1 AUGUST 2014 VOL 345 ISSUE 6196 519 SCIENCE sciencemag.

org
T
he global locus of manufacturing has
been changing dramatically over the
last three decades, driven by indus-
trializing nations, most prominently
China. Classical economics suggests
that global productivity gains achieved
by shifting the location of manufacturing
will outweigh the losses ( 1). But shifts in the
global locus of manufacturing may affect not
just production costs, but the nature and
pace of technological change.
Moving manufacturing to a different na-
tion might hinder innovation at home: in-
creased distance, electronic dependence,
time zone changes, and national
differences reduce knowledge
flows ( 2, 3). Firms can benefit by
locating near one another ( 4), and this com-
mons can be industry specific. Once a criti-
cal mass of supplier and producer firms in an
industry moves overseas, domestic manufac-
ture is less likely to be competitive ( 5).
When manufacturing moves offshore,
will research and development (R&D) fol-
low? Evidence suggests that, although some
middle-stage innovation may move, to date,
the leading edge of innovation in most indus-
tries has remained in the United States ( 6, 7).
Further, economic theory suggests that shifts
in manufacturing may hurt wages in nations
that lose manufacturing, but global innova-
tion and productivity gains will not suffer ( 8).
However, recent work shows that moving
the locus of manufacturing
overseas, in particular to
developing countries, may
reduce innovation, domesti-
cally and globally, at least in
the short to medium term
( 9 11). Production char-
acteristics (wages, yields,
downtimes, materials, and
organization of production)
can differ greatly across
nations (and in particular
between developed and
developing ones), chang-
ing which product develop-
ments are profitable for firms to pursue. In
two casesautomobile bodies and high-end
optoelectronic components for communica-
tionswhen U.S. firms shifted production to
developing East Asia, products developed in
the U.S. based on the most advanced technol-
ogies were no longer immediately profitable.
The overseas firms stopped producing these
advanced products and, in optoelectron-
ics, also stopped innovation in the most ad-
vanced products overseas and in the United
States ( 9 11).
NOT ALL TECHNOLOGIES ARE CREATED
EQUAL. The impact of manufacturing loca-
tion on global technology development is
shaped by three constraints: (i) the largest
number of manufacturing facilities economi-
cally sustainable for a firm; (ii) the location of
design expertise and whether the designers
need to experiment regularly on and be phys-
ically present at the production line; and (iii)
the importance, security, and enforcement of
intellectual property rights.
The manufacture of high-end optoelec-
tronic components for communications
shows how policy can shape cutting-edge
technologies for firms facing the most con-
straints. First, manufacturing and product
innovation are bound together. Production
yields are low, and the process is more an
art than a science, with engineers regularly
called to the shop floor. Second, the market
is small relative to the production volumes
required to achieve economies of scale.
Firms can afford only one manufacturing
facility, and there are not enough engineers
in developing East Asia with capabilities to
support local production of the new technol-
ogy. Therefore, firms must choose between
producing the most advanced technology in
the United States or older technology in de-
veloping East Asia (see the chart). Expected
changes in technology and production in the
two regions over the short to medium term
have typically increased the cost advantage
of the old technology produced in developing
East Asia over all other options ( 9).
Challenges from low yields and separat-
ing design from manufacturing are common
for early-stage products in such industries
as semiconductors ( 12), specialty chemicals,
and pharmaceuticals, in which product inno-
vations are fundamentally linked to advances
in manufacturing. A small market compared
with the production required for economies
of scale is also common for such firms. These
c o n s t r a i n ts a f f e c t a s u b s e t o f e a r l y - s t a g e
high-technology start-ups.
The United States continues to lead inno-
vation in many technologies. However, with
the decline of U.S. corporate R&D laborato-
ries and large firms increased reliance on in-
novations of small- and medium-sized firms,
long-term research faces new challenges. In
the case of high-end components, the major-
ity of manufacturers have gone offshore and
abandoned production of the most advanced
technology products, despite their promise
for accessing new, larger markets. All public
firms that remained active in the industry
moved offshore. The firms that stayed on-
shore and pursued the most advanced tech-
nology were privately owned and venture-or
government-backed ( 11). These findings com-
plement evidence that private equity may
have positive effects on firms innovation
( 13); public firms may be less innovative ( 14).
Certain factorssuch as the ability to
separate design from manufacturing, mini-
mum efficient plant size,
and transportation costs
are largely technically deter-
mined. Other factorssuch
as market size, number of
competitors, and the het-
erogeneity of consumer
marketsare shaped by
other social, political, and
economic forces. Govern-
ments levers to influence
constraints faced by firms
include funding of early-
stage start-ups (shaping
market forces within the in-
dustry), procurement (shap-
ing market size), workforce
education (shaping the locus
of knowledge), and funding
Global manufacturing and
the future of technology
By Erica R. H. Fuchs
Where you manufacture changes what you get
ECONOMICS
Department of Engineering and Public
Policy, Carnegie Mellon University,
Pittsburgh, PA 15213, USA. erhf@
andrew.cmu.edu
I
L
L
U
S
T
R
A
T
I
O
N
:

E
S
E
N
K
A
R
T
A
L
/
I
S
T
O
C
K
V
E
C
T
O
R
S
/
G
E
T
T
Y
I
M
A
G
E
S
POLICY
Published by AAAS

o
n

A
u
g
u
s
t

4
,

2
0
1
4
w
w
w
.
s
c
i
e
n
c
e
m
a
g
.
o
r
g
D
o
w
n
l
o
a
d
e
d

f
r
o
m


o
n

A
u
g
u
s
t

4
,

2
0
1
4
w
w
w
.
s
c
i
e
n
c
e
m
a
g
.
o
r
g
D
o
w
n
l
o
a
d
e
d

f
r
o
m

INSIGHTS | PERSPECTIVES
sciencemag.org SCIENCE 520 1 AUGUST 2014 VOL 345 ISSUE 6196
of R&D (shaping those constraints that are
technologically determined). The time scale
by which these levers can affect change varies
substantially.
Some government actions, such as those
related to the market, can have immediate
ramifications. Government funding of highly
constrained start-ups can help alleviate mar-
ket pressures. For example, because of needs
within the Department of Defense, the U.S.
Defense Advanced Research and Develop-
ment Agency (DARPA) funded companies to
develop and, it was hoped, subsequently to
produce the most advanced optoelectronic
communication technologies.
Government funding of workforce educa-
tion and technological advancement takes
longer to have an effect, and outcomes are
uncertain. There are, however, historical
precedents. DARPA, the National Science
Foundation, and the Office of Naval Research
played critical roles ( 15) in facilitating the
separation of central processing unit (CPU)
design and manufacturing in the semicon-
ductor industry, which enabled university
researchers to develop new designs without
having an expensive fabrication facility. It
eventually enabled production to move over-
seas to emerging markets. However, even in
semiconductors, design and manufacturing
are integrated when changes are introduced
in the nanoscale devices (e.g., transistors)
that comprise the CPUs or when changes re-
quire coordination between device or mate-
rial improvements and CPU architecture.
Increased global participation in manufac-
turing need not be universally detrimental for
innovation. In less-constrained cases, global
manufacturing can increase opportunities
and incentives to innovate. For example,
automotive manufacturers have found pro-
duction sufficiently standardized to separate
design of advanced automobile bodies from
manufacturing, and composite-materials ex-
pertise is available outside the United States.
The plant size required for economies of
scale allows automobile manufacturers to ef-
ficiently produce for regional markets. Auto-
mobile bodies high transportation costs and
global market heterogeneity build on these
incentives to produce regionally for regional
markets. Policies that constrain choices of
body manufacturing locations would reduce
opportunities and incentives for innovation.
To take advantage of economies of scale in
both production and R&D, companies with
multiple product offerings develop plat-
forms consisting of a series of parts shared
across larger families of products. For ex-
ample, one-quarter of the worlds vehicles
are made in China ( 16) where, since 2009,
automobile sales have exceeded those in the
United States. Chinese consumers may have
a greater willingness to pay for electrified ve-
hicles than consumers in the United States,
given regulatory and physical infrastructure
in both countries ( 17). Technologies designed
for sale in China are unlikely to be used only
in China. Because of these platform econo-
mies, the global shift in the locus of produc-
tion and demand for personal vehicles may
lead to greater economic incentives and op-
portunities for electric vehicles globally. This
has potential to enhance economic growth,
increase national energy security (through
reduced oil use), and (depending on efforts to
reduce air emissions from electricity genera-
tion) improve the global environment.
TECHNOLOGICALLY NUANCED POLICY.
It will be critical to avoid a onesize-fits-
all policy approach, both across technolo-
gies and across nations, because policies
that enhance one sector can undermine
another. One important issue, especially for
advanced technologies, is integrating tech-
nical and industry expertise into govern-
ment decision-making. DARPA, for example,
brings technical experts from academia and
industry into limited, 3- to 5-year positions
as program managers, from which they fund
new technology directions in academia and
industry ( 18). In the Semiconductor Research
Corporation (a U.S. public-private partner-
ship), industry articulates its performance
needs, finds supporting government fund-
ing, and funds academics to develop new
technologies to achieve these goals ( 19). With
manufacturing continuing to shift to devel-
oping nations, and with the global future of
technology at stake, nations have reason to
act for themselves and multilaterally.
REFERENCES AND NOTES
1. D. Ricardo, in The Works and Correspondence of David
Ricardo, P. Sraffa, Ed. (Univ. of Cambridge Press, Cambridge,
1953).
2. C. Gibson, J. Gibbs, Adm. Sci. Q. 51, 451 (2006).
3. J. N. Cummings et al., Inf. Syst. Res. 20, 420 (2009).
4. A. Marshall, Principles of Economics (Macmillan, London,
1890).
5. G. Pisano, W. Shih, Producing Prosperity (Harvard Business
Review Press, Cambridge, MA, 2012).
6. J. Macher, D. Mowery, Innovation in Global Industries
(National Academies Press, Washington, DC, 2008).
7. L. Branstetter, G. Li, F. Veloso, in The Changing Frontier:
Rethinking Science and Innovation Policy, A. Jaffe and B.
Jones, Eds. (forthcoming Univ. of Chicago Press, Chicago,
n.d.), chap. 1; http://papers.nber.org/books/jaff13-1.
8. P. Samuelson, J. Econ. Perspect. 18, 135 (2004).
9. E. R. H. Fuchs, R. E. Kirchain, Manage. Sci. 56, 2323 (2010).
10. E. R. H. Fuchs et al., Int. J. Prod. Econ. 132, 79 (2011).
11. C. Yang, R. Nugent, E. Fuchs, Gains from OthersLosses
(Carnegie Mellon Univ. working paper, Pittsburgh,
PA, 2013); http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=2080595.
12. C. Lecuyer, Making Silcon Valley (MIT Press, Cambridge, MA,
2005).
13. J. Lerner et al., J. Finance 66, 445 (2011).
14. S. Bernstein, Does going public affect innovation? (Research
paper no. 2126, Stanford Graduate School of Business,
Stanford, CA, 2012).
15. National Research Council, Funding a Revolution:
Government Support for Computing Research (National
Academies Press, Washington, DC, 1999).
16. International Organization of Motor Vehicle Manufacturers
(OICA), World Motor Vehicle Production by Country and Type
(2013); www.oica.net/category/production-statistics/.
17. J. Helveston et al., Will subsidies drive electric vehicle adop-
tion in China and the United States?(Carnegie Mellon Univ.
working paper, Pittsburgh, PA, 2013); www.cmu.edu/me/
ddl/publications/2014-WP-Helveston-etal-EVs-in-China.
pdf.
18. E. Fuchs, Res. Policy 39, 1133 (2010).
19. R. Burger, Cooperative Research: The New Paradigm
(Semiconductor Research Corporation, Research Triangle
Park, NC, 2014); www.src.org/about/p001960.pdf.
ACKNOWLEDGMENTS
E.R.H.F. is funded by the NSF Science of Science and Innovation
Policy Program, DARPA, and the National Institute of Standards
and Technology. E.R.H.F. thanks D. Andersen, D. Hounshell,
G. Morgan, and anonymous reviewers for feedback.
300
400
500
600
0 50 100 150 200
Annual production volume (thousands/year)
Current product technology U.S. production
Next-gen product technology U.S. production
Current product technology
developing East Asia production
High-end communications component production
in the U.S. vs. China
Unit cost
Lines shown represent average capabilities across firms in the industry. [Adapted from ( 9)]
10.1126/science.1250193
Published by AAAS