The Role of Innovation and Entrepreneurship in Economic Growth

Michael J Andrews, Aaron Chatterji, Josh Lerner, Scott Stern, Michael J Andrews, Aaron Chatterji, Josh Lerner, Scott Stern

• Publisher: University of Chicago Press
• Year: 2022
• ISBN:
  9780226810645
• Topic: Business
• Subtopic: Business generale
• Index: Business

This volume presents studies from experts in twelve industries, providing insights into the future role of innovation and entrepreneurship in driving economic growth across sectors. We live in an era in which innovation and entrepreneurship seem ubiquitous, particularly in regions like Silicon Valley, Boston, and the Research Triangle Park. But many metrics of economic growth, such as productivity growth and business dynamism, have been at best modest in recent years. The resolution of this apparent paradox is dramatic heterogeneity across sectors, with some industries seeing robust innovation and entrepreneurship and others seeing stagnation. By construction, the impact of innovation and entrepreneurship on overall economic performance is the cumulative impact of their effects on individual sectors. Understanding the potential for growth in the aggregate economy depends, therefore, on understanding the sector-by-sector potential for growth. This insight motivates the twelve studies of different sectors that are presented in this volume. Each study identifies specific productivity improvements enabled by innovation and entrepreneurship, for example as a result of new production technologies, increased competition, or new organizational forms. These twelve studies, along with three synthetic chapters, provide new insights on the sectoral patterns and concentration of the contributions of innovation and entrepreneurship to economic growth.

I

Productivity Drivers

1

The “Weighty” Manufacturing Sector

Transforming Raw Materials into Physical Goods

Erica R. H. Fuchs, Christophe Combemale, Kate S. Whitefoot, and Britta Glennon

1.1 Introduction

Manufacturing has historically played a significant role in productivity and R&D. Jorgenson (2001) suggests that advances in microprocessors alone were associated with 50 percent of total factor productivity growth in the US and worldwide in the 1990s. This outsized role in R&D and productivity appears to continue today, even with significant changes across the sector in technology and globalization. US manufacturing is a disproportionate source of private R&D spending relative to its share of employment and global value added (GVA)^1,2 and has higher than average labor productivity relative to other sectors.³

For the manufacturing sector as a whole, the past few decades have been marked by increases in R&D and productivity and a declining share of the US economy as other sectors grew faster. US manufacturing value added (MVA)⁴ has grown in real terms from the 1980s to the present (as far back as public data allow us to observe) in addition to real growth in US private R&D spending by manufacturing industries. However, both absolute employment and share of total US employment in the sector have declined over the same period.⁵ Despite MVA growth, manufacturing today accounts for a smaller share of total US value added than it did in the 1980s and 1990s.⁶ While a majority of US industrial R&D spending still occurs in manufacturing, this too is a declining share of the US total. Manufacturing is a sector whose apparent role in the economy on these important dimensions would seem to be in decline, but it remains unusually productive per employee and highly research intensive.

Despite these average trends and commonalities, drawing implications from sector-wide manufacturing trends can be misleading because of the variation in these indicators across manufacturing subsectors. By definition, the manufacturing sector includes all establishments engaged in mechanical, physical, or chemical transformation of materials, substances, or components into new products (US Census Bureau 2017). The industries in the sector vary widely with respect to value added, workforce size and composition, and level of R&D effort. At the five-digit NAICS code level, the top sources of employment are animal processing, aerospace products, and printing (on various materials, including textiles, metals, and plastics); the top sources of revenue are petroleum refineries and automotive; and the top source of R&D spending is pharmaceuticals followed by semiconductors and other electronic components.

The rate and direction of technology change also varies greatly across subsectors. Indeed, industrial R&D spending is not only disproportionately driven by manufacturing, it is also disproportionately driven by the top five subsectors: pharmaceuticals, semiconductors and other electronic components, automobiles and light duty vehicles, communications, and aerospace. Unpacking the relationship among globalization, innovation, and labor outcomes requires not only understanding how the manufacturing sector can be different than other sectors, but also addressing the sector’s diversity. Here, deep subsector-level knowledge and empirical detail may prove particularly valuable for unpacking the puzzling (and sometimes conflicting) results in today’s state-of-the-art analyses.

This chapter is structured as follows. We begin with a brief history of manufacturing technologies and systems. Second, we provide a birds-eye view of the trends in manufacturing based on available data on manufacturing value added, R&D spending, and human capital and demographic composition of the labor force. Third, we explore why manufacturing contributes to a majority (66 percent) of US industrial R&D spending but a much smaller (12 percent) proportion of US domestic value added. Fourth, we highlight subsectoral level differences in our birds-eye view measures, and potential subsectoral differences in the dichotomy between US industrial R&D spending and US value added (and potential explanations for that dichotomy). Finally, we engage with the existing literature and discuss implications of the chapter’s findings for the relationship among globalization, innovation, and labor outcomes.

1.2 A Brief History of Manufacturing Technologies and Systems

US manufacturing began in the seventeenth and eighteenth centuries as a craftwork system imported from Europe to the American colonies. Craftwork was performed by skilled artisans, often working with tools that they owned themselves. Labor was organized into master craftsmen with apprentices or in small firms. In this period, most craftwork was for domestic consumption, and exports were dominated by raw materials (Shepherd and Williamson 1972).

In the mid-eighteenth century, what later came to be known as the first industrial revolution emerged in Great Britain. This revolution would eventually reach its maturity in the United States during the first quarter of the nineteenth century (Crafts 1996). The first industrial revolution shifted the sources of production power from human and animal toward chemical sources such as coal and wood, and water sources such as riverside mills (Crafts 1996). Faced with abundant materials but scarce, relatively skilled labor, US manufacturers in this period strongly favored innovations in mechanization (even compared with Great Britain; Rosenberg 1972). This mechanization reduced the demand for labor on the production line but increased material waste and produced new demands for skilled machinists to construct the machines. At the same time as the demand for skilled machinists grew, the shift in production organization from artisanal work to factory production saw a decline in the demand for skilled artisanal labor while shifting demand toward less skilled production labor in the factory (Goldin and Katz 1998).

After the first and into the second industrial revolution, US manufacturing saw the emergence, national prominence, and international export of the “American system,” a mechanized approach to producing separate, interchangeable parts that made up final goods (Hounshell 1984). Eli Whitney originally popularized the concept of interchangeable parts in response to the needs of American small arms manufacture for high performance and easier repair, maintenance, and logistics (Hounshell 1984). Progress toward interchangeability was further developed by such entities as the Springfield Armory (Ford 2005). In addition to facilitating higher production volumes, interchangeability also expanded opportunities for the division of labor (Tyson 1990). Novel modes of organizing production activity at larger scales were driven in large part by the demand of US armories that emerged in the late eighteenth century and proliferated in the first quarter of the nineteenth century. Production volumes grew around US conflicts, such as the Mexican-American War and the American Civil War as well as arms production for national and international use in the later nineteenth and early twentieth centuries (Malone 1988; Smith 1980, 1985).

By the 1870s and the coming of the second industrial revolution, major productivity gains had been achieved through specialized labor and tools (Atack, Margo, and Rhode 2019) and innovations in power sources (e.g., from coal to oil; Mokyr 1992). As infrastructure, transportation, and communication technologies expanded and improved, production was able to further increase in scale, scope, and complexity. Along with increases in these dimensions came an enlarged role for salaried managers who did not own the industrial enterprises but rather were organized according to functions in the overall system of the firm, such as sales, purchasing, or research (Chandler 1990).

The organizational implications of the increasing scale economies of production gave rise...