The United States has moved from a position of global leadership in innovation and manufacturing output at the end of the 20th century to running a trade deficit in advanced technology goods today. David Adler and Bill Bonvillian track the rise and fall of the US innovation system, writing that since World War II, manufacturing-led innovations have become mostly an afterthought. They propose a new innovation system to support advanced manufacturing, arguing that the way forward is for the US to redesign its innovation system, so that innovation is more closely linked to production.
The United States was once the global leader in manufacturing, helping to usher in the mass production era from the end of the nineteenth through the mid-twentieth century. It is not a global leader in the advanced manufacturing of the twenty-first century. The US now runs a trade deficit in advanced technology goods, largely with Asian nations (predominantly China) that has grown to $244 billion as of 2022. This is an accelerating problem for the United States, not a declining or stabilizing one.
In the last three years, the federal government has undertaken multiple industrial innovation policy initiatives: Operation Warp Speed, the Chips and Science Act; The Executive Order on Biotech and Biomanufacturing; the Bipartisan Infrastructure Law and the Inflation Reduction Act, with over a half trillion in funding. But what if there are more profound weaknesses holding back advanced manufacturing in the United States which these initiatives do not address?
An overlooked but pervasive source of weakness is the disconnect between the US production system and the US innovation system. Unlike Germany, Japan, Korea, Taiwan, and now China, the United States has failed to put manufacturing at the center of its innovation system. In fact, it didn’t even consider manufacturing as part of innovation. When the United States was assembling its innovation system after World War II, it assumed its lead in manufacturing would be eternal. It built its innovation system in the area it needed to strengthen: R&D. Thus, America’s innovation system is in many ways a historical artifact, maladapted to the global economic competition of today.
Post-war innovation policy
“Science—the Endless Frontier,” the 1945 report written by Vannevar Bush, President Roosevelt’s science advisor, is widely credited as the basis for postwar US science and innovation policy. It conceived of innovation as a linear pipeline. The government would fund basic research and industry would develop it further, moving it along the pipeline until it was ready for mass production. Today, this “innovation chain” is broken in the US, yet Bush’s emphasis on basic research remains the focus of the US innovation system, at the National Science Foundation (NSF), the National Institutes of Health (NIH), other government agencies, and in US universities, as does his linear innovation model.
The Department of Defense (DOD) was an important holdout from the Bush model in that it continued to support prototyping, testing, demonstrating, and implementing technologies in addition to basic research. The result, effectively, was two innovation systems in the United States, an integrated defense one, and a disjointed civilian one.
Although DOD’s system integrated R&D with implementation, its aim was national not economic security. Missing from both new R&D-led innovation systems was any focus on manufacturing or the understanding that manufacturing-led innovations could occur along the pipeline rather than just as an afterthought.
The government planners and business leaders of the postwar era may have presumed that America’s leadership in the prior manufacturing innovation wave—mass production—would be repeated in subsequent waves, but this was not to be. The disconnect in the United States between innovation and production would lead to profound weaknesses. As the mass production era was succeeded by new waves of manufacturing advances, led by Japan’s embrace of quality production, America would no longer be king of manufacturing.
The future will be post-industrial
In the 1980s and later, the US government did launch a handful of industrial policies in response to Japan’s industrial successes during this era, such as the Bayh-Dole Act; the Manufacturing Extension Partnership; the Small Business Innovation and Research (SBIR) program; Sematech, and the R&D tax credit. But these were overwhelmed by larger social trends pushing in the opposite direction, against reviving domestic manufacturing.
“394 007 010” by U.S. Department of Energy is US government work
America’s success in the IT revolution in the 1990s completely diverted attention from following through on the piecemeal industrial policy reforms of the 1980s. The widespread belief—and prophecy—found in books such as Daniel Bell’s “The Coming of Post-Industrial Society” (1973) that the most advanced economy was a postindustrial one, made concerns about America’s manufacturing malaise seem irrelevant.
American economists too have often held manufacturing in disdain, with deindustrialization a sign of progress akin to sociologists’ prophecies. Alan Blinder, former member of Clinton’s Council of Economic Advisers and vice-chair of the Fed, wrote in 2005, “The shift to services is still viewed with alarm in America, where people bemoan rather than welcome the resulting losses of manufacturing jobs.”
Macroeconomic theory has been unable to adequately model innovation, though there have been some attempts such as Paul Romer’s growth models. But the details of America’s innovation system and its weaknesses are essentially alien to macroeconomics and not part of this field.
Finally, America’s financial system and its workforce educational system do not support advanced manufacturing. The US vocational education system of the 1950s, ’60s, and ’70s was not quality education, shunting off too many students into what often became a dead-end track. The US attempted a reform of trying to send everyone to college but then didn’t. Meanwhile there was no effective workforce education system. Financialization and globalization combined to reduce incentives for manufacturers to adopt advanced production techniques in the United States. American financial markets favor a capital-light production model, or one of no production at all.
An innovation system to support advanced manufacturing.
The recent industrial policies of the Biden administration mark a sea change in America’s approach, but they are light on the “industrial.” For the United States to successfully adopt advanced manufacturing at scale, its industrial innovation policies need to address production directly. It can’t just focus on research, as has been the case since World War II. The way forward is for the United States to redesign its innovation system, so that innovation is more closely linked to production. Here are some pragmatic steps the United States could take to strengthen its innovation chain:
- Improve Manufacturing Institutes. Under the Obama administration the US created 16 manufacturing innovation institutes, each organized by consortia of industry, universities, and government around a particular manufacturing technology. But the institutes have faced limited terms and limited federal funding. They require long-term budget commitments. They need to cooperate to offer industry packages of linked technologies rather than a single technology. Collaborations between industry and state and local governments for regional implementation and workforce training should also be deepened.
- Back R&D for manufacturing technologies. Manufacturing needs to be a research subject of federal R&D agencies and linked to implementation through the institutes.
- Provide scale-up financing. While venture capital has been a major force for financing innovation in the United States, it is focused overwhelmingly on software, biotech, and various services sectors, not hardware. This means there are few financing mechanisms to scale up manufacturing production; alternatives need support.
- Use government procurement power to promote new manufacturing technologies. The US Department of Defense is by far the largest procurement agency, and it needs to use this power to strengthen its industrial base through adoption of advanced manufacturing.
- Direct production support. In the case of some critical technologies, we may need more direct production support to build factories, including a more sustained Chips Act for the next generation of post CMOS semiconductors, as well as for other critical technology sectors.
- Provide both “top-down” and “bottom-up” support. In top-down, tools, such as those deployed by the Defense Advanced Research Projects Agency (DARPA), the government identifies a technology challenge to be addressed and picks a small portfolio of leading companies to pursue it. Bottom-up tools involve incentives available to all interested companies to meet a technology challenge.
- Build a manufacturing focus into existing industrial policy programs. The recently passed major package of industrial policy programs needs a specific focus on manufacturing technologies, which has been largely missing from these initiatives.
- Map and fill gaps in supply chains. This is key for resilient supply chains and economic security.
- Fix workforce education. If the United States wants to adopt advanced manufacturing, its workforce must be ready for it. This requires rebuilding much of workforce education at all levels.
- Put someone in charge. The above steps require a series of agencies to act in concert, not an easy task in our stove-piped government, and a better mechanism must be found to pull these varied manufacturing pieces together.
The United States needs to integrate government policies, trade, finance, education, innovation, and production more fully.
Though our fixes are directed towards the US, this analysis of innovation systems could be applied to the UK as well. As the UK embarks on major innovation initiatives such as Advanced Research and Invention Agency, policymakers should assess the overall state of the UK innovation system, its readiness to diffuse and scale new technologies, and consider what system redesign is needed to support advanced manufacturing.
- This article is adapted from a paper which originally appeared in American Affairs Volume VII, Number 3 (Fall 2023): 3–30.
- Note: This article gives the views of the author, and not the position of USAPP – American Politics and Policy, nor the London School of Economics.
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