Why bringing manufacturing "back home" might be a boon for innovation

Seldom does the unintended consequence of a change in socio-economic policy carry with it the potential benefit of improvements to innovation. But that may be the case with the move by western countries (most notably the United States) to bring back ("onshore") manufacturing activities that have been offshored for two decades, only to result in supply chains that raise security concerns and reliability (since Corona) issues. Because anything that may enhance innovation is welcome, IP types should take notice.

The move to onshore manufacturing capability emerged from increased concerns over the oversized role that China was perceived to be playing (both more and better) in manufacturing. In America, reaching back to the Obama years, the question began to be raised: What happened if China chose to turn off the manufacturing spigot (or it closed the transportation routes of crucial chip manufacturing done in Taiwan)?

Despite the hyper-partisanship during the Obama, Trump and Biden presidencies, there developed a rare political consensus: manufacturing needed to be repatriated to the U.S., and new manufacturing capacity within the U.S. needed to be championed. Various executive and legislative steps have been taken, including legislation in 2022 to encourage domestic chip manufacture and climate-sensitive projects, where the key words are "Made in America".

"Okay Kat, this is all interesting, but what does any of this have to with innovation"? Precisely this question was addressed in a piece that was published last month in The Economist.

As for intended consequences, both security and employment benefits were emphasized. Distributing manufacturing capabilities to U.S. facilities will lead to less dependence on China (or any other dominant locus of manufacture). Score one for presumed better politico-economic security.

More domestic manufacturing is also supposed to lead to oodles of new, high-paying jobs. Actually, as the article indicates, and the point has been frequently made over the last decade, new manufacturing capability enhances productivity more than it provides reservoirs of new, high-wage jobs. The article refers to research that concludes that the number of manufacturing jobs has steadily declined since 2000. The culprit is increased use of effective technology in both its hardware and software forms.

But this is not an unintended consequence of encouraging local manufacturing as much as a misplaced understanding of the interaction between manufacturing, improved productivity, and employment. Warnings that this might happen were already out there in the public conversation, and, in any event, innovation was not part of the discussion.

                                                               Ship ahoy: this cat is about to be onshored

By contrast, emerging indicia that onshoring might be good for innovation seems to have come as a surprise. Thus, the article reports a study by Gary Pisano and Willy Shih of Harvard Business School, pointing to spillover benefits to innovation when R&D is carried out near to the manufacturing facilities. This is especially the case in the initial stages of a new product cycle. The lesson (it would seem): when one repatriates manufacture, make every effort to put R&D and manufacturing near to each other.

Want some patent-focused evidence? Consider the research by Teresa Fort of Dartmouth College, Wolfgang Keller of University of Colorado, and colleagues, which indicates that the more that an enterprise places R&D and manufacturing in close proximity, the more patents and citations are created.

The article then continues that "smaller the geographic distance between manufacturing and arms of the firm, the more innovation ensues," although what constitutes innovation is not spelled out. Still, here too, the results point to the possible benefits of onshoring when the sites of the R&D and manufacturing activities are in proximity.

Lest the Kat reader think that these studies eschewed any granularity regarding the nature of the products and their related manufacture, Pisano and Shih point out that product differences need to be considered. The argument is made that in the biotech drug industry, innovation is enhanced by putting R&D and manufacture in proximity because drug design is tightly related to the manufacturing process. (That said, where the generic drug industry fits into this is not addressed.)

Less tightly connected, it is claimed, is the semiconductor industry, where some existing US companies with a notable market share (such as Nvidia) have felt comfortable carrying out the design function in the US but having the designs manufactured abroad (in Nvidia's case, in Taiwan). Query whether the recent efforts by the Biden administration to onshore semiconductor activity will change that arrangement, and, if so, whether it will lead to increased innovation in that industry.

This Kat has one final thought. Maybe the argument that improved innovation resulting from the onshoring of manufacturing is not quite as unintended as we have suggested. The advantages of clusters in enhancing development and production can be traced to the Ancient world and through to the European Middle Ages and the Chinese Middle Kingdom: Silicon Valley and the Research Triangle are merely the most recent manifestations.

The question remains: will the current form of clustering in the service of onshoring lead to improvements in innovation?