Innovation Expert: Regaining U.S. Manufacturing Leadership is Key to Middle-Class Prosperity


HONOLULU (Nov. 2, 2012)—With job creation remaining the key issue in the U.S. presidential election, international economist Dieter Ernst says a question that is being hotly debated within U.S. industry and government is: How can America regain its leadership in industrial manufacturing and innovation, as new technologies continuously transform industries, and competitors across the globe are upgrading their innovation capabilities?

“There is no doubt that America needs a manufacturing renaissance in order to maintain a robust middle class,” says Ernst, a senior research fellow at the East-West Center in Honolulu who specializes in the economics of innovation. “Betting America’s future on services and innovation alone does not provide a gateway to prosperity.”

Ernst says that the U.S. faces three critical challenges in ensuring that America remains, as President Obama has put it, “a nation that ‘invents it here and manufactures it here.’” These are:

  1. A significant erosion of international competitiveness. The U.S. is losing ground in the production and trade of advanced technology products, Ernst notes – including those resulting from U.S. inventions and innovation – and in manufacturing-associated research and development.
  2. An industrial employment crisis that is reflected in a large and persistent deficit in the total number of jobs being created, an insufficient level of high-quality jobs, and a serious shortage of specialized skills needed to staff advanced manufacturing or service operations. As a result, Ernst says, income inequality has risen to a level not seen since the Great Depression.
  3. A lack of sufficient investment in long-term innovation infrastructure such as research, higher education and especially vocational training through community colleges.

One side of the argument, Ernst says, is that markets will provide adequate responses to these challenges, and that the government should get out of the way to facilitate those market-led transformations. But for market forces to reclaim manufacturing jobs that have gone overseas in recent decades, he asserts, would require a U.S “race to the bottom” in wages and regulations, and even that would still be unlikely to solve America’s offshoring problems.

More promising in terms of job creation, he says, is the recent domestic boom in natural gas and other new energy development, with the U.S. now exporting more energy than it imports for the first time in many decades. “The boom in gas and unconventional oil extraction may generate a significant number of new jobs,” Ernst says, “especially since it reduces one of the main cost factors for petrochemical products such as plastic, which could accelerate investment in a broad range of domestic industries. But for this to happen, appropriate support policies would need to be in place, as well as smart regulations to ensure environmental protection.”

On the other side of the manufacturing argument is the Obama administration’s “advanced manufacturing” strategy, which seeks public-private partnerships to fundamentally transform the current industrial development model. Last year, Obama launched the Advanced Manufacturing Partnership, or AMP, a private-sector-led national effort that brings together industry, universities and the federal government to “further the development of emerging technologies that will create high quality manufacturing jobs and enhance U.S. global competitiveness.”

The AMP strategy, Ernst says, is based on three core propositions:

  1. That public-private partnerships are needed to rebuild America’s “industrial commons” – the shared pool of infrastructure resources, expertise and skilled labor that enables high-tech industries to flourish in a given place;
  2. That a “high road strategy” is needed to create a well-trained, well-paid, continuously improving workforce as a critical prerequisite for upgrading industry through innovation; and
  3. That America’s core competitive advantage is a superior capacity to use transformative technologies to provide packaged solutions through integrated manufacturing, services, and innovation.

“This strategy arguably presents America’s best hope to address its manufacturing challenges,” Ernst says. “However, America’s strength ­– it’s diversity of views ­– is also its weakness, since deep ideological divides and the gridlock in America’s political system constrain and delay the strategy’s implementation.”

Most importantly, Ernst says, for AMP to succeed would require both government and private industry to invest serious financial resources toward improving education and vocational training, which provide the basis for attracting innovation-based manufacturing.

In addition, he says, substantial public and private investments are required in basic and applied research in order to produce transformative technologies like digital platforms based on advanced computing, new materials, nanotechnology and additive manufacturing (sometimes called “3D printing”).

“It is time that America rediscovers its tradition of public-private partnerships to strengthen the country’s industrial commons through a national network of regional clusters for innovation,” Ernst says.

In addition, he says, policymakers should act to:

  • Create incentives for domestic innovation, such as tax breaks and favorable rules for companies that relocate quality jobs in manufacturing and R&D back to America.
  • Reform the U.S. patent and standardization systems to enhance knowledge diffusion and boost the innovation role of smaller enterprises.
  • Develop more proactive trade diplomacy policies that draw on research into the trade and competitiveness consequences of AMP for international competitors, especially in Asia.

“In a world of competing industrial and innovation strategies by countries at different levels of development and with different economic institutions,” Ernst says, “the U.S. and its challengers will need to find new ways to cooperate if tomorrow’s global manufacturing economy is to realize its full potential.”