Most manufacturing leaders have long understood the importance of investment to competing in the modern, ever-more-global economy. The point is being driven home by the increasing gap between labor and "structural" costs such as benefits, energy, corporate taxes, regulations and tort costs, which are more than 30% higher in the U.S. when compared to our leading trading partners. Being better at innovation and growing productivity help offset these disadvantages.
Economic research is now catching up with business DNA and showing what kinds of investment are most clearly linked to innovation and productivity, the key metrics to sustaining competitive advantage. This sort of insight is helpful to business managers and to public officials who can help create an environment more conducive to innovation.
Research done by two of my colleagues at the Manufacturers Alliance/MAPI has shown that employing good scientific personnel, investing in capital equipment such as information technology, and conducting research and development (R&D) all help drive growth in product and process innovation. Less evident perhaps is a strong link -- after a lag of five to six years -- between basic research at universities and innovation.
Since about 1995 the Federal Reserve Board, led by the efforts of Alan Greenspan and now Ben Bernanke, also has added to our ability to link certain investments to innovation. Studies inspired by Greenspan clearly show that investment in information technology and the processes needed to make good use of it eventually boosts productivity.
More recently, Fed economists have focused on what they call "intangible investment." This includes everything from worker training and Six Sigma implementation to developing strategic alliances, brand awareness and use of advanced software. It also includes investment in both scientific and non-scientific research and development. Surprisingly, business investment in intangibles is about one-third larger than that of tangibles (computers, machine tools, bricks and mortar, etc.), and appears to have about the same weight as tangibles in explaining productivity growth in recent years.
What are the implications of this research? First, businesses are investing more than reported by the national accounting figures we normally see. Many commentators -- myself included -- have wondered why investment in the manufacturing recovery since 2003 has been so weak. One explanation is managers are investing in things like process improvement, knowledge acquisition and upgrading skills that aren't normally counted in the investment numbers.
Second, because "intangible investment" is a driver of innovation, we ought to find ways to promote it. When President Reagan signed the R&D tax credit into law in 1981, it put the U.S. in the lead among all developed countries in tax incentives for R&D. By 2006, other nations had understood the message and set up their own incentive plans. Even before allowing the credit to lapse earlier this year, the U.S. had fallen to 17th place among the developed countries in R&D tax incentives. It is high time to renew the credit and find ways to expand it to include intangible investment, such as building human capital and achieving process improvements. Expensing of all investments, too, would be enormously helpful.
Third, vibrant universities are an important part of our competitiveness strategy, both for their training of scientific, engineering and managerial leaders and as centers for cutting-edge basic research that eventually leads to innovative processes and products. For instance, particle physics research has led to advancements in nanotechnology, and modern electronics, including semiconductors, was born in the path-breaking research of Einstein and others on the particle nature of light.
Finally, we should keep our eye on the little things that business leaders have been doing for generations -- improving processes, building alliances and improving brand awareness. These are investments in the future just as important as the more visible and glamorous ones like buying computer systems or new capital equipment. Both kinds of investment are crucial to the future success of American manufacturing.
Dr. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.
