Implications of the current technological trajectories for industrial policy New manufacturing, re-shoring and global value chains Mario Cimoli
You remember when most economists said that industrialization should decline / that manufacturing was equal to any other economic activity / that markets were the most efficient mechanisms for allocating resources in open economies. Thus, in many countries, industrial policy institutions and instruments were dismantled Other dicta: Growing importance of services / services as the new focus of innovation Growing share of services in international trade The financial sector auto-regulates and expands harmoniously Global value chains, free trade and specialization as substitutes for industrial policy Innovation not contingent upon production (different localizations) China: the only factory, today and in the future Natural recourses as the base for innovation and growth
Sources of development and innovation What we were told Growing importance of services for growth and innovation Services as the new focus of innovation What evidence indicates Manufacturing is (was and will be ) the main field of innovation. E.g. microprocessor, biotech, nanotech, etc. Most advanced services are technological spin-offs of manufacturing (software, telecoms) Growing importance of services in the trade balance The financial sector is capable of autoregulating and expanding harmoniously Manufactured goods dominate in international trade The 2008 crisis showed that the financial sector must develop in line with the real sector (manufacturing and other products)
Manufacturing firms are more likely to engage in R&D Manufacturers are more likely to innovate: Over 70% of total R&D expenditure comes from manufacturing. R&D intensity is significantly higher in manufacturing than in services. This is true not only for large developed countries, but also for countries like Mexico and Ireland.
Manufacturing performance affects other sectors through inter-industry linkages Physical production processes are increasingly at the centre of larger value chains. Manufacturing is changing, creating revenue and value beyond the production and sale of products: Packaging of services with products (servitization) New sources of information on how products are used based on embedded sensors and open data (Internet of Things) Most advanced services are technological spin-offs from manufacturing (software) or are based on manufacturing innovation (ICT, telecoms, finance).
Manufacturing dominates international trade Manufacturing has the highest share in exports: Not only at global level, but also in the average for LAC countries. In LAC countries, manufacturing share in exports is higher than those of fuels and mining
Manufacturing is essential for productivity growth
Industrial/ technological policies (1) What we were told No need for industrial policy / firms and countries are similar Global value chains, free trade and specialization are substitutes for industrial policy The new technological paradigms lead to industry maturity Disconnection between innovation and production (different localizations) What evidence indicates Upgrading countries technological capabilities requires industrial policies Growing management costs of long global value chains (changes on the location paradigm) New technologies transform all industrial opportunities (what is mature today, could be highly innovative tomorrow. The Vernon cycle is static.) Innovation is strongly linked to manufacturing and other types of production (learning, geographical proximity, tacit knowledge) Abundance economics (prices of new products decrease, connectivity increases and becomes faster, acceleration of robot capabilities)
Technological capabilities Require time; Are subject to path-dependency, i.e. the evolution of capabilities depends on previous experience and directions of past learning; Complementarities between sectors and capabilities, externalities and increasing returns are crucial for industry and the economy alike; Irreversibility in the building of certain physical and technological assets, which cannot be abandoned or replaced; A critical tacit component that could not be obtained from importing capital goods nor from manuals or other forms of codified information; Countries and firms which are closer to the technological frontier have a growing advantage in innovation with respect to the laggards. Cumulative processes leading to vicious or virtuous cycles explain why some countries move to a path where learning, production capabilities and institutions interact virtuously, while others remain in a hysteresis state, e.g., in a low-growth (divergence) trap.
Industrial/ technological policies (2) What we were told No re-shoring of manufacturing: China is and will continue to be the only factory of the world Natural resources are a basis for innovation and growth What evidences indicate Countries are not firms, and can lose their industrial capabilities (industrial commons) Static view of production and technology New technologies are built upon existing industrial capabilities Risk from global value chains management Re-shoring of production in advanced countries Concern for innovation systems - industrial commons There are few activities related to natural resources that are sources of complementary assets
Process maturity Manufacturing is critical for innovation Locating production away from R&D hurts a country's ability to innovate The modularity maturity matrix High Process- embedded innovation Process technologies, though mature, are highly integral to product innovation. Design cannot be separated from manufacturing Examples: high- end wine, advanced materials fabrication Process- driven innovation Major process innovations are evolving rapidly and can have a huge impact o the product. The value of integrating R&D and manufacturing is extremely high. The risks at separating design and manufacturing are enormous. Pure product innovation The processes are mature, and the value of integrating product design with manufacturing is low. Outsourcing manufacturing makes sense. Examples: Desktop computers, consumer electronics, commodity semiconductors Pure process innovation Process technology is evolving rapidly but is not intimately connected to product innovation. While locating product design near manufacturing is not critical, proximity between process R&D and manufacturing is. Low Examples: Biotech drugs, nano-materials. Examples: Advanced semiconductors, high density flexible circuits. Modularity: the degree to which information about product design can be separated from the manufacturing process High Source: Pisano & Shih (2012)
Evidence of a paradigm shift in the location of industrial production A tendency to stop the out-shoring of some industries (particularly in the U.S.) explained by: The gap in labor costs compared to China has been reduced. Technical change towards greater automation reduces the importance of labor costs. Transportation costs (energy) and logistics (time) become increasingly important. Increased importance of the proximity of production and design to promote R&D Changes in the visions of the leading business schools Some evidence from the U.S. and the UK MIT's Supply Chain Forum of Innovation: 33% of firms with overseas production, considered returning to the U.S., 15% had already made the decision (2012). Boston Consulting Group: Made in America, Again. Why Manufacturing will Return to the U.S., 2011 UK Government Office for Science: The future of manufacturing: A new era of opportunity and challenge for the UK, 2013
Changes in the approach to industrial policy in Europe and the U.S. Manufacturing is crucial because It dominates trade balances It is the engine for growth in other sectors It fosters technological development: it is overrepresented in R&D and creates local spillovers It creates high-wage jobs (In the U.S., the new discourse emphasizes the importance of industrial employment as a support for the middle class) The loss of manufacturing not only destroys jobs but also destroys innovative advantages The relocation of manufacturing is accompanied by the relocation of high value-added services. Not all industries are equally important: some generate more growth and productivity gains.
Changes in IP in Europe and the U.S. Policy instruments Horizontal policies and getting the fundamentals right are not sufficient. Selective policies designed to rebuild the foundations of industrial commons, particularly innovative capacity Innovation leads to productivity growth which, in turn, improves wages. Two pillars Technical and scientific know-how: Public investment in basic and applied research (e.g., DARPA and the Human Genome Project ) Specialized human capital: science graduates and vocational training systems (technical skills) This concept is similar to a vertical industrial policy strategy (picking winners), however, it is presented as being "aimed at developing certain skills in the industry There is no dichotomy between market and state. While the U.S. has a strongly market-oriented economy, throughout its history the government has played a central role in supporting technological innovation.
Social impact and welfare What we were told Productivity growth is correlated to job loss What evidence indicates Design / production of means of production increase employment Displacement of unskilled workers in some industries The need for new labor competencies and capabilities Supports a middle class based on the diffusion of mechanized / robotized new manufacturing processes Strong correlation between high-wage services and high-wage manufacturing
Blue: 1980-1989 Green: 1990-1999 Red: 2000-2010 Manufacturing: Labor productivity and value added
Labor compensation,sector i/manufacturing average labor compensation (%) High correlation between technology intensity in manufacturing and labor compensation 180 Low-Tech Medium-Low Tech Medium-High Tech High-Tech 160 140 120 100 y = 11,704ln(x) + 109,34 R² = 0,6483 80 60 0 1 2 3 4 5 6 7 8 R&D expenditure, sector i/value added, sector i (%)
Best practice paradigm: co- evolution between industrial structure transformation and technological trajectories Industrial transformation Knowledge Intensive Unsynchronized process Modernization Latin American path Increasing gaps Lost of industrial commons Exclusion and informality Human resources S&T Innovation Industrial policies
In the U.S. manufacturing industry creates high-wage jobs for low-skilled workers Fuente: Susan Helper y otros, Why does manufacturing matter?, Brookings, 2012
Productivity, structural change and employment To foster the expansion of productivity, the accumulation of technological capabilities must be combined with the transformation of the production structure incorporating new unrelated activities (industries far from those with comparative advantage) A more complex economic structure generated through the accumulation of technological capabilities creates externalities, complementarities and technological innovation and diffusion (Schumpeterian efficiency) A clear association between technological capabilities and the ability to compete in sectors whose demand grows faster; thus, reducing the balance-of-payment constrain to growth (Keynesian efficiency) Developing economies: large share of the labor force in low-productivity sectors (dual economies) Creating employment in higher productivity sectors requires technological upgrading and the transformation of the economic structure Structural change is the engine that moves labor out of the subsistence sector