Helping Manufacturing at the Start

Startups are the future of U.S. manufacturing, but more must be done to help them survive.

It was the kind of good news that is bittersweet. John Haltiwanger, a University of Maryland economics professor, was addressing a conference on the manufacturing economy sponsored by the Federal Reserve Bank of Cleveland. He noted that over the last several recessions, manufacturing has emerged with much higher productivity. "Manufacturing has used these recessions to reinvent itself. The sharp declines in employment -- those jobs don't come back. Productivity goes up and it stays up."

Haltiwanger's research examines the creation and loss of jobs. He noted that in 2006, a robust year for job growth, the U.S. economy created 19.4 million new jobs, jobs that didn't exist in 2005. However, it also saw the loss of approximately 15 million jobs. And out of that net gain of 4 million jobs, some 3.5 million were created by business startups. In that year, manufacturing was only able to generate a net gain of 60,000 jobs, but Haltiwanger emphasized that the sector did produce 1.6 million new jobs.

In the 2009 recession, the economy was particularly weakened because while there was a predictable massive loss of jobs, job creation was noticeably weak. And Haltiwanger warns that over the past 30 years, the pace of dynamism in the U.S. economy has slowed. In other words, the U.S. is simply creating fewer new jobs. Particularly hard hit, he points out, are jobs coming from startups and young, small businesses. He points out that these firms were likely impacted by the financial markets, where they had difficulty getting financing both from banks and from more cautious venture capitalists.

How can we help restore this dynamism, particularly for manufacturing? A good deal of veteran business journalist William Holstein's new book, "The Next American Economy," focuses on how the United States can do a better job of taking innovative ideas and successfully commercializing them. Holstein argues for the creation and support of technology clusters such as the genomics cluster in the San Diego area or the cluster of advanced robotics firms in Pittsburgh. Central to these clusters is an "idea factory" -- a university, corporate laboratory or national weapons laboratory. These institutions generate valuable new ideas but the difficulty lies in finding the right processes, funding and leadership to develop these ideas into commercially viable products. For example, Holstein cites one estimate that only 1% of the technologies in the national labs suitable for commercialization have been launched into the market.

The lithium-ion battery manufacturer, A123 Systems, is a success story cited in the book. Entrepreneur Ric Fulop approached the technology licensing office at the Massachusetts Institute of Technology and told officials he wanted to license technology for a battery startup. They put him in touch with professor Yet-Ming Chiang, who was working on a revolutionary new battery technology. Along with Bart Riley, they formed A123 Systems in November 2001. The fledgling company experienced its share of setbacks, including the need to abandon its original technology and shift to lithium-ion. But with the help of experienced investors and executives and financing from both private and public sources, they were able to take the company public and build a factory in Michigan in the depths of the recession.

To help foment startups, Holstein advocates shifting 10% of the nearly $150 billion that the federal government spends on research and development to the formation of businesses. "The United States already has a cornucopia of technologies in its idea factories," he writes. "The critical gap is the early-stage financing that allows companies to survive the valley of death."

He also argues that federal R&D dollars be focused on "component technologies" rather than specific products, such as the nearly billion dollars in federal loan guarantees extended to Fisker Automotive and Tesla Motors. That way, he says, the investment supports many companies and "gives the market a large say in how the technology evolves and how it is used."

Holstein's research shows that the answers to improving our innovation and commercialization challenges lie in isolated pockets around the country. Now it's time to reform our inefficient systems and develop the national strategy that can help the companies and industries of tomorrow take shape today in the United States.

Steve Minter
Editor-in Chief
[email protected]

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