Sustaining the innovation economy

New MIT research proposes policy changes, new models for American industry

September 25, 2013

MIT professor Suzanne Berger Photo: David Sella

MIT professor Suzanne Berger Photo: David Sella

While the bulk of the world’s product innovations continue to come from American initiatives, the products resulting from those innovations are increasingly made elsewhere. For the past three years, the MIT Production in the Innovation Economy Commission examined the causes and impacts of that shift, asking critical questions about not only the lost manufacturing jobs of today, but also about innovation tomorrow.

MIT political science professor Suzanne Berger led the study and authored Making in America: From Innovation to Market, the resulting book. She discussed the results at a Sept. 20 conference.

The study involved more than 40 MIT faculty and graduate students, who interviewed and surveyed hundreds of senior managers at large multinationals, midsize companies, and “main street” manufacturers in the United States and abroad, with an emphasis on China and Germany.

Much of the research took place on shop floors, where researchers asked detailed questions about the pathway from innovation to product, focusing on capabilities needed—and those that were lacking—along the way.

“We began with a central question,” Berger said. “What production capabilities do we need to fuel innovation and to realize its benefits in good new jobs, new enterprises, and sustainable growth?”

Berger cited chemical giant DuPont as an example of a company that brought innovation to production in a previous era. DuPont spent 10 years developing the polymer nylon, and when the company was ready to launch products it had the capital to build and maintain factories in the United States and the capability to bring the product to a global scale. By contrast, Apple products are entirely American innovations—manufactured in China—but still reap the bulk of their profits in the U.S.

Berger asked whether this is simply a natural progression towards a service economy, as the shift from agriculture to manufacturing was a century ago, and whether it might be sustainable for the United States to be the R&D center of the world, with goods produced elsewhere.

Berger also said that the line between “service” and “product” is now blurry and that many of the most successful innovations bundle services and products together. Mobile technology is an obvious example, she said, where customers buy both a device and a service to use it. But there are also myriad examples from “main street” manufacturers, such as an Ohio company that manufactures sleeves for repairing oil pipes, but also provides the technicians to put them into place—perhaps the most valuable aspect of the product.

Innovation via manufacturing

One key discovery of the Production in the Innovation Economy study is that manufacturing itself plays a key role in innovation, and that the United States needs to address barriers to building and sustaining a larger manufacturing base or risk forfeiting future innovation capabilities.

Where the DuPonts and other established companies could invest long term and build factories when a product was ready, a shift in corporate structures has moved businesses away from vertical organizations with in-house capabilities, Berger said. The influence of financial markets on valuations and investment time horizons has moved companies to leaner, “asset-light” organizations that reduced less immediately profitable divisions and headcount at a time when globalization presented cheaper options abroad.

But that shift comes at a longer-term economic cost. Today’s companies find it challenging to justify investments in manufacturing compared to an earlier generation of corporations.

“We discovered that manufacturing is very important in bringing good ideas,” Berger said. “Whether they come from the shop floor or the laboratory, through the stages of prototyping, pilot manufacturing, larger-scale production, and finally commercialization. There’s a lot of innovation and learning in manufacturing, which feeds back into research and development. That is critical.”

“There are no automatic forces at work in the manufacturing world that will build a sustainable advantage for our manufacturers, unless we make the kind of policy choices and changes that can make this possible,” Berger said.

Skills for success

MIT Sloan professor Paul Osterman presented findings on workforce issues in manufacturing, drawn from a survey that included highly detailed questions about skill sets needed in the industry. He stressed that two-thirds of employers are looking for only basic skills, noting that basic reading factors heavily in today’s manufacturing jobs, as do basic math skills.

“You can’t get along with a strong back anymore, we’re not in that world of manufacturing where you can just be strong and survive,” Osterman said. “You do need skills, but the skills needed are not rocket science. They are within reach of most Americans. And that’s really important.”

But, he said, there is a disconnect between employers citing shortages of skilled labor and the millions of manufacturing workers who are currently unemployed. At the same time, manufacturing wages have not risen to reflect an increase in demand. Osterman’s survey defined a “shortage” as a vacancy of three months or more and found that, by that definition, only 25 percent of companies showed true shortages.

MIT President L. Rafael Reif stressed the need for a continued commitment to the work of the commission, using the occasion to announce an MIT Innovation Initiative, similar in scope and structure to the MIT Energy Initiative begun in 2006.

While further details will be released in the coming weeks, Reif said the new initiative will focus on accelerating innovation through research into methods for converting innovations to products; policy research in regards to manufacturing; education; and ensuring that MIT “walks the talk” in supporting innovation in its operations and programs.