Competition from China reduced Innovation in the US
Via Tyler Cowen, here is a piece by David Autor, David Dorn, Gordon Hanson, Gary P. Pisano and Pian Shu.
Cowen quoted the most important part, so let me follow his lead:
The central finding of our regression analysis is that firms whose industries were exposed to a greater surge of Chinese import competition from 1991 to 2007 experienced a significant decline in their patent output. A one standard deviation larger increase in import penetration decreased a firm’s patent output by 15 percentage points. Using data from the 1975 to 1991 period and a regression setup that accounts for the diverging secular innovation trends in computers and chemical, we confirm that firms in China-exposed industries did not already have a weaker patent growth prior to the arrival of the competing imports.
…The innovation activity of US firms did not merely shift from the US to other countries. We estimate similar negative effects of import competition on patents by US firms’ domestic employees and by their foreign employees. Instead, our results are most consistent with the notion that the rapid and large increase in competition squeezed firms’ profitability and forced them to downsize along many margins, including innovation. Consistent with that interpretation, we find that the adverse impact of import competition on patent output was concentrated in firms that were already initially more indebted and less profitable.
Here’s what I think is happening. Chinese imports typically enter a market from the bottom, with a low price and a reputation for low quality. After a few years, the quality begins to improve, though it takes somewhat longer for the reputation to follow.
From the perspective of incumbent players, the Chinese don’t play at the top of the market where the high margin flagships are, but they take up a lot of market share in the lower end products. But, though broadline products have slim profit margins, they keep the plants operating at capacity, and that’s what covers capital costs.
So… the existential threat to the incumbents comes from having higher costs than the new competitor. The natural reaction then, is to cut costs. Fire people, idle plants and reduce expenses like marketing and R&D.
Despite Schumpeterian theory, many of the most innovative (large) companies in post-WW2 America were monopolies or awfully close to it. Think Bell Labs, Xerox Parc or Skunk Works (i.e., Lockheed’s Advanced Development Projects) for classic examples from back in the day. Ma Bell could afford the time and money needed to do world-class research. Today’s phone companies cannot. Smaller companies have other dynamics, and often they are the source of innovation in many industries. Smaller innovators whose technology proves successful end up being bought (and sometimes ruined) by the more established players.
At the low end of goods production, where the China’s imports compete with US low end production, and thus also where profit margins are low, U.S. domestic firm’s capital roi invested in inventions (R&D) has a low return… lower than simply moving production to China for those goods.
For the high tech higher profit margin goods production, a similar capital investment condition occurs… put the investment in China’s production via low labor and facilities costs instead of investing in R&D for innovation (especially since implementing an innovation is far, far more capital intensive than just getting the point of inventing it).
R&D is not an effort undertaken without a long term outlook since the capital costs are high with unknown rates of return… you cannot predict with any degree of assurance how long it will take to “invent” a new process of method. And by the time you do, you cannot be assured that you’re invention will be the first one or that an even better invention wasn’t achieved by a competitor, making your invention valueless.
Most inventions don’t occur by serendipity so an ‘invention’ is pursued to a specific ends.. a specific advance in functionality (either products or methods of production). This effort entails heavy levels of expertise, new learning, many trial & error attempts, each being more costly than the prior one, and some degree of luck or lack of it.
So a CEO must ask ‘How likely is it that we can “invent” xyz in less than n years for no more than $y?”…. since xyz is only worth $z/unit if it can be invented. $z/unit profit x the number of units that can be produced and sold before the competitors find an alternative means or cut prices to maintain volumes (thus reducing my volumes, thus profits)is a quantitative economic exercise…. with +/- probability bounds. The capital and expense costs of doing the R&D is a new and higher expense for the period over which the effort is applied.. reducing near term profits or requiring loans (& interest costs), with no probability assurances that the invention sought can be achieved.
Most business’s can’t afford them… or the risks outweigh the benefits in profits achievable.
If there’s a surer alternative, such as using low labor sources instead, that is nearly always the best use of capital considering risks. If you[‘re an IBM or ATT in their heydays you are still taking huge economic risks but as with IBM, if you don’t take that “bet your company” level of risk you’ll loose to the competition shortly anyway. If’s only when you have an overwhelmingly high profit margin and competitors are on your heals that an R&D bet on invention can be a good bet…. in other words you have to be able cover the loss if the invention doesn’t pan out or doesn’t pan out in time. Mostly though if competitors are on your heals, you either have to punt with invention costs — take the risk —- or merge with a competitor. .
That’s not possible on low end low margin products so when China started competing in that market the US domestic margins collapsed, making R&D a low probability win. R&D and thus inventions in that end of the market disappeared …. replaced by low wage labor in China, Thailand, Singapore, & Mexico.
The high end margin business’s still had to invest in R&D to invent .. Intel for one example, and new software related businesses (Google, Amazon), so there was a reduction in the rate of inventions realized, Add to this that other non-US business’s were also no capable of invention by investing in R&D which reduces the probability of the high rate of invention US being successful in being first to invent and first to market, thus reducing the odds of success (roi) on R&D spending.
In one industry with which I’m intimately familiar I watched the industry go from only one business with gargantuan profits to several dozen compeitors over a couple of decades who wanted a piece of those profits and then back down by consolidation and bankruptcies as the competitive business dropped margins to barely hanging on levels to just two competitors in the global market at present
Over that time period sub-component manufacturing increased taking lower margins and thus the major mfg’ers outsouced to them increasingly. Some of the critical components which were initiallyoutsouced became profitable enough to start inventing themselves so that now much of that industry is no longer even close to vertically integrated but spread out with components produced by other high tech companies that grew friom small sub-component vendors to global market leaders…. obviating the need for the remaining two major producers to invent “everything” themselves… the component mfg’ers now lead the market with their inventions so the industry has become highly integrated across multiple component mfg’ers in multiple nations.
What used to be invented in the US by these company’s for all the components, is now spread among all those components to different company’s in different nations. The total number of inventions is lower because the investment for smaller gains in function cost much much more per functionality added, but if you add up all the inventions that are used in that industry by the two major producers of the product, it’s not a lot fewer than it ever was.. .just that the majority of the new inventions are no longer isolated to the US.
This shift didn’t occur with China however.. it occurred with Taiwan, Japan, and European sub-component vendors who grew to supply all other users who had to begin inventing to complete among themselves (and branched out into other industries as well). A few succeeded. Most failed to afford to keep up. So now there are perhaps only two or three sub-component mfg’ers supplying the global market.
Almost all of this occurred before China became part of the global supply chain. The same is true for most of the other high tech industries (some more, some less) .the market for a product is now segmented among several sub-component mfg’ers who are inventing new functionality for their parts of the product to advance the function of the completed product.
Where did the capital for this segmented component R&D and consequent invention come from? Japan, Taiwan, Hong Kong, Singapore, & EU. originally, then Thailand and S. Korea, and more recently (last 5 or 8 years) Chinese investors.(private and State)… but State investors were also occurring for the Taiwanese, Singapore, Thailand, S Korea, and EU also.
The lions share of mfg’ing the stuff though is in China.. Japan outsources to China, Thailand get’s some of it’s parts from China, Taiwan outsources to China, Singapore imports low wage labor each day from neighboring Maylasial, the EU produces in the former Eastern block nations (mostly.. some in Germany where high levels of automation is rampantly used instead of labor), etc.
So a lot of the loss of invention rates in the US are due to a global horizontal distribution of component mfg’ing by business’s that competed with one another to supply the component parts by investing in R&D to invent as a mans of competing. And since that’s a high capital intensive operation it was only a few that could succeed just because their capital sources had deeper pockets.
You can ask why U.S. business’s didn’t compete as well… it’s a good question but the answer is that there were more profitable investments for to invest in that didn’t require as high a risk as R&D invention.. this was especially true in high tolerance, complex parts metal fabrications which only required more automated methods rather than invention… so productivity gains kept them viable (which is what you see in goods production productivity (higher value products but with less and less labor)
Presently there’s a lot of invention in relation to the technologies for autonomous vehicles going on… but Europe was well ahead of the US in that market (R&D at Universities for example) long before the US so most of the invention and experience has come from Europe so far. Google specialized in software, but the sensor technologies that are the input sources to the computational algorithm’s have come from Europe so far. Even many of Musk’s Tesla engineers were German & Dutch, imports hired away from European company’s.
But Google’s competition in the software arena for autonomous vehicle infrastructure and systems now comes from China and Singapore who have had some of the most advanced University reseach going on in that arena (not for hardware, but for how to communicate between vehicles, how to use location, speeds, & relative proximities to maximize utility and minimize time and energy consumption. Remember it won’t be people making these decisions, but computers, and much more centralized communications systems than single vehicles require.. .
On outsourcing components:
For a very long time (until the mid 1980’s) our requests for quotations RFQ’s) on components mfg’ing went exclusively to US vendors. Then one day an enterprising procurement engineer read a brochure from a Japanese outfit (nobody had ever heard of). So he sent them an RFQ for no good reason other than to find out what they could produce and for how much.
It turned out they gave the lowest quote by 50% and the samples they sent were miles ahead in quality and tolerances than any of the major well known best of class producers in the U.S. So a team of engineers went to Japan to review more of how they were doing what no U.S. vendor could even come close to doing.
The upshot was that they used a nearly fully automated process and quality control methods invented by the best statisticians in the U.S. during and before WWII… which the US mfg’ers had ignored as being too costly for the quality imnprovement obtained. Tey were controlling this automated process by computers making adjustments to hundreds of variable every second and sub-second.
Not only that but they could increase volumes to double or quadruple or by 10x in a matter of a few weeks, while the U.S. vendors couldn’t even double production in less than 6 months notice.
Because they were nearly fully automated and with sufficient volume the per part capital costs were 5less than 50% of the U.S. vendors costs.(“best of class, world renowned — but not for long). So when they added a 25% profit margin to the product it was still only 50% of the US prices. This wasn’t low cost labor pricing .. it was just automation taken to it’s refined limits at the time.
Oh.. and they could implement an engineering dimensional change just by dialing in the new dimensions to the computer and voila.. .the entire automated facility changed all subsequent parts in the process to the new dimension in seconds… no downtime, no retooling time, nothing but a single inspection for the first two or three parts with the new dimension to verify.
Needless to say we sourced 50% of the parts to them in the 1st 6 months of production to insure they could do this on an ongoing basis, and then 100% of production for the next two years of the product’s mfg’ing life.
After that there was no turning back. We bagan to actively search for Japanese companies for component production and found them .. they were all over Japan…. just not producing the kinds of stuff we needed.. by they could do it at the drop of a pin….at sometimes less than 20% of the U.S. costs… and they were;profiting at 25%!!!!! unheard of in the US.. at best 6% or 7% profit levels for competitive US producers..
Now the kicker though. Why didn’t the US vendors follow suit? The capital investment to automate to that level didn’t provide sufficient roi on investment relative to other uses of capital for their business’s.. we weren’t their only purchasers of products they fabricated. These US businesses were highly diversified .. producing stuff large and small, low and high tolerance parts in high volumes with high rates of changes that they didn’t think were suitable for that level of automation.
In the end, the US vendors were deciding to stick with BAU rather than compete with Japan … and this was solely because they were os highly diversified that they couldn’t achieve the requisite roi by automating to a level competitive with Japan.
Over the next decade almost none of those major name “best of class” world renowned business still existed. .. some of their names still exist, but what they produce now is not the same business or world class stuff they produced then..
When our business figured out that the Japanese could do a better job for a lot less cost, it didn’t take long for other US businesses to figure it out too. This wasn’t low cost labor, it was automation, attention to detail, and processes refined to a gnat’s eyelash. Capital investment for high volumes on an on-going basis including being able to easily and rapidly implement high frequencies of multiple design changes turns out to be far less expensive in production that using low cost labor.
That began in the mid 1980’s for our company.. think of what Japan has done since then in automation… robotics as it’s now referred to. They are the global leader in automated systems and robotics .. I think (last time i looked was a few months ago) of the top 5 producers of automated equipment and robotics, Japanese companies are the top four with 60% of global market. They produce the stuff for Japan of course, but for China, the US, S. Korea, Brazil, and a lot of the EU even though there are a lot of German companies in the same market.
What does this have to do with patents.. only that if the US doesn’t produce a lot of stuff any more, why would the have to invent? Apple and others do their inventions in the US (so far) and produce stuff in China mostly.. looking to India now also, but there are far fewer “Applies” in the US than there were in he 1980’s because they gave up their business’s to foreign competition because roi on capital to compete wasn’t high enough to invest in competing.. Without products being produced here, there are far fewer reasons and experience and incentives to invent stuff.
Incidentallyh if you look up the US steel industry the same thing happened .. the US chose not to invest to compete with Japan and Germany after WWiI .. roi on reinvesting in more modern steel making methods to compete with them didn’t return a high enough roi.
I call this “short-termism”.
Mike, since you’re an economist you probably also work with people or clients in finance. If so then you understand the relation of investing capital and roi… if there’s an alternative for greater roi over the short term (high return for a short period of investment) that’s where capital will flow. But in competition sometimes it’s a better investment over the longer term to take a lower roi in the earlier period. It just depends on whether you’re looking out for future ability to compete or not.
This is amplified if there are significant risks such as those with R&D and seeking an invention. R&D and invention is not a short term game. When I worked (R&D) we were working on stuff we would need in 5 years and 10 years out in time… what would be necessary to insure our competitive advantages were still there 5 and 10 years out. Our development into production cycles were on 2.5 year cycles but our actual development and research was started 5 years or 10 years earlier on each new product or feature or major improvement. That’s when the inventions were made and filed.. mostly, but sometimes they were “discovered” by new eyes as pre-production experiments were starting… new eyes see new things possible… those are more serendipitous though… chance occurances. You can’ bank on them..
R&D Risks are real and major.
Many research and then development efforts failed .. some within a year and 10 engineers time, but some after 5 years and 40 or 60 engineer’s time — 200 – 300 engineering years (plus capital equipment, plus space utilization, etc.) That ain’t cheap.
Most companies can’t afford much R&D risk.. or any for that matter. You have to have deep pockets and be able to afford those losses and still stay in a competitive, if catchup, business. if you bet too much and fail it will mean bankruptcy. So it’s not always prudent to invest in R&D unless you can really afford the losses… and they occur at a higher rate than the successes so you learn to cut your losses as fast as you can.. i.e. determine whether your chances of success are improving or not improving as you go through the expenditure of time and effort.
I did a patent portfolio investigation once… 500 patents submitted for a legal case. I had to determine which of these were viable patents.. having any value (and how much value they had potential). I was given 6 months to do this. I was done in 4 weeks! 95% of the patents were worthless… they were basically some small and obvious change to a prior patent that the patent office had approved. Technically they were patents by patent office rules, but they had no value.. they were more or less just a feather in some engineer’s resume. The other 5% of patents were good ones… real value and real advances in the state of the arts.
The 5% ratio is standard I found out after that.
FYI all the patents were in my area of expertise and industry. Many were foreign patents (rubber stamped by the US patent office). Of the 5% that were good patents, ~60% were from U.S. company’s and employees, and ~ 40% from foreign owned businesses and employees.
I’ve found out since then that it’s now reversed or worse… 3/4’s of good patents are foreign and 1/4’s are U.S.. What a difference 20 or 30 years made, huh? It’s still 95% of patents are in name only.. not of any value. But they make a company’s name look good.
The global capability in R&D has changed… educational attainment much higher now in larger numbers at highly ranked Universities in foreign nations … especially in the sciences. Information flows faster between Universities in different nations and between companies in different nations so the wealth of information is spread far more widely than it used to be.
Most of the advanced nations (and China) offer very low cost to no cost University education to those who qualify academically.. this increases the probabilities of productive results by graduates relative to a system as in our own where a families income determines who might get to go to college and get a 4 year or higher degree and who can’t.
Some of our best Universities are private with tuitions that only a tiny minority of students who qualify academically can afford. That’s not a competitive system on a globally competitive level. Even our best public Universities are impacted so that fewer than qualify can attend.
I won’t even go into the secondary and primary schools problem… which determines in real terms who can qualify for university attendance.
In invention, it’s not money that makes the difference…that’s just what has to be expended to realize inventions. But invention is a matter of brains and experience .. not money or wealth.
In short, I disagree that invention in the U.S. declined due to offshoring stuff, or especially to China in particular . It contributed but not to any significant levels .. certainly not in any value level. The US is not an island unto itself.. we’ve got to start understanding that “little” fact of reality as a nation.
Thanks for the comments.
First, in answer to one of your questions (or statements) – I used to be a consultant. Now I am not a professional economist, but rather the head of the Pricing and Market Analytics Dep’t for the sales company of a foreign manufacturing firm.
I note that the issue is complex. In your last comment, you end by disagreeing with me, but in your first comment, well, this seems like agreement:
As I noted – China (and before that, Japan, and before that, Taiwan) starts out at the bottom of the market. But that hollows the unsexy, high volume – low margin stuff, and that over time makes it impossible to fund the work that produces the lower volume but high margin stuff, and that includes R&D.
A 2006 paper abstract ( I won’t pay for access to the full article),
Competition and Innovation: An Inverted-U Relationship, Philippe Aghion, Nick Bloom, Richard Blundell, Rachel Griffith and Peter Howitt , The Quarterly Journal of Economics, Vol. 120, No. 2 (May, 2005), pp. 701-728
This paper investigates the relationship between product market competition and innovation. We find strong evidence of an inverted-U relationship using panel data. We develop a model where competition discourages laggard firms from innovating but encourages neck-and-neck firms to innovate. Together with the effect of competition on the equilibrium industry structure, these generate an inverted-U. Two additional predictions of the model-that the average technological distance between leaders and followers increases with competition, and that the inverted-U is steeper when industries are more neck-and-neck-are both supported by the data.”
This effectively says that firms that aren’t very competitive in the first place won’t continue to invest in R&D to maintain their (poor?) competitive position in the face of increased competition, but firms that are competitive will continue to increase R&D spending to remain competitive.
This is fully consistent with and corroborates of my own observations and statements in my prior posts o this thread for the period 1970’s to the present…. e.g. the US firms that chose to not compete with new automated production methods from Japan in the mid 1980’s. that I used as one clear example.
The same occurs of course with domestic competitors… those who chose to exit or change markets to avoid investing in R&D to compete are those that have by & large not invested in much R&D in the first place. “Avoid” is probably not the correct term… rather roi considerations including risks involved prohibit economically justified increases or continued R&D investments…. so there’s an increasing loss of competitiveness while the business seeks to be consolidated with larger more competitive businesses with deeper pockets. I’ve seen this time and time again in my industry.
I’ve written in other of my documents in the past and shown the relationship between outsourcing production of high tech products or sub-components to lower labor cost production locations causes delays (reduces) the roi on R&D domestically predictably, knowingly, and intentionally simply because the reason for R&D is to increase productivity and product capability in the face of competition. Stated differently, a competitive firm will see to compete by dropping prices by x while increasing profits by y. They can do this by either
1) increasing R&D to find improved methods using increasing automation and automation investment of production, or
2) by finding lower labor costs and not having to invest in automation & greater R&D … at least for while until competitive forces re-align to their equilibrium again.
Given the roi considerations it’s nearly always a more profitable use of capital in the short term to use option 2) .. outsource production to low labor cost locations But this is only really applicable to highly competitive firms in the first place.. those that already spend heavily on R&D (hence patent “applied for” counts).
Those firms which aren’t competitive or on decline in completive capability aren’t the ones that were spending much or anything on R&D in the first place. They can outsource to remain viable and price completive for the short and even perhaps medium term, but their outsourcing doesn’t reduce R&D spending as it relates to new patents since they weren’t contributing to the total domestic R&D and patents in the first place (or only very marginally).
So we’re really then only talking about the firms that were highly competitive and still in the hunt for market share maintenance and improvements… i.e. those domestic producers who were already competing both with domestic and international firms.
The international competition began to come primarily from Japan and the EU beginning in the early to mid-1980’s. The US, Japan, and the EU all have relatively high labor costs (total compensation costs).
However Japan capitalized first on automated methods of production using statistical methods the US chose deliberately to not use (Ref: Shewart Quality Control via Deming’s statistical foundations) . .
And of course when China became US favorite trading nation status long before it entered the WTO, the Japanese, US, and EU competitive business’s quickly pushed their new production to low labor costs rather than spend on R&D (for the time being). .. to remain price competitive.
As an economist you should fully understand that this wasn’t a surprise or unpredictable and was clearly the only smart roi use of capital, thus intentional,. both from avoiding premature investments in more automation, and in spending on R&D to improve production methods and innovations to reduce labor content.
It did not however obviate R&D for new product development and invention to remain competitive in product function and capability. Where the U.S firms lost in that form of competition was mostly to Japanese firms that spent far more heavily in improving their functionality and features of products than the US did.
As best I and others understand this was that the Japanese were focused more on the longer term ability to compete than in the shorter term. Some Japanese companies didn’t make it .. SONY for example., Toshiba for another more recent example. Panasonic lost out to Korea in the TV wars Hitachi made an attempt to enter the high margin and high tech market but ultimately failed… innovation and R&D spending was primary in high tech, but Hitachi’s corporate owners and leaders were not accustomed to taking that level of R&D risk to remain competitive. .. so they didn’t invest at the levels necessary and decided to bow out of their high tech effort business and sell to a competitor to cut their losses (or avoid further increases in R&D spending) instead.
The successful competitors (in the US, Japan, & EU and more recently in Chinas own enterprises) have to spend heavily in R&D to compete. What’s happened is that the U.S. has encountered increasingly more competition with foreign owned business’s and with segmentation of components business’s now being spread globally, the markets have become horizontally rather than vertically integrated, spreading R&D spending horizontally across more nations.
Pushing production to low labor markets (Mexico, Thailand, Singapore (who use non-resident Malay’s as labor), Eastern Europe, and then China was a global necessity to compete in pricing. It was just as necessary for those U.S. domestic businesses that were competitive internationally already to shift production to low labor markets as it was for all other competitive business’s if they wanted to remain price completive.
R&D spending rates for price competitive purposes was reduced for all company’s by using lower labor cost markets, not just the U.S. company’s. R&D spending for product competitiveness remained as high as it ever was among competitive business’s. Any reduction in US spending for product competiveness was simply because they lost out to foreign product competitors … and that was simply because they either tried and failed, or didn’t spend enough to remain competitive.
I guess what I’m really saying is that the conclusion that offshoring to China with the advent of its WTO status caused US reduction in patents is not the correct conclusion at all… not by a long shot. That was simply due to not having to spend in production related R&D and innovation and applied to all nations in their competitive businesses to the extent that they weren’t investing in more automated methods.
But with increasing foreign competition in products rather than simply pricing of products, the U.S. lost to foreign competitors by not investing sufficiently in new product innovations related R&D. China was not a foreign product competitor… it was a pricing based competitor.
By inferring or concluding that China’s WTO status caused US innovation to decrease is also to suggest that if China hadn’t been given WTO status then US innovation rates would have continued to climb as before ignores the fact that international product innovation competition was already increasing more rapidly than it had been before and so U.S. competitors were finding that outsourcing component purchases to other foreign company’s (no matter where those company’s produced them) reduced their R&D spending to do the same.. it was a better roi to purchase components friom a better innovator than invest in duplication and patent avoidance R&D spending when it didn’t need to for it’s product innovations.
A good case in point is Apple’s smart phones… the major innovations in the hardware are not Apple’s innovations… they come from the company’s that innovate the “glass or whatever” covers; from chip design companies; from vision lens company’s and vision chip company’s (for cameras on smartphones) the component segmentation and horizontal markets in components I’ve described before. Apple’s legal disputes on patents are for software innovations, not hardware. That Apple pays these component company’s a premium for exclusive use of a new innovation perhaps or a customization requested by Apple increases the costs of Applies smart phones.. which is a minor cost of Smartphones anyway. The patents are held by the foreign (Japanese, Taiwanese, European, Korean) company’s who also use low cost labor in China to keep their prices down. China isn’t the innovation replacement for US reductions in rates of patent applications.
What China’s WTO entry did is to provide production capital a better roi in *production* by using low cost labor than by using it to use capital in R&D to improve U.S. (and every other nation’s) to productivity advances for price competitiveness.
One of my major innovations was to reduce production costs from $300/unit to $10 per unit (while increasing production capacity at lower costs as well)… but it also simultaneously improved functionality by 100k times as another huge benefit… that wasn’t my objective, but it also happened to be the by-product of the R&D speding to reduce production costs. Oh, and it put ~ 500 people out of work in our company at the same time. Then by selling the patent (royalties) to other companies, it created another entire industry globally which benefited employment growth in other nations almost exclusively and none for the U.S…. simply because lower cost labor in other nations reduced the price to $5/unit (both by competitive prices ..hence.lower margins, and lower cost labor).. Not parenthetically 40% of the unit price was paid to my company in royalties…. so the actual unit price of production and profits to the company’s that purchased royalty rights was $3/unit. 100k increase in functionality, with a 99% reduction in price will generally create a new industry.
Was my invention serendipitous? I can’t say for sure… it came to me in a flash while showering one morning but there had been 50 years of prior innovations (patents) trying to do what I did but with no where near (by any stretch) having the capability of my invention in costs or function.. it was a major technological advance — although I still believe anybody else working on the same problem in the same environment of technology I was in, would have come up with the same innovation. That wasn’t however evident in the prior patents (which I’d known nothing about at all.. I didn’t even know that what I was trying to do was a real problem… just one that needed some more attention. The total R&D to bring the product to production took another 6 months and 20 engineers. A very, very, very low cost R&D effort by any measure. not even measurable in the 4th or 5th decimal place of R&D costs.
When I say serendipity, I’m referring to something that causes an effort to result in a new observation that then translates to an “innovation”.. sort of by luck of something not going as planned or expected. X-rays for example discovered by that cause. My flash was simply from computational exercises that didn’t produce the results I wanted (in theory), so the flash of insight was simply looking at another way of seeing the problem I was trying to solve. In that sense it wasn’t serendipitous. But the fact that I was in a specific technological environment, and working on this problem at the same time was in fact a pure stroke of luck… happenstance . in that sense it was serendipitous.
My point is only that there are two kinds of R&D effort.. those that have to do with reducing costs of production and those that have to do with increasing functionality. The latter (functionality R&D) almost invariably increase costs of production so the functional advantage has to outweigh the price / cost increase that results. to be viable in the market place. Most functionality patents are NOT economically viable. Those that become economically viable almost always also require the most R&D and time to achieve that ends. I would guess that 3/4’s of such efforts are cut before spending enough to achieve an economically viable result…. at some point in spending there’s a capital outlay continuation or increase to proceed with uncertain outcome. Cutting effort is a risk decision in concert with other uses of capital with more certain outcomes. If you spend enough for long enough you can insure the outcome is favorable … such as in military spending for example, or rockets or space vehicles. Deep enough pockets can almost always insure the sought after outcome if costs aren’t an obstacle, and where profits are by Cost Plus contracts. Generally these are taxpayer funded for unlimited time. Short of actual Wars, those aren’t business decisions but political ones. How many innovations are from gov’t contracts? Most were from direct gov’t contracts with universities and private enterprise contacts during and after WWII .. taxpayers funded the R&D but patents are awarded to the inventors and the company’s they work for….not to taxpayers who paid for them.
Similarly tax incentives for private enterprise to spend on offshore production efforts are also political decisions.. such as they are, so if that also reduces incentives to spend on production related R&D and then that’s a political decision, the business decision is directly a result of that tax policy.. by design and intent of the policy.
If bringing China into the WTO was a political decision, it was promoted by private enterprise to improve their capital roi on production to remain competitive with other nations… hence profitable for the capital owners, not their employees who were certain to priced out of the market. But the advantages were to increase interdependencies between East and West, Communism and Capitalism as a means of reducing potential military adventures (and costs) among other international issues, and to import lower priced goods for US public consumption thus increase domestic demand for domestic goods, hence improve GDP to the extent possible given increasing foreign competition in goods production.
Those were political decisions .. not made by private enterprise but for the advantage of private enterprise, for the advantage of reducing international tensions for the advantage of U.S. consumers, and for the advantage of GDP. hence gov’t revenues to provide benefits to citizens. The displaced goods production employees went into lower wage services industries (on net composite measures).
None of these outcomes were unforeseen or unexpected at all. (e.g. in my one semester macro economics class in 1965? or 66″ the fact that low cost labor would become more and more utilized in other nations by the advanced nations was known and the effects on goods production (lower prices on imported goods, fewer goods production jobs) with increasing shift of goods production to higher margin products and more to an increasing services based economy.
So I find it more than just a bit coincidental that there are now economic articles publishing the effects on US “employment” and “innovation” now as a result of China’s entry into the WTO when it was all well known to occur by economists long, long ago and by political actors when WTO entry was given to China.. not the least of which were private enterprise actors in political decisions.
Don’t you find it equally interesting, more than just coincidental, that these articles are just now being published… right after Trump’s rise in politics and right after the Tea Party’s rise in politics?