Revitalizing U.S. Manufacturing

Economic Stimulus

STEPHEN EZELL

Revitalizing U.S. Manufacturing

The United States suffered a precipitous decline in manufacturing during the past decade. Key to a reversal will be greatly expanded efforts to support the competitiveness of small- and medium-sized firms.

At a recent Washington, DC, conference on the state of U.S. manufacturing, the head of one prominent economic policy think tank was asked, “How much of its manufacturing sector can the U.S. economy lose and yet still thrive?” The reply: “Really, we could lose all of it and be just fine.” Unfortunately, this view that the U.S. economy can thrive without manufacturing as a postindustrial, knowledge- and services-based economy has become all too prevalent among the Washington economic policy elite. Some even argue that the decline of manufacturing is a sign of U.S. economic strength, because it signals a thorough shift to an advanced services economy. After all, it’s only the laggard nations who still manufacture, they say.

But as explained in The Case for a National Manufacturing Strategy, a report by the Information Technology & Innovation Foundation (ITIF), it’s impossible for large economies to remain competitive without a viable manufacturing sector for five key reasons: (1) manufacturing plays a vital role in helping countries achieve balanced terms of trade; (2) manufacturing provides large numbers of aboveaverage–paying jobs; (3) manufacturing is the principal source of an economy’s R&D and innovation activity; (4) the health of a nation’s manufacturing and services sectors are complementary and inseparable; and (5) manufacturing is essential to a country’s national security.

An increasing number of U.S. competitors, including Australia, Brazil, Canada, China, Germany, Japan, Korea, and the United Kingdom, have recognized that manufacturing remains vital to their economic competitiveness and that they cannot have a healthy manufacturing sector without a healthy base of small- and medium-sized enterprise (SME) manufacturers. They recognize that because SME manufacturers account for more than 98% of manufacturing firms in almost all economies, they form the backbone of a nation’s industrial supply chain.

Yet despite their importance, SME manufacturers lag larger manufacturers in adopting new technologies, increasing productivity, and exporting. Accordingly, an increasing number of countries have introduced and robustly funded a broad array of agencies, programs, and policy instruments to support the competitiveness, productivity, innovation, and export capacity of their SME manufacturers. These countries understand that supporting SME manufacturers’ adoption of new technologies and manufacturing processes as well as bolstering their R&D, innovation, and new product development activities have become indispensable to being an advanced industrial economy. They know that countries that do not have strategies in place to support their SME manufacturers are simply going to be left behind.

Unfortunately, the United States is lagging badly in these efforts. Lack of support for SMEs was a key factor in the precipitous decline of U.S. manufacturing during the past decade. The United States must step up its efforts to revitalize manufacturing in general and SME manufacturing in particular.

Free fall

Manufacturing’s share of U.S. gross domestic product (GDP) and employment has fallen precipitously during the past decade. Yet many argue that U.S. manufacturing is actually quite healthy and that any job losses are simply a result of superior productivity gains. Others assert that manufacturing is in decline everywhere, so that the relative decline in U.S. manufacturing is not noteworthy.

In contrast to these sanguine views, the reality is that, although U.S. manufacturing output and employment remained relatively healthy up until 2000, during the past decade the United States experienced the deepest industrial decline in world history. Some 54,000 U.S. manufacturers, including 42,000 SMEs, were shuttered. Manufacturing output, when properly measured, actually declined. Manufacturing employment fell by 33%, with the loss of 5.7 million jobs, a steeper decline than even during the Great Depression.

Official government figures suggest that U.S. manufacturing output grew just 5% during the prior decade, even as U.S. GDP grew 18%. However, that figure is inflated because it significantly overstates output from two industries: computers/electronics and petroleum/coal products. Overestimation of the output growth from those two industries masks the fact that, from 2000 to 2009, 15 of 19 aggregate-level U.S. manufacturing sectors, which account for 79% of U.S. manufacturing, experienced absolute declines in output. The vast majority of apparent growth in manufacturing output came from the computers/electronics industry, which, according to official statistics, grew 260.5%. In other words, this one sector, which accounts for just 9% of overall U.S. manufacturing output, accounted for 80% of manufacturing output growth from 2000 to 2009, even though the number of workers in the industry declined from 1.78 million to 1.09 million.

The reality, as explained in detail in The Case for a National Manufacturing Strategy, is that technical errors afflict official U.S. government measurements of manufacturing output, such that, when calculated accurately, real U.S. manufacturing output actually fell by at least 10% during the prior decade. A major cause of that decline has been a lack of investment in U.S. manufacturing. From 2000 to 2010, capital investment within the United States by U.S. manufacturers declined more than 21%, even as capital investment abroad by U.S. manufacturing firms was on average 16% higher than at home.

Likewise, the notion that manufacturing job losses primarily reflect productivity gains is also mistaken. U.S. manufacturing productivity grew at similar rates between 1990 and 1999 and between 2000 and 2009—56 and 61%, respectively—yet manufacturing employment declined 3% in the former decade but 33% in the latter. Moreover, U.S. manufacturing job losses have been extreme as compared to those experienced in peer countries. Of the 10 countries tracked by the U.S. Bureau of Labor Statistics, no country lost a greater share of its manufacturing jobs than the United States between 1997 and 2009. In fact, if manufacturing output had grown at the same rate as GDP during the prior decade, the United States would have ended the decade with 2.2 million more manufacturing jobs. Given the multiplier effect that manufacturing jobs have on the rest of the economy, which is at least two to one, had U.S. manufacturing not shrunk, there would be perhaps 6 million more Americans working today. In short, the extreme job loss in U.S. manufacturing during the past decade reflects not productivity increases but rather output declines resulting from the lack of U.S. manufacturing competitiveness and the fact that U.S. manufacturers were increasingly offshoring and investing abroad. This is not the picture of a healthy domestic manufacturing sector.

Finally, the notion that U.S. manufacturing decline is either inevitable or normal is also mistaken, as demonstrated by the fact that manufacturing is growing in many countries, including developed countries. For example, from 2000 to 2008, manufacturing output in constant dollars as a share of GDP increased by 10% in Austria and Switzerland, 14% in Korea, 23% in Finland, 32% in Poland, and 64% in the Slovak Republic. Moreover, from 1970 to 2008, Germany’s and Japan’s shares of world manufacturing output remained stable, even as the U.S. share declined by 12 percentage points, from 28.6 to 17.9%, and China’s share rose 13.4 percentage points, from 3.8 to 17.2%.

The deindustrialization of high-wage economies is not preordained. Competitors such as Germany and Japan have avoided the sharp declines in manufacturing that befell the United States in the last decade. They have done so by remaining committed to manufacturing as a core contributor to their economies and by implementing coherent strategies to boost the productivity, innovation, and competitiveness of their manufacturing sectors, including specific programs and robust funding in support of their SME manufacturers.

The growth of manufacturing extension services

Argentina, Australia, Canada, Germany, Japan, Spain, the United Kingdom, and the United States have each created formal agencies or institutions to provide manufacturing extension services to SME manufacturers. These services provide hands-on outreach mechanisms to stimulate SMEs to acquire or to improve their use of technology and to stimulate innovation. Although other countries, notably Austria, China, Korea, Sweden, Singapore, and Taiwan, don’t have analogous manufacturing extension agencies, they have implemented specific programs to support SME manufacturers.

In the United States, the Hollings Manufacturing Extension Partnership (MEP), located within the Department of Commerce’s National Institute for Standards and Technology, was founded in 1998 to work with SME manufacturers to help them boost productivity, increase profits, and create and retain jobs. MEP’s 1,300 technical experts, operating out of 60 regional centers located in every U.S. state, serve as trusted business advisors focused on solving manufacturers’ challenges and identifying opportunities for growth.

Australia’s Enterprise Connect program, launched in 2008, is a national network of 12 manufacturing centers run by the Department of Innovation, Industry, Science, and Research, which serves as the country’s primary vehicle for delivering firm-level support. Britain’s Manufacturing Advisory Service (MAS), founded in 2002 and modeled after MEP, provides technical information and specialist support to SME manufacturers through a staff of 150 operating out of nine regional centers. Canada’s Industrial Research Assistance Program (IRAP), founded in 1962, supports SME manufacturers with a staff of 230 working out of 150 offices across 90 communities. Japan’s 162 Kohsetsushi Centers, first launched in 1902 and modeled after the U.S. agricultural extension service, has a staff of more than 6,000. As a share of GDP, Japan has 15 times the number of specialists working with SME manufacturers as does the United States.

Countries’ investments in manufacturing extension services generate impressive returns and contribute strongly to broader economic and employment growth.

Countries support their SME manufacturers for four key reasons. First, they recognize SMEs as key drivers of employment and technology growth. For example, Canada’s SMEs account for 80% of new jobs and 82% of new technologies created in the country. But they also recognize that a number of systemic market failures and externalities affect manufacturing activity in general and SME manufacturers in particular that justify government intervention. Thus, the second reason governments specifically assist SME manufacturers is that they lag in adopting new technologies that would make them more productive. SMEs are less likely than larger enterprises to implement new technology, to adopt modern manufacturing processes, to invest in worker training, to adopt new forms of work organization, and to deploy improved business practices. Because of this, a substantial productivity gap exists between large and small manufacturers. This gap is apparent in virtually all countries and has been growing over time. For example, on average in the United States, value added per employee in SMEs was about 80% of that of large establishments in the 1960s. By the late 1990s, this number had fallen to less than 60% of that of large establishments. Extension services play a critical role in closing knowledge and best-practices gaps between small and large manufacturers.

The third rationale, as the European Commission’s Study of Business Support Services and Market Failure found, is that several types of market failure afflict the provision of public information and advisory services to SMEs. First, adverse selection issues arise when “inappropriate take-up of business support services occurs” because SMEs lack the scale to know the range of business support services available to them or the experience or knowledge necessary to adequately assess the value of those services or the quality of particular service providers. A second form of business support market failure arises when information services are not provided because no or only insufficient financial return can be made by private-sector firms. In fact, the UK’s extension service justifies its role precisely on the basis of addressing these two market failures.

Finally, governments support SME manufacturers because they play critical roles in supporting healthy manufacturing ecosystems, supply chains, and even entire regional economies. As large firms increase their dependence on suppliers for parts and services, the performance and capabilities of small manufacturers become critically important to the competitiveness of all manufacturers. Because the health of an economy’s large manufacturers depends on the strength of the SME suppliers in their value chain, SMEs’ competitiveness or lack thereof has externalities that affect other enterprises throughout an economy.

SME support programs have evolved toward helping SMEs move up the value chain in terms of their ability to innovate and commercialize more research- and technology-intensive products.

Traditionally, countries’ manufacturing extension programs focused on helping SME manufacturers realize continuous productivity improvements. This included encouraging new technology adoption, especially manufacturing process technologies, and boosting efficiency not just on the shop floor but throughout the business and supply chain operations. In other words, for many years, manufacturing extension programs were focused on helping SMEs improve the cost side of their business. But while retaining the original focus on boosting productivity, SME support programs have evolved toward helping SMEs move up the value chain in terms of their ability to innovate and commercialize more research- and technology-intensive products. Thus, SME support programs are increasingly focusing on supporting the growth side of the businesses, whether by helping SMEs identify export opportunities, coaching them on innovation skills and methods, or, as in a growing number of countries, directly co-funding SME manufacturers’ innovation, R&D, and new product development activities.

Jayson Myers, the chief executive officer of Canadian Manufacturers and Exporters, explains the transition this way: “Five years ago it was all about lean, quality, Six Sigma, and continuous improvement, but now it is all about innovation and new product development and finding new customers and new markets. A lot of small companies can understand process improvements, but performing R&D, retooling, understanding new customer sensing, designing products for new markets, and understanding standards requirements…these are the new challenges.”

Services provided

SME manufacturing support services can be grouped into three primary categories:

The first category—technology acceleration programs and practices—includes the core SME support functions such as promoting technology adoption by SMEs; conducting audits to identify opportunities for improvements in manufacturing and operational process; supporting technology transfer, diffusion, and commercialization; performing R&D in direct partnership with SMEs and/or providing access to research labs; and including SMEs in collaborative technology research consortia.

The UK’s MAS offers several levels of service to manufacturers. MAS’s Level 2 service is a free, one-day, onsite manufacturing review in which MAS practitioners assess the firm’s manufacturing operations and highlight opportunities to improve operational performance. Level 4 is MAS’s capstone subsidized consultancy support service, called a workout. During workouts, MAS practitioners spend up to two weeks onsite working hands-on with an SME, instilling competitive manufacturing processes, including implementing lean manufacturing processes, codeveloping value stream and process maps, teaching innovation methodologies, improving shop floor layouts and space utilization, and introducing sustainable and energy-efficient manufacturing principles.

Japan’s Kohsetsushi Centers excel at partnering with and undertaking R&D efforts directly alongside SMEs, helping them perform R&D of direct relevance to new technologies and products. For example, Kohsetsushi Center staff spends up to half their time on research, mainly on applied projects focused toward and often undertaken in direct conjunction with local industries. Small manufacturers often send one or two of their staff members to work on Kohsetsushi Center projects, providing opportunities for company personnel to gain research experience, develop new technical skills, and transfer technology back to their firms.

Austria and Germany excel at engaging SMEs in collaborative, consortia-based, precompetitive research programs organized around specific industrial technologies, such as nanotechnology, robotics, advanced materials and sensors, mechatronics, electromechanical systems, and metallurgy. Germany’s Fraunhofer Institutes and Austria’s Kompetenzzentren (Competence Centers for Excellent Technologies) undertake applied research of direct utility to private enterprise. In effect, they perform applied research that translates emerging technologies into commercializable products.

The second primary area of attention—next-generation manufacturing technical assistance—includes the identification and implementation of strategies regarding coaching innovation and growth skills; providing export assistance and training; promoting energy-efficient manufacturing practices; understanding the importance of design; and providing information about and assistance with acquiring standards and certifications.

For example, MEP has introduced a new training program, the Innovation Engineering Management System, which includes a digital tool set, online collaborative workspace, and formal curriculum to help U.S. manufacturers innovate and grow. MEP designed this program to help U.S. SME manufacturers develop skills at and confidence in commercializing new technologies.

Several countries, including Canada and the United Kingdom, have introduced programs to help SME manufacturers understand the critical importance and role of design methods and principles. For example, the UK’s Designing Demand program gives high–growth-potential SMEs 10 days of design and innovation-focused mentoring, helping them understand the value of design processes and how to specify demand projects and issue design tenders.

Boosting SMEs’ export potential is a central goal of many nations’ programs, and one way of facilitating that is by helping SMEs understand international technical standards. For example, Korea assists its SMEs in improving their reliability and boosting their exports by bearing a portion of the costs related to acquiring international standards certificates.

The third major category of assistance—technology acceleration funding mechanisms—have become increasingly popular mechanisms of supporting SME manufacturers. These include providing direct R&D grants to SMEs, loans to scale and grow the enterprise, and innovation vouchers to assist SME manufacturers with new product development and innovation efforts.

At least a dozen countries provide innovation-related funding directly to their SME manufacturers, with the United States being one of the exceptions. For example, from 2010 to 2011, Canada’s IRAP will provide a total of $238.9 million in direct innovation support to SME manufacturers. This support is provided as a nonrepayable grant averaging about $110,000 to $115,000, although it can be as large as $1 million to $2 million, for innovation activities including R&D, technical feasibility studies, prototype and process development, and developing/exploiting licensed technology. Germany’s Central Innovation Program (ZIM) supports R&D cooperation projects among SMEs or between SMEs in conjunction with universities and research organizations. ZIM provides grants of up to 50% of the research project cost for SMEs (and up to 100% for participating research institutes) up to $245,000 per R&D project. Since Germany launched the program in July 2008, ZIM has granted 13,000 awards to assist SMEs with technology R&D projects. Similar programs can be found in Austria, China, Japan, Korea, Taiwan, and the United Kingdom.

Another increasingly common support instrument is the innovation voucher. Used in Austria, Canada, Belgium, Denmark, Germany, the Netherlands, Ireland, and Sweden, these vouchers, usually ranging in value from $5,000 to $30,000, enable SMEs to buy expertise from universities, national laboratories, or public research institutes. The intent is to stimulate knowledge transfer from such institutions to SMEs, whether by enrolling them to assist SMEs with particular technical research challenges or helping SMEs implement improved innovation systems.

Funding extension services

The funding models of countries’ manufacturing extension services vary considerably. For example, the U.S. MEP is a cost-share program, whereby the federal government provides one-third of program funding ($110 million), with that contribution matched in equal part by states and recipient firms. In the UK, the federal government’s contribution is matched only by recipient firms. In contrast, in Japan, funding of the Kohsetsushi Centers comes entirely from Japan’s prefectures, and the consultative services provided to SMEs are mostly cost-free, although the use of laboratory facilities is cost-shared. In Germany, 30% of funding for the 59 Fraunhofer Institutes is provided by federal and state governments, with the remainder by private industry.

What has become increasingly apparent is that the United States is not funding its manufacturing extension service as robustly as it once did, or as aggressively as its competitors now are. In fact, as a share of GDP, the federal government invested 1.28 times more in MEP in 1998 than it did in 2009. But not only has recent federal funding of the program trailed the historical norm, it has begun to fall significantly behind the levels of funding that competitor countries provide their manufacturing extension services. Japan’s Kohsetsushi Centers received $1.67 billion in funding in fiscal year 2009. From 2010 to 2011, Germany’s government will invest $1.83 billion in its ZIM programs and $700 million in its Fraunhofer Institutes. Canada’s government will provide $264.9 million to IRAP in 2010–2011. When analyzed as a share of GDP, each year Japan invests 30 times more, Germany approximately 20 times more, and Canada almost 10 times more than the United States in their principal SME manufacturing support programs.

This is unfortunate, because the impact of countries’ investments in manufacturing extension programs on boosting SME manufacturers’ sales, R&D, and employment activity and thus contributing directly to economic growth is quite evident. For instance, a February 2011 study of MEP found that every $1 of federal investment in MEP generates a return of $32 in economic growth, translating into $3.6 billion in total new sales annually for U.S. SME manufacturers. Moreover, client surveys indicate that MEP centers create or retain one manufacturing job for every $1,570 of federal investment, one of the highest job growth returns out of all federal funds. In fact, 2009 impact data show that the MEP program has created or retained more than 70,000 jobs.

Similarly, an extensive 2010 review of the United Kingdom’s MAS found it to be one of the British government’s most successful programs, generating $6.20 of additional gross value added for every $1 of public investment between 2002 and 2009. The review also found MAS to be one of Britain’s best-performing programs in terms of job creation per government dollar invested. Likewise, a 2010 review of Canada’s IRAP program found that each $1 of public investment in IRAP resulted in a $12 impact on the Canadian economy. Moreover, a 1% increase in IRAP assistance led to an 11% increase in firm sales, a 14% increase in firm employment, and a 12% increase in firm productivity. Likewise, a 1% increase in IRAP funding to a Canadian SME manufacturer led to a 13% increase in the firm’s R&D spending and a 3% increase in its R&D staff. Taken together, the evidence supports the conclusion that countries’ investments in manufacturing extension services generate impressive returns and contribute strongly to broader economic and employment growth.

Lessons for the United States

Global best practice in SME manufacturing support has shifted from a sole focus on assisting SMEs with process and productivity improvements to supporting their R&D, innovation, and growth efforts. This has meant that countries’ manufacturing extension services themselves have had to innovate and demonstrate adaptive capability to ensure that their service offerings evolve and remain responsive to the unique needs of their country’s SME manufacturing base. The evolution of the U.S. MEP and its creation of new tools such as the Innovation Engineering Management System and the National Innovation Marketplace, a Web portal that allows SMEs to search technologies emerging from U.S. universities and national laboratories while trumpeting information about their own innovative products and technologies, conforms with international trends to assist SMEs’ innovation efforts.

However, MEP must continue to focus on helping SME manufacturers increase their technological intensity. Approximately 60% of U.S. manufacturing occurs in low-technology or medium-low–technology industries (industries in which R&D expenditures are less than 3% of sales). In contrast, about 60% of German and 50% of Japanese manufacturing occurs in medium-high–technology or high-technology industries (industries in which R&D expenditures are 3 to 5% of sales, or greater than 5% percent, respectively). In part because of this, Germany’s exports of research-intensive products are seven times greater than those of the United States.

As Rainer Jäkel of Germany’s Federal Ministry of Economics and Technology explains, “A key component of Germany’s industrial success is infusing cutting-edge technology, such as nanotechnology or advanced materials, into legacy industries such as steel or textiles. We’re good at integrating high-tech into otherwise low- and medium-tech sectors, allowing SMEs to renew themselves and find profitable niche markets.” Germany achieves this through a sophisticated model of technology creation and diffusion spearheaded by the Fraunhofer Institutes, which bring businesses and universities together to conduct industrially relevant translational research in advanced technology areas, with those advancements made available to all German industries. This is complemented by the ZIM program, which provides direct R&D funding to support the research, product development, and commercialization efforts of SME manufacturers. Thus, the United States must become much more focused on investments in industrially relevant R&D—Germany spends six times more than the United States on industrial production and technology research—and also explore mechanisms to more directly help fund SME manufacturers’ R&D, innovation, and new product development efforts.

Revitalizing U.S. manufacturing

The United States needs to take a multitude of steps to revitalize its manufacturing sectors. It should start by recognizing that a robust manufacturing sector remains vital to the country’s broader economic health. Next, it must acknowledge that a comprehensive national manufacturing strategy with a coherent set of public policies is needed to support U.S. manufacturers, large and small alike. Such policies should be organized around finance, technology investment, trade, tax, and talent.

In this difficult economic climate, many SMEs face severe capital constraints inhibiting their investments in R&D and production expansion. One vehicle Congress could create to assist SME manufacturers is a deferred investment account that would allow SMEs to make tax-deferred investments into special accounts for funds subsequently withdrawn for investments in workforce training or capital equipment acquisition. Although that would help SMEs better plan for the future, many SMEs could expand their operations now if they had sufficient access to capital. The Federal Reserve should consider relaxing some of the stringent guidance it has placed on local banks with regard to the liquidity ratios SME manufacturers must meet to be eligible for commercial loans, allowing local banks to better understand and service SMEs’ capital needs, given their particular cash flow constraints.

With regard to technology investment, Congress should expand MEP funding by at least double to $200 million annually, while retaining the 2-to-1 match. This would help close some of the U.S. SME manufacturing support gap with other countries and allow more SMEs to enjoy the benefit of MES services and the extensive benefits they produce. But the United States also needs to significantly increase direct funding support of SME manufacturers’ R&D and innovation efforts, as many competitors have done. Accordingly, Congress should direct the Small Business Administration to devote at least half its portfolio to supporting high-growth potential, high-tech firms, including a much larger share of manufacturers, with funding specifically supporting SMEs’ innovation and R&D efforts through investments such as in new capital equipment, machinery, or IT software. Further, Congress should restore long-term authorization of the Small Business Innovation Research program, through which 2.5% of federal agency research budgets is allocated to small businesses, and the Small Business Technology Transfer program, through which 0.3% of federal agency research budgets is allocated to universities or nonprofit research institutions that work in partnership with small businesses.

Policymakers should take steps to build a Fraunhoferlike network of industrially relevant, applied research institutes focused on core emerging technologies in the United States. A first step is NIST’s creation of the Advanced Manufacturing Technology Consortia (AMTech), a new public-private partnership that aims to fill a critical funding gap for early-stage technology development by improving incentives for creation of industry-led consortia supporting precompetitive R&D. But the Obama administration’s 2011 budget provides just $12.3 million in AMTech funding. AMTech’s funding should be ramped up to at least $500 million annually and support precompetitive applied research into 20 key advanced technologies. Congress should also expand support for NSF programs that work closely with industry, including the Engineering Research Center, Industry/University Cooperative Research Center, and Partnerships for Innovation programs, which together currently receive less than 2% of NSF’s budget.

With regard to trade, the United States needs to better support SME manufacturers’ export potential and their ability to compete against foreign manufacturers that are subsidized by their governments. First, Congress should increase the statutory lending authorization of the U.S. Export-Import Bank, which provides export credit financing to U.S. manufacturers, from $100 billion to $160 billion, and direct the bank to increase its statutory goal to providing at least 25% of its financing to small businesses. This is needed because competitor nations provide far more export credit financing assistance to their manufacturers. In fact, as a share of GDP, competitors such as Brazil, China, India, France, and Germany provide 7 to 10 times more export credit assistance than does the United States. Furthermore, Congress should allow the Export-Import Bank to use $20 billion in unobligated authority to lend directly to domestic manufacturing companies that are in competition with subsidized competitors and can demonstrate that the funds would support expanded manufacturer activities in the United States. At the same time, the Obama administration should expand MEP’s ExporTech export assistance program, which provides global trade and best-practice information to SME manufacturers.

With regard to tax policy, the United States needs to reduce effective corporate taxes—after Japan it has the second-highest rate among countries in the Organisation for Economic Co-operation and Development (OECD)—and simplify the tax code while expanding key incentives. Congress should expand the Alternative Simplified R&D Credit from 14 to 20% because the United States ranks just 17th in the OECD in R&D tax credit generosity. It should also institute a new tax credit for investment in new machinery and equipment, including software.

Finally, with regard to talent, state and federal policy-makers could take several steps to boost the pool of talented workers equipped with the skills demanded by SME manufacturers. In particular, Congress should boost support for community colleges, in part by increasing funding for Perkins vocational education and training programs (with states matching those investments) and in part by allowing unemployed workers to collect unemployment insurance if they are in approved training programs. Congress should also expanding funding for NSF’s Advanced Technological Education program, which supports partnerships between academic institutions and employers to improve the education of science and engineering technicians in high-technology fields at the undergraduate and secondary school levels. Further, states should increase credentialing for manufacturing workforce members by expanding the use of nationally portable, industry-recognized certifications specifically designed for the manufacturing industry.

Manufacturing will never again support 30% of the U.S. workforce, as it did in the 1970s. But it can be significantly expanded to eliminate the $800 billion trade deficit the United States experiences year in and year out. We cannot give up on manufacturing or be indifferent to the needs of small manufacturers trying to move up the value chain to produce higher–value-added products. U.S. manufacturing can remain globally competitive and be a source of millions of aboveaverage–paying jobs for U.S. citizens. But getting there will require a renewed belief in manufacturing and smart public policies that ensure that U.S. manufacturers operate in as cost-efficient an environment as possible, while having access to the world’s best technology, infrastructure, and talent.

Recommended reading

Stephen J. Ezell and Robert D. Atkinson, The Case for a National Manufacturing Strategy (Information Technology & Innovation Foundation, April 2011; http://www. itif.org/files/2011-national-manufacturing-strategy.pdf).

Philip Shapira, Jan Youtie, and Luciano Kay, “Building Capabilities for Innovation in SMEs: A Cross-Country Comparison of Technology Extension Policies and Programs,” International Journal of Innovation and Regional Development 3-4 (2011): 254–272.


Stephen Ezell (sezell@itif.org) is a senior analyst at the Information Technology & Innovation Foundation (ITIF) in Washington, DC, and the coauthor, with ITIF President Robert D. Atkinson, of the September 2011 report International Benchmarking of Countries’ Policies and Programs Supporting SME Manufacturers (http://www.itif.org/files/2011-sme-manufacturing-tech-programss-new.pdf).