Collaborative Research: The Private and Social Returns to R&D in the Age of Offshoring

Project Outcomes Statement

This project investigates the relationship between physical production and innovation by constructing a new dataset linking all US firms and their establishments to location geocodes and innovative activities since the year 1977. It enables researchers to trace out the private and social returns to innovation from geographically proximate production both as manufacturing turned south within the United States and as firms responded to the reduction in costs of offshoring caused by China’s entry into the World Trade Organization.

Manufacturers perform the majority of US patenting and R&D. The decades-long decline of US manufacturing employment has thus raised concerns that US innovation will fall as well. Over the last two decades, as firms' supply chains have become highly complex and geographically fragmented, the offshoring of manufacturing activities previously carried out within the United States has also increased. Before heading offshore, from the 1980s manufacturing activity moved within the US from the Rust Belt to the Sun Belt. How important is geographically proximate manufacturing for US innovation, or the local innovation rate in a US region? If formal Research & Development efforts and informal knowledge generated through the use of technology are complements in innovation, the geographic separation of R&D and production will slow down innovation. Moreover, if knowledge spills over between physically proximate plants, one firm's production location and R&D decisions will affect the rate of innovation of other firms.

A key finding is that firms that permanently exited manufacturing in the 1990s and 2000s continue to patent at their prior pace, indicating that innovation rates can be sustained without geographically proximate in-house manufacturing activity. By superimposing the geography of US innovation with the geography of manufacturing production, this research puts hard numbers to the claim that the disappearance of manufacturing activity weakens innovation, at the level of US regions or for the country as a whole. The data infrastructure created in this project is essential for the design of regional and trade policies that can increase economic welfare.