Is America giving up on manufacturing entrepreneurship?

Is America giving up on manufacturing entrepreneurship?
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Manufacturing, the way we knew it, is not coming back. The future in manufacturing is high-tech. And it’s eluding U.S. startups. Players in this space rely on a labor pool that needs substantial re-skilling for production increasingly intertwined with automation. The shortcoming reflects American entrepreneurship’s decline. Startups accounted for just 8.1 percent of all firms in 2015, down from 13 percent in the early 1980s, according to the U.S Census Bureau’s Business Dynamics Statistics Program.

This further drags on the economy and should be a cue for stakeholders, from political and industry leaders to career-seekers. They should be homing in on this decline since it affects U.S. manufacturing startups, which are engines of economic growth and job creation.

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The United States ironically is misfiring where it had been revered. It long has been a nation of entrepreneurs, with the best financial institutions for young firms to flourish. Alongside such legends as Apple, Google and IBM, lesser-known legions of entrepreneurs grew into enterprises that made the United States the workshop of the world in a broad range of industries.

 

However, the latest entrants across large swathes of manufacturing aren’t doing so well. Well-established concern about the number of new entrants falling across the economy is displayed in the 2015 paper, “Grown up business cycles,” by Federal Reserve Bank of New York economists Benjamin W. Pugsley and Aysegul Sahin and fueled by U.S. Bureau of Labor Statistics figures showing that the number of new establishments and the jobs they create has decreased over the past two decades.

And now, in our working paper, we have evidence that over the past decade, the basic skill levels of the newest firms declined considerably.

Think of these skills in the context of complex problem-solving, non-routine cognitive analytical, routine manual, interacting with computers, offshoring and probability of computerization. These dimensions account for both worker ability and the nature of tasks in different occupations.

Established firms increasingly are differentiating from new firms in terms of both size and the aforementioned skill-set measures. This leaves startups in a risky position. They’re competing both with Chinese imports and for lower-skilled production that incumbent U.S. firms are outsourcing.

And, for the less-skilled workers, the problem is twofold: The lower-skill firms entering the marketplace are smaller and less likely to succeed, while the thriving incumbents are upgrading their operations and outsourcing any low-skill tasks. These workers are left to choose between rapidly disappearing jobs with growing incumbents, or risky positions for small entrants.

The implications run deeper. A firm’s initial skill level is highly predictive of future skill, growth rates, ability to withstand competition and long-term survival. New firms generally account for most of net employment creation, making entrepreneurial success a crucial component of our economy. Manufacturing jobs also are often stepping stones to higher-skilled jobs.

The lack of highly-skilled entrepreneurs entering the market and thriving each year jeopardizes the supply of good jobs at good wages. This threatens the lifetime income profiles of blue-collar workers.

The problems faced by manufacturing entrants are a troubling piece of a larger picture. The broad middle of these startups is disappearing with a polarizing effect: a manufacturing ecosystem of many low-skill firms doing low-skill production on one side and more highly skilled established firms on the other. This is analogous and reinforcing to the past 20 years of labor market polarization from the disappearance of many middle-skill jobs. Such polarization is gaining force across our enterprises.

Particularly telling is a report — part of a recent Deloitte-issued “Skills gap in US manufacturing outlook” — that less than 40 percent of parents say they would encourage their children to pursue a career in manufacturing. The implied low-skill stigma plagues the sector and adds to the broader problem for which we do not yet have a fix.

Yet there are positive signs. For example, the Manufacturing Universities Act, signed into law last year, is designed to strengthen U.S. university engineering programs to meet the demands of modern manufacturing industry. Commitment to such an initiative is critical — as is isolating the immediate struggles that new firms face. Without emphasizing skills education and training, it is hard to see how manufacturing employment can make a comeback in America.

Meghana Ayyagari is an associate professor at the School of Business at George Washington University.

Vojislav Maksimovic is the William A. Longbrake Chair Professor at the University of Maryland's Robert Smith School of Business.