, and the US government will not intervene on behalf of American suppliers and workers or to ameliorate the trade deficit. Ultimately, GE will be willing to manufacture turbines in China, just as Boeing reluctantly agreed to manufacture significant portions of its 737s and 787s there.

As these trends continue, America will continue to have high unemployment and declining real wages—and no apology from GE, whose CEO Jeff Immelt says this about US labor costs:

Labor costs are also a factor, Immelt says: "In the places where you have relatively high labor costs, they've got to be more productive." The labor in any facility, he says, has to be able to compete on a "global basis."

Also, our crippling trade deficits will continue. Every year but one since 1981, the US has run a current account deficit up to 6% of GDP and averaging 3%. Link. This is a transfer of American wealth, economic power, global leadership, and talent to foreign powers, especially China. What GE and the other multinationals are doing with the assistance of the US government is the cause of these problems—not the solution.

January 4, 2010 | Registered CommenterSkeptic

Western companies in China are figuring out that they've been suckered.

They are being bled dry and robbed blind by predator Chinese 'partners' mandated by the govt.

Serves them right!

January 31, 2010 | Unregistered Commenterlark

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