The IPL newsletter: Volume 16, Issue 320

Innovation Policies for Inclusive Growth

OECD
Innovation is a driver of income growth and can help address poverty and directly improve the well-being of different groups in society. Under certain conditions the gains from innovation benefit everyone in society; in other cases they might reinforce social exclusion. This publication discusses the impacts of innovation and innovation policies on industrial, territorial and social inclusiveness in the world economy.

Strengthening the Innovation Ecosystem for Advanced Manufacturing: Pathways and Opportunities for Massachusetts

MIT Industrial Performance Center
A 2013 MIT study titled “Production in the Innovation Economy” highlighted the fact that the large, vertically-integrated corporations of the 1980s have become less vertically integrated over time as they have focused on their core competencies, outsourced much of their production, and increasingly relied on smaller suppliers to drive innovation. This process has left “holes” in the industrial ecosystem, reducing many of the important investments and spillovers – in areas such as training, technology adoption, and R&D – that used to flow from large corporations to smaller firms. As a result, the country’s small and medium-sized manufacturers often find themselves “home alone” when it comes to competing globally and driving innovation in their companies. This report focuses on how to fill these holes as they relate to innovation. This analysis uses a systems approach that considers how knowledge and sources of innovation flow between key participants within the manufacturing innovation ecosystem. Strengthening these links and expanding the flow of knowledge between key actors will upgrade the system as a whole and enhance the region’s competitiveness. As other regions and countries around the world increase investment in manufacturing and incentives for manufacturing firms, it is increasingly important for Massachusetts to invest in and leverage its own innovation assets to fully establish itself as a world-class leader in advanced manufacturing.

Key Findings

Manufacturing in the Commonwealth Competes on Talent, Quality, and Innovation

Massachusetts has a long and illustrious history in manufacturing and in product and process innovation, and has built advanced manufacturing capabilities over the past 150 years that have allowed companies and workers to transition into new or emerging industries as market conditions change. In fact, one of the region’s strengths is a diverse manufacturing base that supports cross-fertilization between key industry clusters. Several attributes characterize manufacturing in Massachusetts:

§ Small-batch, niche production rather than large-volume mass production;
§ Extremely high quality and performance requirements (zero percent failure);
§ High knowledge and innovation content;
§ New or early-stage products and prototyping;
§ Products with high proprietary content;
§ Products where proximity to market is desirable;
§ Products where regulatory factors encourage siting in the U.S.; and
§ Customized products with quick turnaround time if needed.

These attributes are possible because large manufacturing companies can draw on four primary assets: 1. A well-educated and highly skilled labor force, particularly in engineering; 2. Suppliers with the ability to quickly deliver difficult-to-manufacture parts of very high quality and reliability; 3. World-class universities; and 4. Innovative startups and a dynamic entrepreneurial ecosystem.

For all of these reasons, Massachusetts continues to have a strong manufacturing base. Moreover, that base has stabilized since the 2008 financial crisis. As a result, manufacturers in the Commonwealth are well positioned to take advantage of recent national and global trends that suggest the U.S. may be more globally competitive in manufacturing in the future. Declining energy costs, rising labor costs in traditionally low-wage countries, and concerns about the protection of intellectual property are making the U.S. a more competitive location for certain types of manufacturing, including particularly those types of manufacturing in which Massachusetts excels. At the same time, the development of new “game-changing” advanced manufacturing technologies, such as additive manufacturing, cyber-physical systems, and integrated circuit photonics, is providing additional opportunities for U.S. firms to innovate and increase efficiency.

Advanced Manufacturing Capabilities Support a Diverse Set of Regionally Important Industry Clusters

Manufacturing employment in Massachusetts has steadily declined over the past several decades, dropping from 19% of total employment in 1990 to approximately 9% at present, in part due to the recessions of 2000 and 2008, as well as productivity gains. Today, employment has stabilized since the financial crisis to approximately 250,000 workers and 7,000 establishments in manufacturing. Approximately 97% of all manufacturing establishments in Massachusetts can be considered SMEs (with fewer than 500 employees) and about 92% have even fewer than 100 employees. Although SMEs vastly outnumber large firms, they generate a smaller fraction—only 30%—of all manufacturing jobs. In fact, large firms—though they account for only about 3% of all manufacturing establishments in Massachusetts—employ approximately 70% of the state’s manufacturing workers.

The Massachusetts Manufacturing Innovation Ecosystem is Rich in Terms of Assets, but Relatively Poor in Terms of Interconnectedness

While firm innovation might have occurred in isolation in the past, particularly when many firms were vertically integrated, today’s firms must have high degrees of interaction with a range of other companies and organizations, such as universities, suppliers, customers, and even competitors, in order to build a firm’s innovation capacity. Four key nodes and actors shape the advanced manufacturing innovation ecosystem in the Commonwealth:

§ Large original equipment manufacturers (OEMs)—these are firms with more than 500 employees that manufacture marketable products based on ‘original’ designs,
§ Supplier SMEs—these are firms with fewer than 500 employees that manufacture parts and components for OEMs,
§ Startups, and
§ Universities and research institutions

While each node within the system is relatively robust, the strength of connection between them varies in terms of knowledge flows. In general, OEMs have the strongest links within the innovation ecosystem because they are driving much of the innovation. Knowledge flows between OEMs and research universities are strong in both directions, while knowledge flows with SMEs are relatively unidirectional flowing from OEMs to the SME. With respect to innovation, startups typically bring new ideas to the OEMs.

Manufacturing Intermediaries in the Commonwealth are Primarily Focused on “Point Solutions” and on the Supply Side

Massachusetts is rich in intermediaries that provide, among other things, services and advice to SME manufacturers throughout the state. This assistance takes six primary forms: (1) process improvements, (2) workforce training, (3) strategic technology and cluster development, (4) technical and engineering process support, (5) managerial and professional education, and (6) marketing. However, the current system tends to focus on “point solutions”—such as supporting SMEs on a one-on-one basis primarily in workforce training, lean practices, and certification. This is necessary but not sufficient in terms of building innovation capacity. State efforts to support SMEs also focus primarily on the supply side – i.e., on workers and suppliers – often without enough input from the OEMs that drive the demand side. In addition, despite investments in some emerging technologies, Massachusetts lacks an overall strategic vision for advanced manufacturing that looks out five to ten years in terms of supply chain developments, technology road maps, and talent and training needs.