Innovation Myopia: Beyond Labor Savings in Offshore Manufacturing

1. Innovation Myopia: Beyond Labor Savings in Offshore Manufacturing Erica R.H. Fuchs Ph.D. Candidate Engineering Systems Division, M.I.T.

2. Gains From Trade? • Gains of winners enough to compensate losers • Are U.S. jobs being lost to jobs abroad? (Rajan 2004) • What will be the impact on the individual? (Berger 2000) • Trade may not always advantage American economy as real wages fall (Samuleson 2004) • Can developing countries build up necessary skills to compete? (Bhagwati 2004) • Will innovation keep the U.S. ahead? • Missing: Are firms’ decisions to manufacture offshore changing their technology development paths? (Grossman & Helpman 1991)

3. Research Question Is manufacturing offshore changing firms’ technology development incentives, and thereby the long-term technology development paths of these industries? Implications: • Management Strategy • National Competitiveness Location Manufacturing Cost Technology Alternatives Technology Development Path

4. Methods: Case Study Research (Yin 1989) • Technology Development Incentives: PBCM Data Collection (Jick 1979) • Design: current, emerging alternatives • Production: current, new requirements • Location: differences in production variables • Technology Development Path: Semi-structured interviews (Glasner and Strauss 1967, Eisenhardt 1989) • Design decisions in the U.S. vs. offshore • Explanation or logic behind decisions (Kirchain & Field 2000) Process-based Cost Model

5. Two Cases: Emerging Technologies • Not yet adopted, crucial to industry future • Automotive Industry: FRP Vehicle Lightweighting • Emissions reduction, Alternative powertrains • Optoelectronics Industry: Monolithic Integration • Network bandwidth, Computer processing • Both Cases: • Manufacturing offshore significantly changes production characteristics • Economic position of emerging design against incumbent technology switches • Firms unaware of technology implications of moving • Decisions economically advantageous in short-term, overlook long-term consequences

6. Focus: Optoelectronics • Electrons • Processing of digital information • Photons • Future for digital information over distance • Million-times-a-thousand bandwidth advantage • Optoelectronic components • Interface electronic information processing and photonic transmission • Fiber optic communications; electric eyes; laser, remote sensing, & medical diagnostic systems • Computers… board-to-board, chip-to-chip …monolithic integration critical to application

7. Device Device Integration in Optoelectronic Transmitters • Production of multiple devices on a single chip • Increase performance, reduce cost • Integration of Laser-Modulator • Critical telecom network improvements • Currently available on market – U.S. production • Integration of Laser-Modulator-Isolator (and cooler) • Critical for computing applications • Emerging technology + Modulator + TEC Laser + Isolator + … Transmitter Integration

8. Original Innovation Driver: Telecom Industry driver: speed of innovation efficiency & cost Actual vs. Forecast U.S. Fiber-Optic Market Sizes (Cahners Business Information 2000, Turbini & Stafford 2003) Forecast Demand Actual Demand

9. Options to Reduce Cost Location Solution: Low Wage Environment • Technology solution • Cornerstone: monolithic integration • Reduce packaging, assembly, size • Improve power, performance • Low-wage production • Pursued by all firms studied Pressure To Drive Down Costs ? Technology Solution: Monolithic Integration, …

10. Results: U.S.-Based Production Unit Cost of Laser-Modulator Devices Discrete Package Discrete Device Monolithically Integrated Annual Production Volume

11. Integration Unable to Compete Against Developing East Asia Cost Reductions U.S. Production Scenario E. Asia Production Scenario Discrete Package Discrete Device Discrete Package Discrete Device Monolithically Integrated

12. Further Integration Continues to be Cost-Inferior Discrete Isolator in Developing East Asia vs. Monolithically Integrated Isolator in the U.S. (x103)

13. Results: Difficulties Manufacturing High-End Devices in Developing East Asia • Front-end processes • Yield not known until end • Need design and production engineers on-line, to intimately know production • Necessary for monolithic integration • Back-end processes • Over a decade of tacit knowledge in individual workers in the U.S. • Necessary for higher-speed devices … plus, integration incentives reduced

14. Not looking ahead? Location Solution: Low Wage Environment • Can’t produce high-end devices abroad • Increasing demand for smaller, faster, higher performance… • Are firms setting themselves up for failure? • By moving production, are we removing our own ability, incentives to stay ahead? Pressure To Drive Down Costs ? Technology Solution: Monolithic Integration, …

15. Policy: National competitiveness? • Manuf. Offshore  Tech. Development Path ? • Small firm in U.S. with new tech • Unclear if it will survive • One firm… abroad 10 years • Farthest behind, largest market share • All other firms since 2001 moving backend abroad • Alternative conditions: Japan • Significant R&D support • Encourage/force local production • Should the U.S. be supporting or even forcing firms to keep part of their manufacturing home?

16. References • Berger, S. (2000) “Globalization and the Future of Work” Zukunftsstreit. • Bhagwati, J. et al. (2004) “The Muddles Over Outsourcing” To be published in Journal of Economic Perspectives. • Cahers Business Information (2000) “Current and Projected U.S. Fiber Optic Market Sizes” Control Engineering. 47:12 • Eisenhardt, K (1989) “Building Theories from Case Study Research” Academy of Management Review. 14:4 • Glasner, B. and Strauss, A. (1967) The discovery of grounded theory: Strategies of qualitative research. London: Wiedenfeld and Nicholson. • Grossman, G. and Helpman, E. (1991) Innovation and Growth in the Global Economy. Cambridge, MA: MIT Press. • Jick, T. (1979) “Mixing Qualitative and Quantitative Methods: Triangulation in Action” Administrative Science Quarterly. Vol 24 • Kirchain, R. and Field, F. (2000) “Process-Based Cost Modeling: Understanding the Economics of Technical Decisions” Encyclopedia of Materials Science & Engineering. Elsevier Science Pubs. • Rajan, R. (2004) Economic Counselor to International Monetary Fund. Panelist. “What Should be Done about the Export of Jobs Abroad?” Academy of Management Issues Forum. • Samuelson, P. (2004) “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization” Journal of Economic Perspectives. 18:13 • Turbini, L. and Stafford, J. (2003) NEMI Optoelectronics Technology Roadmap. National Electronics Manufacturing Initiative Annual Conference. • Yin (1989) Case Study Research. Newbury Park, CA: Sage.