There are two major challenges facing U.S. manufacturing. The first is building competitiveness with global manufacturers, especially for U.S. small- and medium-sized enterprises (SMEs), and the second is overcoming strategic risks to health care, national defense, and other areas of the global supply chain.
As to the first challenge, the long-run competitiveness of U.S. manufacturing, along with the higher-wage employment that it has traditionally offered, is at risk. Productivity growth, which depends in significant measure on technical innovation, is the basis for long-run competitive success. Greater output per unit of input means longer-term success in the marketplace. Unfortunately, however, in most U.S. manufacturing sectors, productivity growth is substantially below the best-in-class standard set by Germany. In addition, many U.S. SMEs are not productive enough to compete with the cost advantages of Chinese and other low-wage competitors.
These failures present a puzzle. The United States is the world leader in scientific research, and scientific discovery is the basis of manufacturing innovation. So why has competition from firms in countries such as Germany and China, with scientific establishments inferior to those of the United States, not caused U.S. manufacturers to translate an absolute advantage in basic science into a similar advantage in manufacturing innovation and productivity growth? Why has this country been less successful than Germany at diffusing technology across the U.S. manufacturing sector, especially to SMEs? Why can’t U.S. small firms overcome low-wage competition through innovation that delivers higher quality and greater efficiency, as do many German firms.
The source of these failures lies in public good and collective action problems that have not been addressed. Individual profit-maximizing firms underinvest in applied proof-of-concept research, measurement technology and standards, and workforce development, because they cannot capture all the benefits of those investments. This slows productivity growth, since these kinds of investments are needed to translate basic scientific discoveries into manufacturing processes and allow workers to adapt to continual technical change. These problems can be solved, but policy intervention is required to overcome the market failures that produce them.
This report recommends policy measures, analogous to those successfully adopted by Germany, that can address these problems.
Manufacturing-Competitiveness_ReportTo read the full report from the Center for American Progress, please click here.