R&D secret of US productivity success

In the 1980s, UK manufacturers looked to Japan and Germany for ideas to boost productivity. But the surprise industrial success story in the past few years has been the US. Manufacturing output there rose by an average of 3.5% per year between 1990 and 1998, and by as much as 5.2% per year between 1996 […]

In the 1980s, UK manufacturers looked to Japan and Germany for ideas to boost productivity. But the surprise industrial success story in the past few years has been the US.

Manufacturing output there rose by an average of 3.5% per year between 1990 and 1998, and by as much as 5.2% per year between 1996 and 1998. Despite warnings that the North American Free Trade Agreement would lead to a shift of jobs to Mexico’s cheaper labour market, manufacturing growth has outstripped the rest of the economy every year since 1992.

There are many theories about why this might be so. The favourite is that risk-taking, frowned on in the UK, is encouraged in the US. The US is also supposed to be full of manufacturing `clusters’, lightly taxed and regulated and relatively isolated and difficult to export to.

So what lessons are there for us in the success of the US? A report out this week from the Institute for Manufacturing (IfM) suggests that two rather more traditional factors – research and development and training – are the most important.

In 1996, at the start of the period of highest growth in the US, R&D spending relative to sales ran at 4%, compared with 2.1% in the UK. `Research and development spending is helping them find the best technologies and develop the best new products,’ says IfM economic adviser Elaine Barnett.

Training spending is higher in the durable goods manufacturing sector than in any other – its employees receive about five times as much formal training as those in retailing.

Investment in new technology rose sharply between 1993 and 1997 – which could explain why training is so important. Barnett says: `It’s pointless having the equipment if you’re not going to train people to use it.’

A recent report from the Machine Tool Technologies Association suggested tax incentives for investment in new machinery could encourage similar gains in the UK. Contrary to expectations, the US has the second-highest tax rate on domestic corporate investment, just behind Canada. This might seem to count against the MTTA’s argument, but US manufacturers benefit in other ways from government policy.

US interest rates have been lower than the UK’s, bringing down the cost of buying equipment. And regulations, while different in each US state, are generally less onerous.

The idea that US manufacturers have benefited from a large but isolated market is not backed by the IfM’s figures. These show that industries that have been subjected to the greatest amount of foreign competition have also seen the greatest increases in productivity.