First Person: Burdensome Policy Makes Commercialization of U.S. Innovation at Home a Challenge
The editor of Area Development magazine recently spoke with Jack McDougle, Senior Vice President at the Council on Competitiveness, about the offshoring and
re-shoring of U.S. businesses and what it would take to grow the nation's manufacturing sector. The Council's recommendations are highlighted in its "Make: An American Manufacturing Movement" report.
Jack McDougle, Senior Vice President, Compete.org / The Council on Competitiveness (April 2012)
AD: What initially drove the offshoring movement by U.S. manufacturers?
McDougle: A lot of variables contributed to offshoring. Other governments made investments in infrastructure, education, and improved business environments so they became more attractive to investors. Also American manufacturers wanted to take advantage of Asia's lower costs and expanding markets - get their foot in the door. Don't forget, 95 percent of global consumers live outside the United States.
AD: Besides Asia, where else are U.S. manufacturers offshoring?
McDougle: U.S. direct investment in Europe is actually greater than in Asia. This is probably because of similar laws governing contracts, business operations, and IP protection. Also Europe is a developed market with higher purchasing power so U.S. companies want to be there. That's the same reason European companies want to be in the U.S. - lower costs don't explain everything.
AD: How has the tendency for U.S. manufacturers to offshore their operations changed in the last few years?
McDougle: The total cost of production is rising in Asia and other countries. As multinational firms become more sophisticated, they are developing a greater understanding of their total cost of production so other drivers are becoming more important, including taxes, regulatory costs, and the costs of raw materials and energy as well as IP protection.
AD: I've read a lot about U.S. manufacturers bringing jobs home and re-shoring because of rising transportation costs, product quality issues, etc. Is this a real trend?
McDougle: It probably is a real trend but I'm not sure of the number of jobs being brought back. It's more a question of where specific industry sectors can gain competitive advantage by manufacturing in the United States. For instance, GE is bringing back manufacturing of appliances from China and Mexico, but it's also shifting some manufacturing around in China and other parts of Asia. The Chinese government is working hard to improve its citizens' purchasing power and we need access to that market.
AD: What competitive advantages would you say the U.S. has?
McDougle: Our greatest strength is understanding and leveraging emerging technologies and new innovations. We need to create the right environment at home to scale up production of those innovations, creating new types of jobs. We could see regional growth in manufacturing value added and output, with highly skilled, high value-added jobs in factories and the entire support network around manufacturing plants.
AD: With all the talk about a "skills gap" in the U.S., how are these manufacturing companies of the future going to find the workers with the necessary skills?
McDougle: This is a significant issue and there's no one-size-fits-all solution. First, our educational system must become more demand-driven, and the Council on Competitiveness is advocating for this. Historically we've developed knowledge in our educational institutions, but not workplace skills. We need to de-stigmatize vocational education. This is by no means a "dumbing down" of the work force.
AD: Can you give me an example?
McDougle: Welders, for instance, today need calculus and advanced engineering skills; they utilize computer-aided design. We need technologically skilled workers, and people are recognizing this. Two- and four-year colleges are addressing this as well and engaging more with industry. However, it's going to take a while for this mindset to change.
AD: Tell me more about near-shoring, that is, the U.S. as a market for FDI?
McDougle: The U.S. is still the world's number-one innovation economy. It's still an amazing engine of creativity so foreign companies want to invest here. Certain areas in the U.S. are very competitive globally, like the Southeast region. In fact, in his State of the Union address, President Obama highlighted Siemens' investment in the U.S. and job creation in North Carolina. Nonetheless, where we fall short is in the commercialization of innovations.
AD: Why are we having trouble bringing innovation to market?
McDougle: We need policies to reflect that manufacturing at scale is a critical piece of the full life cycle innovation process. It doesn't make sense to continue investing heavily in R&D only to have American inventions brought to production in other countries because burdensome tax and regulatory policies make scaling up in the U.S. a challenge. We must ensure that small businesses have access to the tools and resources to grow, while creating the right environment for large multinational companies to expand capital investments in the U.S.
AD: What is "Make: An American Manufacturing Movement"?
McDougle: This report came out of a series of recommendations from the U.S. Council on Competitiveness aimed at attracting and growing U.S. manufacturing.
AD: What do you see as the future of U.S. manufacturing?
McDougle: The U.S. is going through a new phase of economic development and we need to recalibrate our approach. The long-term prospects are good if we put the right mechanisms in place. Some of our best days are ahead of us, but it will take time.