A long essay by Andy Groves (former head of Intel) in BusinessWeek (How America Can Create Jobs) is causing something of a stir. Groves message is straight forward enough: economic prosperity depends on more than invention. It also requires commercialization and production – what Groves calls the ability to scale:
Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.
The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.
(See also comment s by Why is the American Jobs Machine Broken? by Tim Duy and Andy Grove on the Need for US Job Creation and Industrial Policy by Yves Smith of the “naked capitalism” blog.)
As readers of this blog will quickly note, this is also an ongoing diatribe of mine. The I-Cubed Economy is not about just producing intangibles and undertaking innovation. It is about doing something with those assets. Intangibles and knowledge are the fuel, innovation the process and the outcome is economic activity. That means production of both goods and services here in the US.
Many have been seduced by the misunderstanding of the intangible economy. They argue that we can simply move to knowledge activities in the believe that only these are higher value added activities. They point to economic history to bolster their claim, specifically the evolution from agriculture to manufacturing to services.
As I’ve noted many times before, this is a oversimplified version of history. When the economy moved from agriculture to manufacturing (to use the simplistic model) we did not get rid of agricultural production. We mechanized (industrialized) it. The same shift is occurring with respect to knowledge and manufacturing. Manufacturing is becoming a much more knowledge intensive activity. In fact, manufacturing companies are complaining that they cannot get the skilled workers they need.
The question is what to do to correct the situation.
Many complain that the Administration is not focused on the issue. Even Steven Pearlstein of the Washington Post has gotten in on the act in his latest column
Without retreating on other initiatives, the administration could also win back some business support by devoting more resources and high-level attention to winning those competitions for big new plants and research facilities that, increasingly, are winding up someplace else. Americans may be unaccustomed to presidents and Cabinet secretaries acting as glorified economic development directors, but in a globalized economy this is how the game is played and won.
Snaring multibillion-dollar projects with a midnight meeting at the White House or a last-minute pitch from a won’t-take-no-for-an-answer secretary of commerce — a few wins like that would generate more votes and goodwill from the business community than those set-piece presidential factory visits peddling the latest version of “jobs, jobs, jobs.”
In a recent in the FT, Richard Florida makes the case that we need to upgrade services jobs. America needs to make its bad jobs better. That is certainly part of the equation. But simply upgrading services doesn’t solve the larger problem.
Likewise, getting companies to invest more is another part. As Yves Smith and Rob Parenteau point out in a piece in the New York Times (Are Profits Hurting Capitalism?):
public companies have become obsessed with quarterly earnings. To show short-term profits, they avoid investing in future growth. To develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on.
Rather than incur such expenses, companies increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in purely financial speculation. But this means they also short-circuit a major driver of economic growth.
But again, this deals with the invention and commercialization part of process — not the scaling concern raised by Groves. We need to think more broadly about transforming the production base (see previous posting).
The key is not the output (“agriculture,” “manufacturing,” “service”). It is the production process that is important. During the industrial revolution, machine power replaced human and animal power. The key input was energy. Today, knowledge has become the key input (factor of production).
Transforming manufacturing will take more than restructuring a couple of companies. It will take restructuring the entire production process. One of transformations is through a “high road” strategy that puts its emphasis on all upgrading of the inputs to the production process: technology, worker skills and cooperative/collaborative organizational structures (see previous posting).
It also means changing the manufacturing mindset. As I have argued many times before, the line between manufacturing and services has blurred. But many companies seem still fixed in the industrial age mentality of turning out a large volume of a commoditized product. The very nature of the supply chain forces 3rd and 4th tier suppliers in to this mode. These companies are not involved in product design and innovation; they simply respond to specs and price. Changing that structure will be painful and disruptive. Trying to revive that structure will be futile.
Thus, one of the major tasks for our new manufacturing policy needs to be focused on the lower tiers. How does the policy help these small companies re-orient themselves to the 21st Century?
Let me suggest two sets of activities. First, we need more research on the transformation. This means a greater understanding of how to create a high road strategy — including helping companies better manage and utilize their intangible assets. It also means developing a better understanding of the service-manufacturing linkage.
Second, we need to find creative ways to help companies utilize that understanding. We especially need to help the smaller supplier move up the value-chain to take advantage of this shift. Here we have a valuable tool in the Manufacturing Extension Partnerships. The MEPs were on the front lines helping small and medium size companies during the quality revolution. They need to be on the front lines of the intangible asset, innovation and “customer solution” revolution.
Broadening and expanding the MEPs is on small step. I’m sure there are a thousand more we can come up with. But first of all we need to recognize the problem. Andy Grove’s essay – and all the others like it — are leading in the right direction.