Production in the Innovation Economy

Massachusetts Institute of Technology

The MIT Production in the Innovation Economy study:
Objectives and methods

The PIE project asked one big question: what production capabilities do we need to fuel innovation and to realize its benefits in good new jobs, new enterprises, and sustainable growth. Innovation is critical for a vibrant and productive society. The research examined what it takes to sustain innovation over time and what it takes to bring it into the market. It examined innovation in products; in processes; in combinations of products and services; in start-ups; in large multinationals; in Main Street small and medium-sized manufacturers; in European and Asian partners and competitors; in hotspots for new technologies, like the biotech cluster of Cambridge, Massachusetts, in traditional manufacturing country, like Ohio; and in new manufacturing areas in the Southwest, in Arizona; and abroad in China and in Germany. It tracked the innovation to market links from the bottom up by tracing all the steps that a firm takes to procure the inputs of capital, labor, facilities, and expertise that are required to commercialize a new product and service. Where did the company get the skills, the capital, the suppliers, the test and demonstration facilities, the additional expertise, and reactions from early customers that it needed to move innovation into production? Did it find these inputs at home or abroad? Where did it decide to locate each of its operations, and why? Which parts of its production activities does it believe it needs to keep in close proximity to its R&D in order to bring a product to market and to maximize the gains from its own innovation?

Research on Large U.S. Corporations

American-based multinationals are among the largest global investors in R&D. Over the past thirty years these companies have changed from almost entirely U.S.-based operations to organizations carrying out R&D and production around the world. From their senior managers we sought to understand strategies for locating innovation, prototyping, pilot production, test and demonstration, early-stage manufacturing, and full-scale commercialization in the United States and abroad.

Research on Start-ups to Full-Scale Commercialization

A second focus was the population of new companies that grew out of patents that had been created in MIT laboratories and licensed by the MIT Technology Licensing Office over the years 1997–2008. We tracked their development from the lab, through startup, and scale-up. The MIT start-ups are well positioned to succeed. At those points in the scale-up process where these firms, even with all their relative advantages, find serious difficulties in obtaining the inputs they need for getting their products into the hands of customers, other new American firms based on innovative technologies will likely also be having trouble, and the researchers tried to extract these general lessons.

Research on “Main Street Manufacturers"

The third target population within the PIE company sample was small and medium-sized U.S. manufacturers. To figure out how to raise the water level of all kinds of innovations—product, process, service, incremental, radical, repurposing, business model—flowing into the economy, we interviewed senior managers and CEOs in a set of manufacturing firms in Massachusetts, Ohio, Georgia, and Arizona, from the population of all U.S. manufacturers that had doubled their revenues in the interval 2004-2008.

Lessons from abroad: Germany and China, scale-up economies

The fourth group of firms in the PIE sample were foreign: mainly German and Chinese companies. In both Germany and China we found innovative manufacturing and scale-up that challenged many of our ideas about why innovative companies in the United States often falter before attaining the size and capacity to reach large numbers of customers. Innovation in Germany builds on legacies: in industrial specializations, longstanding relationships with customers, workforce skills, and proximity to suppliers with diverse capabilities. The China interviews showed firms with remarkable innovative capabilities in manufacturing. If China’s initial assets were cheap factor prices, today the PIE research team found Chinese firms in industries like renewable energy that excel in scale-up to mass manufacturing because of ability to move complex product designs into production and commercialization.

Research on advanced manufacturing technologies

Today, manufacturing is a lengthy and often inefficient process, in which the raw materials that nature provides are pushed through stages of fabrication, assembly, and warehousing and emerge as goods for sale in the market. In a future which technologies on the near horizon could enable, human-designed and -engineered materials could be pulled by demand through continuous manufacturing and customization to meet specific and differentiated human needs. Today manufacturing remains highly centralized and concentrated, and components and finished goods are transported at great cost and with high impact on the environment through long supply chains. New advanced manufacturing technologies could enable a distributed manufacturing system to “destroy the tyranny of bulk” and manage capacity and demand flexibly through networks of small, localized manufacturers linked by the Internet.

Research on jobs and skills

Is there a skill shortage? PIE economists tested this controversial issue by administering and analyzing a national representative survey of manufacturing establishments in 2012. They asked how long it took a firm to fill a vacancy. These researchers also examined evidence for change in skill requirements in manufacturing.

The PIE research traces out an evolutionary path for production in advanced economies. From ground-level research in 264 interviews and analysis of the pathways from discoveries to market, we find that manufacturing firms have a critical role both as sites of innovation and as enablers of scaling up to commercialization of the strong flow of innovations from America’s research laboratories, universities, public laboratories, and industrial R&D facilities. Along these pathways to economic growth, it is not only manufacturing that develops and commercializes great patentable ideas that matters; it is also manufacturing that brings less radical improvements in product and process onto the market that sustains economic vitality. We see a strong rationale for strengthening manufacturing in innovative economies. To achieve this, we examined new public-private partnerships to build the common resources on which all productive enterprises draw: a skilled population, efficient capital markets, institutions to distribute risk, and vibrant centers of innovation to drive new ideas into the economy. The PIE recommendations aim to contribute to policies to create these resources and rebuild manufacturing.