Build It In The Back Yard: Why We Need American Manufacturing
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at a small scale, and contract it out at development and commercial scale for our first two FDA-approved drugs, telaprevir (Incivek) and ivacaftor (Kalydeco).
The innovative potential of manufacturing has another consequence, too – one of broader, even societal concern. Innovation-driven economies can generate tremendous amounts of economic activity – and create significant numbers of jobs – but they do this only when an innovation is actually made and used. Current American attitudes, reflected in public policy as well as public discourse, celebrate innovation in its many forms as the centerpiece of a thriving, 21st-century economy. This analysis isn’t wrong – but it is incomplete. Innovation does lead to jobs and economic activity, but not, to any great extent, during the discovery of the generative good idea. Real economic benefits, like jobs and wealth creation, accrue during the scale-up, commercialization, and manufacture of products that emerge from research and development. Commentators are starting to notice this. Even Andy Grove – who, as a founder of Intel, is one of the great technology innovators of our day – has argued in BusinessWeek that scaling up a good idea does more for the economy around it than the idea itself ever could.
In fact, the single most efficient way to create jobs and expand economic output is by nurturing the manufacturing sector. In a recent book, Andrew Liveris, CEO of Dow Chemical, argues that for every $1 of manufactured goods that an economy produces, it also creates $1.40 worth of output from the nearby producers, suppliers, and service providers that support and sustain the manufacturing effort. This multiplier effect is more pronounced for manufacturing than for any other endeavor. (It is, for instance, several times greater than for the service sector. The economic collapse of Flint, Michigan is an example of this that has been well
documented elsewhere.) The benefits for the wider economy can be profound. Liveris cites the example of Germany, which went from a trade deficit of $5.9 billion in 1998 to a surplus of $267.1 billion ten years later. Germany shifted the balance of trade so profoundly by investing in manufacturing – especially advanced, technology-intensive manufacturing. Manufacturing makes up 20 percent of the German economy, and as a result, this country with 1.2 percent of the world’s population holds 17 percent of global market share in manufactured goods.
As a public concern, therefore, manufacturing is an appropriate interest of governments as well as private companies. Michael Porter (a Harvard Business School professor and expert in corporate strategy), among others, is right to criticize the outdated notion that government and business play a zero-sum game. It is imperative that leaders of both government and business pause in their negotiations – not always amicable ones – over taxes and incentives and regulations and recognize that, in a substantive and non-trivial way, they’re playing on the same team.
Re-building the American manufacturing sector is not, however, a responsibility that the government can shoulder alone. No amount of government support could, or should, sustain a manufacturing sector that is not world-class in quality. Business, therefore, needs to respond as well – not just in its short-term self-interest, although the right incentives would promote that too, but also out of far-sighted motivations that could make American firms competitive for decades to come.
Both constituencies in the private sector – the buyers and the sellers of manufacturing services – have to do their part. The buyers are the companies that bring manufactured goods to market – whether they produce these goods internally, outsource production to wholly separate firms, or some of both. Like any company, the manufacturing buyers are subject to the often overwhelming pressure of quarterly financial targets. However, as Michael Porter argues, the days of surviving by stringing together three-month time horizons are over. In a January 2011 article in the Harvard Business Review, Porter suggests, instead, an idea of “shared value” – an effort to “[expand] the total pool of economic and social value.” The goal of creating shared value, in Porter’s conception, is to “enhance[s] the competitiveness of a company while simultaneously advancing the economic and social conditions of the communities in which it operates.” The approach “opens up many new ways to serve new needs, gain efficiency, create differentiation, and expand into new markets.” In other words, nurturing one’s customers, suppliers, and employees is sustainable, growth-promoting, and utterly logical in the long term.
Manufacturing buyers cannot change the industry by themselves, however. They may commit themselves to creating shared value, and governments may give generously of their resources, but manufacturers themselves – from independent providers to the production divisions of vertically-integrated firms – have to make good on the opportunities that this cooperation offers them. The unwelcome truth is that a company’s decision to move … Next Page »