A new SSRN paper finds that research and development (R&D) helps manufacturers keep ahead of competition from imports. U.S. manufacturing firms in industries with strong import competition from China fared better 50 percent better when they had larger stocks of capital used for R&D. While this finding is intuitive, it provides an important piece of evidence that reiterates a critical point about the U.S. economy: international competitiveness is extremely important and smart R&D policy (including tax credits) is a key method of maintaining it.
The authors Johan Hombert and Adrien Matray use granular industry-level data on imports from China and show that these imports have a significant impact on the performance of U.S. manufacturing firms. They then examine whether this impact changes depending on how much R&D capital firms have. In order to make sure the R&D capital isn’t related to other factors, they use state-level changes in R&D credit policy during the 1980s.
Their results here show that firms that had access to cheaper R&D and were thus more likely to acquire more R&D capital had an easier time “climbing the quality ladder” and staying competitive in the face … Read the rest
For a country that has not run a trade surplus since Gerald Ford was in office 40 years ago, the United States is surprisingly optimistic in its widespread belief that the trade deficit is going to eventually correct itself. After all, as tidy macroeconomic models of international trade show, a nation’s trade deficit should lower the value of its currency, lowering the cost of exports and raising the cost of imports, thereby gradually reversing the deficit. After all, the models show that in the long term, current accounts must balance.
As Martin Feldstein, former Chairman of the Reagan administration Council of Economic Advisors, predicts:
“The United States cannot continue to have annual trade deficits of more than $100 billion, financed by an ever-increasing inflow of foreign capital. The U.S. trade deficit will therefore soon have to shrink and, as it does, the other countries of the world will experience a corresponding reduction in their trade surpluses. Indeed, within the next decade the United States will undoubtedly exchange its trade deficit for a trade surplus.”
Unfortunately, Feldstein wrote this in 1987.
Far from his predictions coming true, the U.S. trade … Read the rest
We’ve posted recently about how our current immigration policy is hurting Silicon Valley. But when the United States lets in more immigrants, what happens? Often it’s not what you would expect.
A new NBER paper by economists at the University of California Davis and Colgate University studies the effect of skilled H1-B immigrants in STEM occupations on more than 200 cities across the country. In cities with more STEM immigrants, wages for college-educated workers went up 7-8 percentage points, wages for non-college-educated workers went up about half as much, and there was no significant effect on employment.
Why this counterintuitive result? Economics 101 says that when the supply of something grows, the price should decrease, not increase. As is too often true, however, Economics 101 in this case tells us very little about the real world. Figuring out cause and effect in many types of markets, particularly labor markets, is tough because economies are not as simple as the textbook models might have you believe.
What actually happens is that when immigrants enter an economy, they do more than just offer their labor at a (potentially) lower price. They increase … Read the rest
Proponents of effective intellectual property (IP) rights have long argued that weak IP protections will lead to less intellectual property creation. The logic appears clear: if content creators and other innovators know that a significant share of their work will be pirated or otherwise stolen they will have both less incentive and less revenue to create new ideas, creative goods, and innovations.
But how strong is this effect? To find out, we compared IP protection data from the World Economic Forum’s 2014-2015 Global Competitiveness Report, which incorporates the strength of IP laws and the stringency and effectiveness of anti-counterfeiting laws, and creative outputs scores from the 2014 Global Innovation Index, a report from Cornell, Insead and WIPO.
Put simply, countries that score higher on IP protection also score higher on creative outputs relative to the size of their economy. Over a sample of 136 countries there is a strong positive correlation of 0.72 between the strength of IP protections and score on creative outputs.
The Global Innovation Index has three distinct measures of creativity in an economy. First, “intangible assets” combines measures of domestic and international trademark applications … Read the rest
In today’s fast-paced, globalized world, knowledge workers can choose to work anywhere. In fact, being an appealing place for people to locate, especially those with advanced skills, is a valuable national resource. Highly skilled workers earn high wages, spend those wages locally, pay domestic taxes, and contribute to spill-over effects that benefit everyone in the area. Most engineers will tell you that the most appealing location for tech workers is located right here in the United States. Some countries strike oil. Others find diamonds. The United States hit it rich with Silicon Valley.
However, Silicon Valley has a weakness that threatens this preeminence: the lack of enough skilled workers to promote expansion and innovation by existing firms and industries and the development of new ones. One of the chief causes of this problem is America’s growth-stymying, restrictive immigration policies toward high-skill, foreign-born talent. For example, for the first time in American history, there are fewer startups founded by immigrants than there were 10 years ago. The effect is especially apparent in Silicon Valley, where immigrant-founded startups dropped from 52.4 percent to 43.9 percent from 2005 to 2012. And unfortunately for … Read the rest
Indian Prime Minister Narendra Modi’s historic election was viewed with a great deal of optimism by much of the world, including here in the United States. His campaign platform—putting economic growth front and center—championed the kinds of policies needed to get India’s economy back on track. With the Modi Administration having been in office for just about four months now, and as he embarks on his first official visit to the United States, it’s a good moment to take stock of the Modi Administration’s accomplishments to date—and areas where we hope to see continued progress toward improving the state of U.S.-India economic and trade relations.
On the positive side, the Modi Administration has announced a number of promising economic reforms. In particular, it has:
- Retired India’s Planning Commission, a vestige of centralized state planning;
- Eased some restrictions and limitations on foreign direct investment (FDI), notably in the defense and railway sectors (with the FDI ceiling in the former raised to 49 percent and in the latter to 100 percent);
- Committed to renewed infrastructure investment in power generation and transportation networks;
- Set a year-end target to complete long-pending implementation of a
In 1956, an American engineer, William Shockley, had an idea that silicon could be used to make transistors, and founded a company in Mountain View, California. The rest is history. The area experienced explosive growth after the invention of the silicon semiconductor sparked waves of innovation. Other firms developed around the Shockley’s first company, also developing and improving on the invention. Continual support from nearby Stanford University, along with collaboration between local firms, created an innovative environment ideal for fostering growth. By the 1960s, 31 semiconductor firms had been established in the country, of which only five were located outside the region. Smaller firms providing research, specialized services, and other inputs located nearby the larger companies. Innovation thrived, the local economy boomed, the center of high-tech innovation shifted from the east coast to the west, and the Silicon Valley was born.
The Silicon Valley is a prime example of how advanced R&D tends to focus in clusters- geographically concentrated industries that maximize spillovers from firm to firm and between public and private researchers. Once research concentrates in an area, it is hard to displace, which is why DOE and other … Read the rest
You’ve probably heard the good news. After a decade of being constantly bombarded with news of off-shoring, images of deserted factories, and heart-wrenching tales of laid-off American workers unable to find new employment now that their job is in China, jobs are streaming back into the country, factories are reopening, and we’re back to whistling while we work. We’ve even got a new word for the phenomenon- reshoring.
Just don’t look at actual data. Because funny enough, the numbers illustrate that reshoring is a myth.
True, off-shoring has slowed and has maybe even stabilized. But this respite does not mean that manufacturing jobs are reappearing. Yes, there are isolated instances which your local paper can emphatically cite. However, there is no evidence that America’s manufacturing woes have magically worked themselves out, or that a significant number of jobs that left for China and Mexico are being shipped back.
The truth is that even since the recession, more manufacturing firms have been lost than created in the United States. Manufacturing establishments (the number of factories or manufacturing sites), have followed the same trend. In 2011, the United States was home to … Read the rest
In July 2014, ITIF’s Stephen Ezell testified before the Senate Finance Committee regarding the importance of manufacturing to America’s economy and the role that U.S. trade and technology policy plays in supporting American manufacturing. As part of his testimony, Ezell cited data describing the rapid decline of U.S. manufacturing employment to demonstrate the severity of the challenges faced by America’s manufacturing industries. For the reality is that, particularly since 2000, America’s manufacturing sector has been in a steep decline, with job losses outpacing those in many peer countries.
Following the hearing, Marc Levinson, a Section Research Manager with the Congressional Research Service, produced a report countering some of the data in Ezell’s testimony, and suggesting that there is not a clear cause for alarm regarding employment losses in the American manufacturing sector. However, Levinson’s account does not fully present all of the facts and only succeeds in further muddying this important policy debate.
One critique Levinson makes is charging Ezell with bias in selecting base years, which can have a sizable impact on analytical results. Levinson presents data using the years 1991 to 2000 and then the years from 2001 … Read the rest
Many recent studies have shown that America is no longer winning the global innovation race, as demonstrated by manufacturing-sector decline, lacking public policy measures, poor advanced-sector job growth, faltering support of R&D, and overall low international rankings. The latest indication of America’s slipping innovation potential is triadic patents. Since 1999, the U.S. has experienced a sharp decline, with 13 percent fewer triadic patents, a product of America’s lethargic approach to fueling innovation.
Triadic patents are patents filed jointly with the United States Patent and Trade Office, the European Patent Office, and the Japanese Patent Office to guarantee intellectual property (IP) protection worldwide. Because they represent inventions with global impact, triadic patent numbers are in many cases a better indicator of invention and innovation than regular patents.
From 1999 to 2011, U.S. triadic patent filings decreased from 32 percent to 29 percent of global triadic patents. When controlling for increases to the U.S. working age population over this time period, the United States produces a full 25 percent fewer triadic patents per person than it did in 1999. This troubling statistic sharply contrasts with the United … Read the rest