The United States has long been known as a global powerhouse when it comes to innovation – especially when it comes to manufacturing. These innovations may not necessarily be products (although some certainly were) but, rather, just tweaks to the manufacturing process that greatly improved efficiency (think of interchangeable parts or the assembly line, both developed by Americans). However, in today’s global economy, the United States is losing jobs in the industrial manufacturing sector, despite still being on the forefront of innovation. Many claim that this is simply because of the lower wages required in other countries, but is that the only reason why?
According to a September 16th, 2010 article by The Washington Post, the answer is a complicated no. Complicated because, yes, the lower wages do factor into play when deciding where to manufacture goods, but that is only one of a multitude of factors that is being considered. Others include: government incentives (either in taxes or cash), location and accessibility to markets, the amount of political red tape, and accessible capital.
To shed light on the reasons why manufacturing companies leave the United States, The Washington Post profiled a fairly new light bulb manufacturing firm called Lighting Science Group. Lighting Science Group is a producer of light-emitting diode (LED) based light bulbs. Currently, everything about the company – from its founder/inventor Fred Maxik to its manufacturing plant – is in the United States, but that may change in the near future.
Lighting Science Group is considering moving to both Mexico and China. There are a plethora of reasons for these moves: the wage rate in Mexico is about ¼ of what it is in the United States, the Mexican government is offering cash incentives (as much as $4 million) to the company, and there is quicker government reaction time.
There are still plenty of pros to stay in the United States. The engineers can tinker with the products on the line (which increases the pace of innovation in the company) and the workforce is highly skilled. However, other reasons to stay – such as grants or incentives from the government – lag far behind in the United States. In order to apply for government help, proposals must be written almost a year in advance for the funds and there are often lots of strings attached to the money. This can be crippling for a company which prides itself on high innovation and constant product development. The other critical flaw is that company incentives are often given by municipal and state governments, which do not have the funds to compete against other national governments and cannot do anything about federal taxes.
What can the United States do to prevent manufacturing companies and jobs from leaving the country? Is it even a bad thing if they leave the United States to manufacture? Does the government need to become more agile to entice the companies to stay or should the United States still just focus on education and draw companies on the strength of the American worker’s skills?