Most analysts believe that the future of the manufacturing sector in the U.S. is integrally tied to maintaining our historical lead in high technology. In recent years, however, the ability of our research ecosystem to sustain a leading global position has come into question, especially as new competitors emerge, such as China, which churns out huge numbers of new scientists and engineers and increases its research and development (R&D) expenditures at a 20% annual rate. Adding to the concerns is a perception that American firms are outsourcing so much R&D that it will only add to the erosion of high technology industries. The latest National Science Foundation Science and Engineering Indicators shed some new light on the debate about outsourcing. But before turning to the raw data, I want to make a slight detour into anecdote.
While speaking a few months ago to the Chief Technology Officer of a highly diversified Fortune 500 manufacturer, I asked if he was able to fill all the science and engineering jobs required at his growing company. I can fill the jobs, he said, and most of the talent coming out of the U.S. schools consists of people skilled in basic science and mathematics, but with little experience or interest in actually making things. When I was a kid, he reported, I loved to take apart the latest radio or gadget to see how it worked and how the parts fit together. Most of my generation of engineers started with this basic interest, but the current generation didn't have this motivation, and they aren't very good at trouble shooting on the factory floor when a new product design doesn't quite work or there are problems with systems integration.
Another perspective comes from an imaginative history of science and of the manufacturing that accompanied it. MIT's Thomas Levenson's Measure for Measure: A Musical History of Science chronicles the difficulties of making musical instruments that worked in the refined real world of performance while trying to reflect a more rigorous, mathematical and scientific grounding in musical/scientific history. Pipe organs had to be adjusted by skilled (in hand and ear) technicians since Pythagorean mathematical intervals and harmonies (i.e., the theory) did not fully work in practice. Stradivarius made instruments renowned for their sound, which subsequent artisans have been unable to replicate. Levenson wrote: "Yet though we know everything that can be counted about Stradivarius' instruments, we cannot build their like, even now."
The insight of both Levenson and the Chief Technology Officer is that scientists and engineers have to be intimately involved with the production process. If we are separating the R&D function from production, this essential link is severed. It is not obvious that this always creates problems, especially since much of the outsourced research is intended to adapt products or new ideas to local markets. What more does recent NSF data tell us about outsourcing?
In the first place, about 70% of all R&D done by private U.S. firms is paid for and performed by manufacturing and this sector has a much higher proportion of R&D to sales than other sectors. Second, R&D expenditures are growing faster than GDP, especially in manufacturing . The R&D performed by foreign affiliates of U.S. multinationals has trended upward, but only slightly over the most recent 10-year period (data is available only through 2009). About 15.7% of R&D is outsourced, up from 12.6% in 1999. But since around 37% of all global sales of U.S. multinationals is to foreign buyers, and a lot of R&D is done simply to adapt products to local markets, this slight increase is surprising more for its limited scope when compared to the sector's total sales. One should also look at the fact that U.S. affiliates of foreign firms spend more on R&D in the United States than U.S. firms outsource, and we also have a trade surplus in R&D-related services. Clearly, then, the United States remains a premium location for research and it is still the largest investor in R&D among all countries.
The NSF's data also show that other countries, especially Asian manufacturing powerhouses such as China, Korea, and Taiwan are increasing their research investments at a much more rapid pace and preparing many more scientists and engineers than the United States. The results can be seen in raw dollars devoted to R&D (total Asian R&D now surpasses that of the United States), and in some outputs of research and training. Asians now publish almost as many science and engineering articles as Americans, and are catching up with the U.S. in the production of technology-intensive products. A final note from the massive NSF data file is that the composition of government-funded research in China, Japan, Korea, Germany, and France is much more weighted toward the engineering and physical sciences that are important to manufacturing-related technology than it is in the United States, where government support has steadily trended toward the health-related sciences.
The data suggest that worries about outsourcing of R&D in manufacturing are premature. Instead, we should focus on attracting and training of a skilled workforce, including scientists and engineers who are close to the factory floor, on the composition of government support for R&D (especially in basic research which is dominated by government support), and on the total size of our investment in R&D, including the factors which encourage private investment.
This post is part of the HBR Insight Center on American Competitiveness.
Source: http://blogs.hbr.org/cs/2012/03/is_outsourcing_rd_hurting_us_m.html
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