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Having bailed out Wall Street last year, the US is now looking for new industries to kick start its economy. However, many observers feel that the US may have squandered its technological lead over the rest of the world:  the US trade balance in high technology products has fallen steadily into the red over the last decade, from US$5.3bn in surplus in 2001 to to more than US$50bn in deficit by 2007.  What went wrong?

Many commentators point to the outsourcing of high-tech production as the root cause of the US decline. It has been argued that innovation in many industries is most effectively transmitted by face-to-face contact. This favours clustering, where, as Michael Porter has observed, companies in similar industries find it advantageous to be geographic co-located, to allow information flow between organisations.

In the Harvard Business Review, Gary Pisano and Willy Shih generalise this concept. They see the collective R&D, engineering, and manufacturing capabilities of a nation as an industrial commons. Each firm benefits from the existence of the commons, and each contributes to the commons through its know-how in R&D and production. In fact, they argue that flow of information between the shop floor and the lab is vital to the commons. As Gregory Tassey from NIST puts it:

’… co-location of R&D and manufacturing is especially important because it means the value added from both R&D and manufacturing will accrue to the innovating economy, at least when the technology is in its formative stages. This phenomenon occurs because much of the knowledge produced in the early phases of a technology’s life cycle is tacit in nature and such knowledge transfers most efficiently through personal contact.’

J. Technol. Transfer (2008) 33:560—578

Despite this, it may make sense at the individual firm level to split R&D and production by outsourcing. Firms that choose to outsource may improve their profitability in the short term, but at the same time this capability is lost to the commons. Pisano and Shih argue that the US industrial commons has been eroded to the point where US firms have lost their competitive advantage in innovation.

The weakening of the US industrial commons has been blamed on the rise of a managerial class in corporate America, who, in search of short term financial efficiencies, have outsourced production on a massive scale and dismantled their large industrial labs. For example, the Kindle cannot actually be manufactured in the US, even if Amazon wanted to do so — the technological capacity now exists only overseas. Bell Labs, the organisation that gave the world the transistor and the photovoltaic cell, began the decade with more than 30,000 staff; today, under the ownership of Alcatel-Lucent, it has less than 1,000.

Even the US government has retreated from its support of research and development as shown below:US R&D spend

Pisano and Shih make two suggestions as to how the US can turn things around:

•    The government must alter the way it supports both basic and applied scientific research to promote the kind of broad collaboration of business, academia, and government needed to tackle society’s big problems.

•    Corporate management must overhaul its practices and governance structures so they no longer exaggerate the payoffs and discount the dangers of outsourcing production and cutting investments in R&D.

The question remains:  does the US have the energy, ingenuity and cold hard cash to rebuild its industrial commons?