Enabling Manufacturing vs. Tilting the Playing Field

Enabling Manufacturing vs. Tilting the Playing Field

In December, Congress passed an omnibus spending bill that included the Revitalize American Manufacturing and Innovation (RAMI) Act of 2014. The RAMI Act requires the secretary of commerce to establish a national network of "centers for manufacturing innovation," each with a special focus -- be it a manufacturing process, a novel material, etc.

The commerce secretary is authorized to appropriate up to $5 million annually for administrative expenses over the next decade. Also, the secretary of energy may transfer up to $250 million in total over the same period to match state and private funding to establish the centers. Federal funds for a given center must be discontinued after seven years, and the amount of financial assistance to a center must decrease after its second year of funding and in each year thereafter, being replaced by non-federal sources of funding.

How aggressive is this, as far as government intervention is concerned? Fortunately, there's a simple way to tell. In 2010, the McKinsey Global Institute developed an industry- and sector-based approach to evaluating national competitiveness. In the MGI framework, two categories ("Setting the Ground Rules" and "Building Enablers") designate what can be described as "innovation policy," and the second two ("Tilting the Playing Field" and "Playing the Role of Principal Actor") describe "industrial policy." The president's Council of Advisors on Science and Technology defines an "innovation policy" as a strategy that creates the conditions that support innovation, and an "industrial policy" as having the federal government "making bets" on specific companies and industries.

The RAMI Act straddles the line between the two. Yes, it builds enablers by expanding infrastructure, assembling a skilled workforce, and supporting R&D. But it also tilts the playing field by designating "key advanced technologies" it aims to promote (such as nanotechnology, advanced ceramics, and photonics and optics), backed up by the provision of "financial incentives for local operations" -- the $250 million in federal financing for the centers.

This reflects a significant departure from the past. In 2012, using the MGI framework, Mark Perry (of the University of Michigan-Flint and the American Enterprise Institute) and I published a study in Business Economics of 11 different manufacturing-strategy proposals developed by business associations, coalitions, think tanks, and academic and government institutions over a three-year period (2009-2011). We found that, of 21 specific policies identified in two or more of these proposals, the overwhelming majority (17) focused on "Setting the Ground Rules and Direction" (13) and "Building Enablers" (4). The four remaining policies were classified as "Tilting the Playing Field"; two focused on actively intervening on behalf of "green technology/energy" industry development.

Unlike many policy issues, advanced manufacturing has become something both parties can support. "This bill is an opportunity for the United States to bring jobs back to our shores, so we can make it here and sell it there," said Rep. Tom Reed, the House RAMI bill's lead Republican sponsor. With the passage of the act, however, Republicans have moved from a philosophy of "Setting the Ground Rules" to now embracing "Building Enablers" and "Tilting the Playing Field."

To be fair, congressional Republicans did win some concessions -- for example, Democrats agreed not to authorize new appropriations for this legislation, but instead to transfer the project's $250 million in center funding from the U.S. Department of Energy's Energy Efficiency and Renewable Energy account. Also, the original proposal from the Obama administration was for $1 billion in mandatory funding, whereas the RAMI Act limits authorizations to a total of $300 million of discretionary funding. Republicans also emphasized that the RAMI Act must ensure that the results of the program reach small and medium-sized firms -- an important stakeholder constituency for them.

There are other problems with the program as well, though. For example, while federal funding for a center has a declining match over the seven-year period allowed, the secretary of commerce may make an exception to this requirement in various situations -- if the center is otherwise meeting its stated goals, if unforeseen circumstances have altered the center's anticipated funding, or if the center can identify future funding sources. These exemptions offer wide discretion for preferential funding.

Moreover, if a center is not considered self-sustaining after the seven-year period is exhausted, under the RAMI Act no additional financial assistance may be given. The question remains, however, whether this requirement will be maintained, as Congress in 1998 amended the Manufacturing Extension Partnership to allow its centers to continue receiving limited federal funds if they earned a positive independent evaluation. With the precedent established, will the RAMI Act's financial self-sufficiency requirement of seven years be honored?

In conclusion, while Democrats have long favored an assertive "industrial policy" approach to manufacturing, the passage of the RAMI Act is a noticeable bipartisan tipping point for an increased degree of government intervention.

Thomas A. Hemphill is an associate professor of strategy, innovation, and public policy in the University of Michigan-Flint School of Management.

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