A few years ago Andy Grove said something that then was near-heretical about the way we manage knowledge and production. The former CEO of Intel stated that when companies outsource, and his former company was one that did-so aggressively, they cut not only direct jobs, but also what he called the “chain of experience” that allows ideas, knowledge and skill to connect and allow for technological innovation. Dow Chemical CEO Andy Liveris agreed, noting “where manufacturing goes, innovation inevitably follows.” But didn’t we think that knowledge would seamlessly integrate itself from anywhere?
Harvard Business School professors David Pisano and Willy Shih come to a similar conclusion about the location-specificity of knowledge and innovation in their book “Producing Prosperity.“ Therein they argue that “Once manufacturing is outsourced, process-engineering expertise cannot be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long-term then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.” These authors highlight that the view that a jurisdiction can specialize only in high-value research and development and forget about manufacturing “ignores the complex nature of innovation.”
In the late 1970s and early 1980s several American economists started to see these linkages. Two industries, in particular, got attention. Alan Altshuler looked at Japanese vehicle production and highlighted that as production increased in Japan, so too did Japanese patenting activity, and eventually the country emerged as the leading producer of automobiles. John Zysman from Berkeley found that the outsourcing of television production to Japan was followed by Japanese-led innovation on VCRs and hi-def televisions. One can continue past Zysman’s research to show how DVD and CD technology followed. Fast-forward to more contemporary products such as solar technologies and Pisano and Shih see the same process of production-mastery being followed by innovation and design mastery at play.
In short, the connections between thought and process are complex and the belief that manufacturing can be severed without any serious effects on the growth capacity of an economy needs to be questioned. This gets to one of the most pressing research questions that informs the DEEP Centre and our attempts to better understand and explain what drives economic growth and employment.