Volume 11 | Issue 2 | Year 2008

An Iowa manufacturer of scrap processing and solid-waste equipment shrinks its machine size to tap the European market for smaller equipment. A New England lobster trap maker reinvents his technology and applies it to agricultural fencing, aquaculture and prison enclosures, opening up a wide range of new business opportunities. An Ohio company that makes sanitary valves redevelops its product to market it to the biotech industry. And in Minnesota, the last U.S. manufacturer of suspension assemblies for disk drives more than doubles its R&D budget to 8 percent of sales to make sure that its products are world-class today and for the long-term.
All of these successful companies have one thing in common: the relentless pursuit of continuous improvement which marks American manufacturing. Once called Yankee ingenuity, it is the driving force behind innovation of new products, and new and improved processes. It’s innovation that has boosted U.S. manufacturing output to the highest level in history and made manufacturing the 8th largest economy in the world, were it separate from the overall U.S. economy.

Yet in today’s global marketplace, other nations are emulating U.S. success with their own unprecedented innovations. They are training their young people to be tomorrow’s scientists and engineers. As a result, economic growth is burgeoning in many overseas markets. Will the United States be able to maintain its lead as the competitive pressures rise?

There’s good reason for concern. A never-ending passion for innovation bestows many economic benefits on the overall U.S. economy. Perhaps foremost, it enables this country to be a global economic and military leader as it propels economic growth and provides unique defense capabilities. U.S. consumers and businesses reap the advantages of new technology, providing U.S. industry with a competitive advantage over firms elsewhere.

These technological investments – in both new products and new processes—in turn lead to productivity leaps that make U.S. products better and less expensive than what foreign competitors produce. Innovation has led to a higher standard of living for working Americans. Innovation, measured in terms of productivity has resulted in an increase of growth of real compensation in the nonfarm business sector over the past decade. A strong and consistent pattern of innovation also leads to financial rewards throughout the supply chain, from investors and managers to engineers and plant floor employees.

There are three important warning signs for this country. Let’s look first at spending on research and development (R&D) where six fast growing economies – China, Ireland, Israel, Singapore, South Korea and Taiwan – are on track to exceed U.S. spending in a few years. As a share of total world R&D, the United States is still the majority R&D investor, followed by Japan and other developed OECD countries. Within this country, manufacturing is the horse that pulls the wagon, accounting for 70 percent of all business spending on R&D.

Emerging manufacturing centers in China, South Korea and Taiwan are closing the R&D spending gap however. Their total R&D investments collectively have risen by nearly 180 percent since 1995, while U.S. R&D funding has increased by 38 percent. China alone has tripled R&D funding during the past decade. China now ranks second in the world behind the United States and its R&D spending continues to increase significantly.

The R&D tax credit is part of this arsenal. More than 75 percent of it is used for salaries of employees who conduct R&D in the United States. Yet Congress has allowed it to lapse 13 times since 1981. A year ago, the United States ranked 15 among 20 OECD countries offering such incentives. With its expiration, the U.S. ranks last. This is not a good track record of support for one of the nation’s most important economic underpinnings.

Another warning sign is the distribution of federal spending on the physical sciences, which have their biggest payback in the form of manufacturing innovations. Publicly funded research supported the development of semiconductors and the Internet, global positioning technology, biotechnology and nanotechnology, among others. But the ratio of Gross Domestic Product (GDP) to federal spending on physical sciences has steadily fallen since the 1970s and is now half of what it was 40 years ago. Much of this erosion occurred in the 1990s and it’s time to stop it and reverse it.

There’s a lot that can be done to shore up America’s innovation economy. The checklist for enhancing it includes the following steps:

Strengthen the R&D tax credit and make it permanent. Every year or so, Congress toys with this important tax incentive for innovation, passing short extensions. Most recently, the credit expired at the end of 2007, resulting in a $9 billion tax hike on innovation for the 11,000 companies that use it. It should be strengthened and made permanent.

Increase federal spending on long-term basic research by 10 percent a year over the next seven years, with a special focus on the physical sciences, engineering and mathematics.

By 2015, double the number of bachelor’s degrees awarded annually to U.S. students in science, math and engineering and increase the number of those students who become K-12 science and math teachers.

Reform immigration policies to enable the education and employment of individuals from around the world.

There has been strong bipartisan support for this agenda and recent legislation has helped move it in the right direction. But for a country that spends more on tort litigation than on R&D, these critical steps should be urgent business.

William F. Canis is acting president of The Manufacturing Institute, the research and education arm of the National Association of Manufacturers, building intellectual support and raising understanding among policymakers, the media, educators and potential workers about manufacturing’s contributions to the quality of American life, the challenges facing the sector and its excellent, technologically sophisticated career opportunities. Visit www.nam.org.