Yglesias rebuts Ed Luce in the FT.
First, Ed Luce:
…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.
A few general remarks.
One, in my opinion, R&D’s proximity to manufacturing is less important than its proximity to the customer. In the case of Applied Materials, they mention both proximity to “manufacturing operations and to its biggest future market” as the reason for moving R&D to China. Luce and Yglesias pick up on one (manufacturing), but not the the other one (markets) which is probably the stronger driver. From the software industry we know that offshoring development (akin to manufacturing) while keeping design and product management in the US, is now more the norm than the exception.
Two, the US is unlikely to lose its edge on R&D. It has the biggest market by far in the world for anything and therefore the biggest playground for innovators in the world. It also has a lot of other things – the best talent from around the world, great universities, protection of intellectual property, venture capital etc. etc. Much has been said about the advantage that the US has in R&D. Now, in any market, new entrants will always be able to chip away at the leader’s share, just by positioning themselves to do something that the leader can’t do or won’t do. But even if some R&D goes to China and India, it won’t be of a magnitude that can impact the US hegemony over R&D.
R&D is not an end in itself. It is a means to an end. R&D itself creates millions of jobs but you have to have an advanced degree in Science or Engineering to get one of those. Not everyone will get (or want) a job like this. If the US continues to preserve and grow “innovation” related jobs, that is good, but not quite enough. Where are the millions of middle class American jobs going to come from?
This is a serious problem. The future of globalization might depend upon it. When manufacturing started moving to China, services jobs took their place. They were well paying (and a lot more comfortable). As now more and more of the white collar services jobs are being offshored as well, where will those middle class jobs come from?
Richard Florida might have the answer.
Among the fastest-growing jobs categories, according to the BLS, are what are called personal services – everything from day care and elder care to home health aides, food preparation, hair-cutting, home maintenance, and the like. These jobs are nearly impossible to offshore as they involve direct face-to-face human contact. A key platform in a national jobs strategy must include increasing the quality of these currently low-paying service jobs, turning them into higher-paying, family-supporting jobs.
Florida also says that these jobs have seen very, very little investment in technology and skills. Jobs pay better if they require higher grade skills. Jobs require grade skills if they are complex and need the use of tools and technology. Higher productivity can enable higher wages. Higher productivity requires the use of technology.
Instead of thinking about this in terms of jobs, it may be useful to think in terms of what is it that US has to export to the world. Clearly, they import lots of stuff from rest of the world right from oil, clothes, toys to services. What is it that they can export in return? High-tech products like PCs, laptops, routers, iPods, etc are there. But even there, with most of the parts being imported from outside, the amount of value-addition to those products being done in US is very little. The other area where their exports were flourishing till recently was in the area of financial services. Their banks and investment firms created all sorts of financial products and the world thronged to their doors to buy these miracle products. This paid for not only the imports, but also the flourishing economy they had domestically and contributed overall to their living standards. But now that the demand for those financial products has umm diminished slightly, they will have to either a) come up with something else to replace those products or b) cut down on their imports and internal expenditure.
The landed cost of materials and manufacturing on many branded goods sold in the US, from GAP clothes to iPods, won't be more than 20-30%% of the price of the product. In effect, the value created by R&D, design and branding is 70-80%. That value is added in the US. Value-added is not the problem. Jobs are the problem. R&D, design and branding create jobs of a higher class. Where are the middle class jobs going to come from?
This personal services thing reminds me of an interview of Kishore Biyani. He had said that for every 1 consumer class Indian there were 3 or 4 serving class Indians. He called these serving class as ABCD (aaya, bai, carpenter and driver) and his goal is to make the serving class his big bazaar customers.
Pleasantly surprized to see Americans talking about similar kind of jobs! And yes , Kishore Biyani does seem to succeeding…
I guess he didn't find anything better starting with C!
"Cook" is the word he missed 🙂
Back to the original post, isnt there one more view on the RnD part – The US RnD is based on the requirements it sees in its context/market. When the new markets are in India and China, the RnD has to meet their market needs.
Now that makes more sense!
R&D will shift somewhat to India and China as the market grows there, but remember, the size of the US market dwarfs India and China put together.