Is the US a post-innovation economy?

 edited by Richard Locke and Rachel Wellhausen is a useful short summary of an interesting inter-disciplinary MIT research project, and is the companion to an earlier volume,
. Although entirely US-centric, the research into what is needed for firms to be able to innovate then commercialize and grow is fascinating. All the more so in the light of the mild furore yesterday about Facebook’s purchase of Oculus, which some commentators saw as a signal of the inability of start-ups to grow organically.

[amazon_image id=”0262019922″ link=”true” target=”_blank” size=”medium” ]Production in the Innovation Economy[/amazon_image]

The work, based on existing data sources and a new survey of US manufacturing companies – including high-tech spinouts from MIT, explores a number of potential barriers to turning research into successful US manufacturing entities. The papers in the book cover skills, what it rather coyly calls ‘complementary assets’ but is actually finance to grow past the start-up stage, and a thick, geographically specific ‘ecosystem’ of suppliers. Taking these in turn:

– most manufacturers have no specific high skill needs and have little sustained trouble filling jobs, but a significant minority (15-20%) need people with higher mathematics and computer skills, and team working capability, and find it hard to recruit. Small, innovative start-ups do not have the capacity to train up their own people – they need to hunt for them in the labour market.

– surprisingly, finance to get to the point of being able to manufacture at scale, including a stage of iterative incremental innovation and prototyping, is a major barrier even in the US (and surely all the more so elsewhere). Part of the problem is that VCs have become specialists in specific stages and are usually looking for an out from their stage – in other words, venture capital has become very short term finance, shorter term than needed to grow a successful innovative manufacturing business. Many US businesses now turn to strategic overseas investors in Asia, either their customers or even state-funded entities.

– a third requirement is the presence locally – for the exchange of tacit knowledge – of a thick enough market for components. The geographic co-location of members of a supply chain is becoming a constant theme of the literature on innovation. In the economy of the 1960s and 70s, large vertically integrated companies with their own R&D arms did not have this challenge of finding partners in the supply chain; but all new innovative manufacturers have to source components from suppliers who are prepared to work on the new products.

The specific policy conclusions are written for the US, and do not carry over elsewhere in the same form. But the general principles are very obvious. They all point to the need for government to play a co-ordination role. Whether it is ensuring the system of education, training and apprenticeships serves the needs of new start-ups, co-ordinating finance or tax breaks on the funding gap at the transitional stage of growth, or liaising between firms and with local authorities and educational establishments to achieve the geographic clustering, there is a strategic role for government.

Asian governments are superb at this, including focusing support on some specific sectors (such as energy innovation in China), and I think some European governments do a decent job too. The book is pretty clear, though, that the US government has not adapted its industrial strategy for an economy consisting of smaller innovators, one where it can’t rely on big defence contracts and the likes of Bell Labs to look after the business of growing new ideas into large-scale commercial success. In the US and UK there is still the official delusion that industrial policy is equivalent to pouring a bath of taxpayers’ money in which lame ducks can splash around in unproductive luxury. This book provides a really solid evidence base concerning the barriers to growing small, innovative manufacturers, and is very persuasive about the need for policy action to lower those barriers – otherwise, it implies, the US economy can have superb universities and early stage research but will be nevertheless a post-innovation economy.

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How much do we really want a manufacturing revival?

There’s a well-known economics joke that goes:

“Q: How many economists does it take to change a light bulb?

A: None, because if it needs changing, market forces will take care of it.”

The psychiatrist equivalent seems to be:

“A: None, but the lightbulb has to really want to change.”

These old chestnuts came to mind as I was reading Vaclav Smil’s new book,

. It’s exactly the kind of book I find very relaxing, with tons of information and empirical observation.

[amazon_image id=”0262019388″ link=”true” target=”_blank” size=”medium” ]Made in the USA: The Rise and Retreat of American Manufacturing[/amazon_image]

I’ll review it when it is officially published later this month. But, as a curtain raiser, the sections on how hard it has become to manufacture in the US (and by extension other advanced economies) are eye-opening. Low wages in Asia are not the main reason many manufacturers give for offshoring, but rather the complexity of the processes they have to go through to create a viable plant at home – training the workforce, lack of infrastructure, permits, legal obstacles or fear of legal challenge, planning permission – there’s no “can do” but rather an interlocking web of “no, sorry, can’t do”. Smil quotes one example of a planned investment that was pulled because the factory would be behind the local golf course in its priority of access to the water supply.

In another context, I was looking back at my notes on Joseph Tainter’s 1988 book,

, a fascinating work. His argument was that sophisticated societies become too rigid in their complexity, impossible to simplify, resulting in the ultimate simplification of collapse.

Yesterday President Hollande announced a grand new industrial strategy aimed at increasing the share of manufacturing in the French economy – lower now than in the UK, never mind Germany. It isn’t clear that it addresses the kinds of obstacle Smil writes about in his book. How can we make it easier again for businesses to open major manufacturing plants, or build infrastructure, in our highly complex societies? As a start, we have to really want to do it.

[amazon_image id=”052138673X” link=”true” target=”_blank” size=”medium” ]The Collapse of Complex Societies (New Studies in Archaeology)[/amazon_image]

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Municipal grandeur and balanced growth

One of the inspiring things about Tristram Hunt’s book 

is reading about the energy and optimism of leading citizens in the newly industrialising cities.

[amazon_image id=”075381983X” link=”true” target=”_blank” size=”medium” ]Building Jerusalem: The Rise and Fall of the Victorian City[/amazon_image]

It was an era when Britain’s cities other than London, for all the misery and squalor of the working classes, had a sense of control over their own destiny. I do agree with Hunt when he says in the Introduction: “[T]he policies of successive British governments have served to castrate civic autonomy. Unintelligible and ideas-free history [of urban growth] has gone hand in hand with rate-capping, surcharging and centralisation to render local government and civic pride a forlorn part of the historical landscape.”

He points out that Lord Palmerston defended the grand designs for a new Foreign Office building in Whitehall on the basis that it could not be less impressive than Leeds Town Hall. The unpleasant John Ruskin criticised the ugliness of the northern cities – as apparently Peter Hall did too – but it would surely require mental blinkers not to appreciate the glory of Manchester Town Hall or St George’s Hall in Liverpool, or the streets of handsome warehouses in any of the Victorian industrial centres. Hunt writes: “Britain was a land of great cities, each one playing a part in the political process and preventing the unstable accumulation of too much power in the capital.” Commentators at the time contrasted Britain’s stability favourably with the continuing upheaval in over-centralised France.

It is a weakness of the British economy now that it runs on only one engine, albeit a super-sized one, in London. Nobody sensible wants to see London weakened, but surely everybody sensible would like to see other cities have the capacity to grow faster than they have for the past 50 years or more. When people talk about the desirability of rebalancing the economy so that manufacturing and exports grow faster than financial and other services, that’s equivalent to hoping for faster growth in the industrial centres outside the south east, because that’s where most of the manufacturing is located. Economies are not abstractions, they consist of people in places.

I was involved in the Manchester Independent Economic Review, looking at how the city could regain some of that Victorian dynamism, which requires regaining a stronger voice over some of the influences on growth, such as transport and other infrastructure links, planning (an area where the issues in south and north are entirely different), and skills.

It’s a slow process achieving these things, though. Not only is the centre naturally unwilling to cede any decision-making territory, there is also the tyranny of the so-called ‘postcode lottery’. Still, the experience of the devolved nations suggest it is possible to come to terms with difference, so I think it is worthwhile looking for inspiration in the Victorian cities.

Victoriana

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21st century manufacturing

Ricardo Hausman has a nice column on the future of manufacturing in Scientific American. He writes: “More and more information is getting packed into less matter. As a consequence, more of the work goes into manipulating information rather than matter. Jobs move from the shop floor to the design floor. A Boeing 747 or an iPhone are made mostly out of fairly common materials that are worth at most just a few dollars a pound. However, they both go for over $1,000 per pound. The bulk of the value is in the information content, not the raw materials.”

One of the reasons I liked the article is the immodest fact that I prefigured these arguments in my first book, The Weightless World (pdf), published in 1996. The physical mass of the UK and the US economies hasn’t risen since around 1980, according to material flows accounts (and these do take account of trade). The paradoxical point about the dematerialisation of making things is amply underlined by some excellent recent books – 

by Evan Davis and 
by Peter Marsh spring to mind.

[amazon_image id=”1405509856″ link=”true” target=”_blank” size=”medium” ]Made in Britain[/amazon_image]

[amazon_image id=”0300117779″ link=”true” target=”_blank” size=”medium” ]The New Industrial Revolution: Consumers, Globalization and the End of Mass Production[/amazon_image]

Economic theory of the firm hasn’t caught up yet with changes in the structure of manufacturing, although it’s starting to get there with the task-based approach to modelling. Old-fashioned production functions must be on their way out.

Update: Coincidentally, just after writing this post, I read this 2011 New Yorker article by Malcolm Gladwell, Smaller (courtesy of The Electric Typewriter). It’s ostensibly about product improvement in diapers, but is really about the wide efficiencies of using less stuff.

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The people’s car

Who would have thought that a history of the VW Beetle could be such a good yarn? Bernhard Rieger’s 

(out on 5th April) has been ideal for a couple of days of travelling. It weaves together the separate strands contributing to the commercial and cultural success of this iconic automobile, bringing them together in a fascinating story spanning more than seven decades altogether.

[amazon_image id=”0674050916″ link=”true” target=”_blank” size=”medium” ]The People’s Car: A Global History of the Volkswagen Beetle: A Global History of the Volkswagen Bettle[/amazon_image]

One strand is the role of historical accident. The original design by Ferdinand Porsche was commissioned as a grand project by Hitler, the concept of the ‘people’s car’ playing both a populist role in embedding National Socialism and an ideological role, claiming modernity, much as the Italian Fascists did. However, Porsche put a higher priority on technical excellence than on cost, and the pre-war models were unaffordable. Very few Germans bought one. The brand new factory and city in Wolfsburg were turned to the production of military vehicles, using forced labour. After the war, the plant fell into the British occupied sector. Having considered removing the factory to Britain as a part of reparations, and rejecting the idea because it would pose too big a threat to incumbent UK car makers, the occupying forces instead put in a manager, Ivan Hirst, who was rather competent. The rocky process of ‘de-Nazification’ led to a German manager and, ultimately, a fresh start for VW and the Beetle as the symbol of the German post-war economic miracle and of Cold War ‘freedom’.

A second strand was the early introduction of Fordist production techniques, adopted after visits to Ford’s River Rouge factory before the war, and cemented by the appointment of ex-GM and Opel manager Heinrich Nordoff as VW’s post-war General Director. Although the huge success of the Beetle led to a failure to invest in new models through the 1960s, until that time the production techniques and management approach – mimicking Ford’s insistence on the importance of a well-paid workforce – allowed the cars to be produced at huge scale, so affordable price, and high quality. Britain’s auto-manufacturers never achieved that combination.

The third strand is the cultural. Rieger cites Roland Barthe’s wonderful essay in

on the Citroen DS, about the extraordinary cultural role of some cars. What’s interesting about the VW is how different it was in different countries, combining globalized production with distinct national experiences. The Beetle was the mass vehicle in Germany, was never very successful in the UK because of its Nazi origins, became a niche (often 2nd) vehicle for the American liberal suburbs and counterculture, and – news to me – was iconic and massively successful in Mexico and Brazil. VW was one of the main drivers of West Germany’s post-war export miracle. It was an export machine, and also an early example of a huge multinational producing in key markets. The book has a fascinating section on the part played by advertising agency Doyle Dane Bernach from 1959. The agency’s innovative campaigns contrasted with the macho boasting of the American Big 3, emphasising honesty and reliability by making (seemingly) modest claims about technical reliability and service quality, and successfully creating an image of a plucky, friendly, characterful little vehicle – the character picked up in the movie Herbie.

The Beetle now has an afterlife as a “postmodern retro” vehicle, as the Epilogue puts it: “Designed in California with the intention of reviving Volkswagen of America, developed in Wolfsburg, and produced in Puebla by workers on comparatively low wages,” the New Beetle was launched in 1998, although  production ended in 2003. The book ends with a hint – is it wishful thinking? – that this does not mark the end either. Another relaunch seems unlikely but even so, the Beetle certainly deserves to be labelled ‘iconic’.

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