CEO Policy Recommendations for Developed Economy Nations
Opportunity in the Land Of Uncertainty
Although recognized as one the world’s leading manufacturing nations for much of the 20th century, the United States has witnessed a rapid paradigm shift in the 21st century, with its dominance challenged in nearly every area of manufacturing competitiveness, from research and development to shop floor process technology and worker productivity. A slow and steady decline of manufacturing’s contribution to the US economy over the past 25 years has begun to challenge the prosperity of its middle class as well as its long-held status as a global manufacturing and innovation leader. The decline was in part self-inflicted and in part the consequence of rapid globalization – and of the rise of significant competitors in Asia.
Still considered one of the most competitive nations today, the United States is expected to increasingly be challenged by emerging economy nations over the next decade as those countries rapidly build their manufacturing capabilities. Until recently, much of the real issue for the US has been the philosophical debate on whether or not manufacturing even mattered to America’s economic prosperity, as its capabilities and middle class jobs drifted away. More recently, however, US policy-makers, educators and business leaders have taken a renewed interest in – and developed a deeper appreciation for – the important links between manufacturing, innovation, economic growth and high-paying middle-class jobs. The real questions now before American leaders are these: Is it too little, too late? If not, what is the path forward?
Driven significantly by manufacturing, the slow but steady emergence from the Great Recession illustrates that manufacturing does indeed matter and that the United States still possesses many of the ingredients in the “secret sauce” that helped to create America’s vibrant industrial base – a resilient entrepreneurial spirit, world-class innovation capabilities, a strong legal and regulatory environment, and systems that support the free flow of capital, ideas and people.
Chief executives participating in the face-to-face interviews and in the roundtable working session conducted by the Aspen Institute broadly viewed the US economy as having grown and improved over the past several years, and generally described 2012 as a good year for their manufacturing enterprises. At the same time, many executives expressed moderate to significant caution regarding prospects for the economy in the United States and in many other parts of the world in 2013.
With respect to global economic conditions, most US chief executives saw Europe as very troublesome for the next two to five years, and that there are significant issues that will continue to dampen economic growth for the entire Eurozone that will take time to address. In China and other parts of Asia, executives saw more moderate growth compared to the double-digit growth over the past five years. While many said exports would continue to be strong, they saw increasing labour and material costs, currency issues, and rising structural cost burdens clouding the economic outlook for Asia. Changes in leadership in China and Europe and unrest in the Middle East all contributed to an overarching sense of uncertainty among the executives participating in the discussions.
As for the US economy, uncertainty dominated CEO concerns: uncertainty regarding the direction of energy, legal and regulatory policy; the continued debate on tax policy and the fiscal cliff; and the slow housing sector rebound across America. Fundamentally, many did not see how economic growth would be achieved over the coming year or two, which left most questioning whether the US can sustain the heady manufacturing growth experienced over the most recent past.
One chief executive provided a backdrop of what he views as a significant rise in competition between countries and the inevitable disintegration of the “flat, free world” – accompanied by greater policy restrictions in the flows of capital, talent and trade – and thus ushering in a new era of fierce competitiveness between nations.
Executives participating in the interviews and roundtable working session broadly expressed the following concerns when providing their perspectives on the current state of America’s ability to compete in today’s global marketplace.
Policy and Regulatory Uncertainty
Executives frequently described the debilitating consequences of uncertainty, including delayed investment and hiring decisions, and the resulting negative impact on US manufacturing competitiveness. Executives noted the fiscal cliff debate as just another example of seemingly endless uncertainty on key policy issues, and called for an environment characterized by constructive and meaningful dialogue that seeks compromise on an ongoing basis versus an environment often seen as rife with edicts and polarization. Executives also consistently stressed that the US needs to develop policies that provide better long-term clarity and are sheltered from election cycles.
Revive, Nurture and Protect America’s “Secret Sauce”
Executives consistently noted concern with what they perceived as a lack of focus in the United States to protect and nurture America’s “secret sauce” – the ability to connect a vibrant entrepreneurial spirit with world-class innovation capabilities and support them with a strong regulatory foundation and access to venture capital. The topic of access to venture capital was particularly concerning to executives. Many said that the current policy environment had damaged venture capital activity (which was viewed less robust than in the past), and generally believed that any policy action focused on reviving America’s “secret sauce” should focus on making improvements that impact the areas mentioned above.
Government’s Role in Spurring Manufacturing Competitiveness
Few of the executives advocated the need for a “manufacturing policy”. Most desired sensible business policies that stimulate investment and growth, allow free-market principles to sort out winners and losers, and create an environment where businesses can be successful. At the same time, nearly every executive understood the responsibilities they and their companies have to benefit and protect society and expect nothing more than an environment which attracts capital, talent and ideas and where businesses and individuals can thrive. Balance, unanimously, was essential.
US executives said government also has a primary role in levelling the playing field between countries by addressing cross-border issues in areas that include monetary policy, intellectual property protection, immigration, and free and fair trade, aggressively confronting trade violations.
One executive noted that policy-makers need to become comfortable with the notion of “creative destruction” – where focus is given to new manufacturing innovations, businesses and jobs in lieu of trying to save low value-add businesses and industries.
Reduce the deficit by broadly supporting a Simpson-Bowles type approach to tax revenue increases coupled with expenditure reductions and a slowed growth trajectory on entitlements
Executives repeatedly noted the deficit as a major concern and said action is needed to reduce the deficit and, as a result, the borrowing costs and long-term burdens for the United States. Executives generally believed that excessive federal debt would continue to be a drag on US manufacturing – which would only be exacerbated by uncertainty stemming from policy debates similar to those surrounding the fiscal cliff.
Lower corporate tax rates broadly and place the US in a more competitive position relative to other nations
Many of the executives said that if the overall corporate tax rate of the United States were lowered, American companies would be more competitive. Executives unanimously said high corporate taxes negatively impact competitiveness and result in a reduced ability to invest at a level comparable to the global competition. Executives consistently noted that a tax rate similar to other manufacturing-driven economies would improve US corporations’ ability to invest, innovate and compete.
At the same time, while most executives were comfortable with an overhaul of the tax code, concern was expressed by several that past credits and other “preferences” not be immediately eliminated as many companies and key sectors have investments and business operations structured around the existing tax code and its current complexity. As one executive said, “The devil is in the details.”
Interestingly, while many executives said permanency of R&D tax credits was important, those policy issues paled in comparison to the urgency many expressed relative to enacting tax policies that work to reduce the overall corporate tax, as well as policies that address concerns with territorial tax rates – something noted as particularly important to multinational corporations.
To address these concerns, executives recommended the following actions be considered:
- Develop globally competitive corporate tax rates and institute widespread tax reforms that provide long-term clarity and stability on overall corporate tax policies to promote investment in the United States and strengthen competitiveness.
- Decrease the cost of repatriating earnings – either by creating a territorial tax policy or by minimizing the payback difference between foreign and US tax rates.
- Enhance and make permanent R&D tax incentives in an effort to remove uncertainty from making long-term investments in research and development.
Develop energy policies that support the competitive advantage and head start the United States has in the area of shale gas production
Many executives were passionate in the dialogue on recently discovered shale gas opportunities in the United States and on energy policy. Most generally said policy emphasis and investment in alternative energies should not come at the expense of long-term innovation and the economic opportunities that shale gas represents. Executives said shale gas provides a clean, sustainable and affordable energy source, and delivers the BTUs that are essential to the manufacturing process. Many of the executives also believed shale gas provides a significant opportunity to reduce the United States’ dependence on foreign sources of energy, thereby improving the national security of the country and its overall competitiveness.
Executives said the following activities would help the US take advantage of the opportunities shale gas represents:
- Create a comprehensive energy policy that encourages reinvestment in the US energy infrastructure, pursues energy efficiency and conservation, and balances investment across a diverse portfolio of current energy assets, such as shale gas, coal and offshore oil, while also investing wisely and responsibly in alternative energy sources including solar, wind and nuclear.
- Develop energy policies that support ongoing public and private investment into shale gas research and development, thereby creating opportunities for the United States to retain its leadership position and serve as a catalyst for job creation.
- Encourage the use of cleaner and abundant fuels such as natural gas to facilitate the transition away from the use of oil and coal.
- Modernize the US electric grid to grow capacity, improve reliability and integrate alternative energy sources as they develop.
- Moderate near-term government investments in alternative energy and the creation of artificial, high-cost and unsustainable markets.
Create programmes that quickly establish free-trade agreements that are fair and equitable, and attack discriminatory policies imposed by other nations
As previously noted, executives participating in the discussions cited significant concern with trade policy, and said government plays a central role in driving the creation of free-trade agreements and ensuring a level playing field that supports the effectiveness of free-market principles.
Many of the participating executives said strong government support for free and equitable trade, especially in emerging markets, in conjunction with advocacy against protectionist policies such as mandated joint ventures in return for market entry or excessive tariffs would do much to improve the competitiveness of US manufacturers.
Executives also said that the United States could do more to accelerate the pace at which new trade agreements are adopted. While they widely supported recent agreements with Panama, Colombia and South Korea, they believed similar agreements are needed – specifically noting that beyond enhancing the flow of goods across borders, trade agreements also facilitate access to leading technologies and top talent located in foreign markets, which are critical to spurring domestic economic growth and job creation.
To address these concerns, executives recommended the following:
- Develop a new trade promotion and fast-track authority to quickly establish bilateral or regional free-trade agreements with rapidly growing nations that are fair and equitable, while also ensuring US rights under existing trade agreements are enforced.
- Ensure US rights under existing trade agreements are enforced and aggressively confront obstructions to market access, currency manipulation, violations to intellectual property rights, and unfair labour practices.
- Build a comprehensive US-European Union trade and investment agreement.
- Pass permanent trade promotion authority.
- Work towards a market-based exchange rate with major trading partners.
- Expand export-promotion assistance to manufacturers and ensure that competitive finance is available.
Develop education and workforce programmes that ensure the United States continues to have access to qualified graduates and other highly skilled workers
Executives overwhelmingly expressed concern with the brain drain in the United States and potential consequences for the future. Stemming the brain drain and ensuring science, technology, engineering and math deficiencies in the US primary and secondary education system are addressed were clear priorities for US executives participating in the interviews. Their emphasis was placed on ensuring America’s education system continues to deliver a sustainable stream of qualified graduates in the fields of engineering, science and math.
Executives placed particular emphasis on what they described as today’s “mobile” workforce. And many also viewed diversity as a key driver of innovation and, thereby, competitiveness. As a result, executives generally believed immigration policy must be enacted to allow for the retention of critical science and technology talent from other countries educated in American universities, as well as to attract the world’s best talent to the United States.
Finally, executives said that the feedback loop between businesses and US educational institutions needs to be improved, thereby ensuring a proper mechanism is in place that would result in workers having the skills and certifications required to excel in today’s (and tomorrow’s) advanced manufacturing facilities. They stressed the need for US teachers to become their partners and more acquainted with modern manufacturing; both the considerable career opportunities it provides students and the rigorous foundation necessary in science, technology, math and critical thinking.
Executives passionately described the investments their businesses are making in workforce development. Many gave example after example of where they have set up in-house programmes, devoted significant investment to training and development, and invested both money and human resources in the local communities, high schools and community colleges.
To address these concerns, executives recommended the following activities:
- Adopt policies that allow top students from other countries educated in US universities to remain in the United States upon graduation and to enter the US workforce.
- Change the focus of immigration reform discussions and craft policy that creates opportunities for talent born outside the United States to become an integral part of the US workforce.
- Build government-industry partnerships that encourage students to pursue careers in science, engineering and manufacturing.
- Adopt more stringent and consistent standards for STEM disciplines throughout the entire educational system in the United States, including developing educators who are subject matter experts and better able to prepare students for advanced degrees or certification programmes.
- Ensure adequate support for a closed-loop feedback process within the manufacturing “ecosystem” to ensure curriculums meet the changing needs of businesses.
Create and support programmes that drive America’s long-term science, technology and innovation initiatives
Executives participating in the discussions consistently noted a growing gap between universities (where basic research is performed) and the manufacturing sector (where development and applied research is conducted), and the negative impact on America’s ability to drive new ideas through the “valley of death” to full commercialization. They almost unanimously called for the creation and long-term support of programmes that effectively and efficiently allow for the advancement of new innovative science and technology breakthroughs through the so-called “valley of death”, which they believed are critical to the United States’ long-term, global competitiveness.
In providing their perspectives, executives consistently pointed to other countries such as Germany and China, which they viewed as outperforming the United States in the early stages of the innovation process because they develop clear objectives that connect ideas and products with support from both the private and the public sector. China’s 12th Five-Year Plan and Germany’s Fraunhofer Institute were both cited as good examples of a government developing long-term science and technology goals, and a public-private partnership focused on transforming scientific findings and basic research into useful innovations.
An example in the US highlighted by one executive was SEMATECH. Formed in 1987, SEMATECH is focused on semiconductor and emerging technology research.14
Its membership and global network of alliances with equipment and material suppliers, universities, research institutes, consortia, start-up companies and government partners help to offset cost
and risk, and leverage resources.15
Although the US is trailing other countries, some executives did highlight programmes in the United States that today do work towards supporting the commercialization of new ideas. Specifically, executives at the working session hosted by the Aspen Institute highlighted the National Science Foundation (NSF), which in addition to having a number of programmes focused on bridging the gap between basic research and new products for market, released its five-year strategic plan in April 2011. The plan includes clearly articulated strategies for emphasizing the seamless integration of research and education; developing performance-based goals that make investments in emerging new fields of science and engineering; preparing and engaging a STEM workforce to participate in emerging fields; increasing international partnerships and collaborations to fuel US competitiveness; and making investments that are useful to society and address societal changes through science and engineering.16
Executives also recognized the world-class infrastructure within the United States supporting research and development initiatives, noting specifically that the United States has some of the best universities in the world. However, at the same time they expressed concern with the ability of those institutions to continue setting and driving long-term initiatives in an environment where federal and state funding is often subject to election cycles. Some executives said policy-makers do not fully understand the long horizon often associated with research and product development cycles, and said that certainty relative to funding would both attract investors into emerging fields and allow researchers and scientists to focus on their research efforts versus funding.
To address these challenges, executives recommended the following:
- Establish a consortium of business, university, labour and public sector leaders tasked with establishing innovation goals with a 15- to 20-year development horizon. Then collaboratively support those goals with policies, investments, infrastructure, education and other related programmes.
- Develop a US innovation strategy that establishes programmes to feed an innovation pipeline through full life-cycle commercialization and that supports both basic and applied research. The strategy should also break down barriers to collaboration between universities, laboratories, and the private and public sectors.
- Create long-term mechanisms that insulate funding programmes from election cycles and changing administrations.
- Create a system that seeds innovation and helps to avoid multiple “valleys of death” by establishing clear objectives and direction that incentivize the private sector and venture capitalists, are supported by the public sector and include enabling mechanisms to drive innovative ideas and technologies through to commercialization.
- Provide incentives for investment in R&D equipment and infrastructure to ensure the US remains an attractive destination for long-term investment in innovation and manufacturing.
- Develop more industry clusters that co-locate research institutions, industry and the best talent, all focused on advancing research to full commercialization.
Ensure a balanced legal and regulatory environment in the United States that does not place undue burden and costs on manufacturers
In discussing the legal and regulatory environment in the United States, executives consistently expressed frustration with how regulations have historically been developed – noting specific concerns with what they said was an absence of dialogue between business leaders and policy-makers when setting regulation, and unforeseen cost and complexity burdens on businesses as a result of new regulation. While the executives neither disputed the need for regulation nor their responsibilities as business leaders to contribute to the social well-being of society, many believed that both the number of policies and the cost of compliance with those policies place their organizations at a competitive disadvantage. Those costs, according to executives participating in the discussions, are only compounded when one considers overlapping federal, state and local regulation and the complexity associated with both understanding and compliance.
For example, recent research shared at the working session hosted by the Aspen Institute reveals that more than 2,000 manufacturing-related regulations have been adopted since 1981, an average of more than 70 per year.17 Furthermore, the cost of regulation has advanced at a pace much faster than GDP since approximately 1998, and even faster when compared to the physical output of the manufacturing sector.18 The cost of compliance for businesses also increased since 1998, growing 7.6% annually versus inflation-adjusted GDP (2.2%) and physical output of manufacturing (0.4%).19 Finally, and perhaps most disturbing, the research shared at the Aspen Institute working session reveals that the regulatory burden for manufacturers will reduce output in the United States by almost 6% over the next 10 years – thereby also raising production costs and negatively impacting America’s overall competitiveness.20
Executives participating in the interviews and the Aspen Institute working session consistently said improved dialogue between business leaders and policy-makers during the regulatory setting process was an important first step to addressing the regulatory concerns in the United States.
Executives also said that US policy-makers need to redefine the metrics when evaluating the impact of policy decisions. Executives broadly called for the development of a framework that includes input from all stakeholders impacted by the policy setting process. The framework would allow for collaborative discussions that focus on developing effective and balanced policies that minimize regulatory burden, can be implemented quickly and improve the competitiveness of the United States.
To address these concerns, executives outlined the following recommendations:
- Create programmes that allow for the development of policy in a collaborative manner with business leaders and policy-makers so that policy decisions are evaluated on the basis of global competitiveness and do not result in unforeseen burden or cost.
- Benchmark other countries to better understand the positive and negative consequences policy decisions have on competitiveness.
- Identify opportunities to lower compliance costs by eliminating overlapping policies where multiple agencies have jurisdiction. Collaborate across agencies and various levels of government to harmonize policies to reduce monitory and compliance costs.