R&D Following Manufacturing to China

I’ve been urged on any number of occasions to worry more loudly about the decline of manufacturing employment in America, so here’s a link to Ed Luce in the FT:

[M]any of Mr Summers’ very same admirers have also become his detractors. Put simply, they see him as the face of a paradigm that has outlived its usefulness — the view that globalisation is an unmixed blessing for the US economy, and that America’s disappearing manufacturing jobs will be replaced by high-value jobs in the service sector. Things do not appear to be working out that way.

Take Applied Materials, a big US manufacturing company, which earlier this year shifted its chief technology officer and research and development operations to China. The company said it needed its R&D; to be close to the source of its manufacturing operations and to its biggest future market. This is the opposite of what is supposed to happen. America was meant to keep the high-end jobs at home, while China would get all the low-value added production.

In addition to my oft-made point that US manufacturing output is not in fact declining, it’s worth noting that the alleged need for R&D; to be proximate to manufacturing options (plausible) cuts in both directions. Conventional wisdom is that manufacturing operations will all drift to low-wage countries. But if the USA is a better location for R&D; than China, and if it’s strongly desirable to co-locate R&D; and manufacturing operations, then many firms will want to retain manufacturing operations in the United States of America. So if this story is right, then more and better education for America is the key to retaining high-wage manufacturing jobs. Alternatively, if the obsolete Summers/Yglesias paradigm is correct then . . . more and better education for America is the key to replacing inevitably-vanishing high-wage manufacturing jobs with high-wage service jobs.


That’s not to say that Luce is wrong. But my read of Luce’s story is less as one about the alleged deindustrialization of the United States dragging down our R&D; capacity as it is one in which failure to keep up with high-end technical capacity could drag manufacturing down.

The other wrinkle here is that firms shifting R&D; capacity to China may be lying to the press about why they’re doing it. I’ve had executives from a number of firms explain to me that they launched an R&D; center in China primarily as part of an implicit bargain with PRC officials that doing so would help them win Chinese government contracts. That appears not to be the case with Applied Materials since they’re actually shifting operations rather than creating new ones. But it’s definitely part of the story.