Innovation in manufacturing sector

innovation in manufacturing systems and technology and integrated photonics manufacturing innovation hub
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Dr.ThorasRyder,Hong Kong,Researcher
Published Date:07-07-2017
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Skills and Innovation Strategies to Strengthen U.S. Manufacturing Lessons from GermanySkills and Innovation Strategies to Strengthen U.S. Manufacturing Lessons from Germany GLoba L cI t Ie S In It Iat Ive a Jo Int p ro Ject of b rook In GS and J p Mor Gan c ha Se Jo Seph par ILLa, Je SUS Lea L t r UJILLo, and aL an b er Ube Le SSon S fro M Ger Many The Brookin Gs i ns Ti Tu Tion Metropo LItan p o LIcy p ro Gra M 2015 1e x e C u T i v e s u M M a r Y aced with stagnating wages for most americans, business, civic, and political leaders across the United States are rediscovering manufacturing as a source of good jobs and lasting economic growth. f In an era of unrivaled global competition, however, revitalizing the U.S. manufacturing sector will require a renewed commitment to public-private-civic partnerships that deliver on the key driver of industrial competitiveness: a highly Brookin Gs trained workforce that can use technology to translate basic and applied research Me Tropo Li Tan po Li CY and development (r &d) to large-scale commercial innovations. pro Gra M 2“Threekeytakeaways—regionalcollaborationbetween public,private,andcivicactors;targetedinstitutional intermediariesthataddressmarketfailures;andincentive- basedinvestmentstosupportsmallandmediumsized businesses—shouldguideU.S.actorsseekingtoadapt Germanskillsandinnovationbestpracticestosupport manufacturing.” however, in both skills training and technological While recognized as global best practices, these innovation, U.S. policies to support manufacturing models cannot be imported wholesale into the have not matched the sector’s evolution from United States. r ather, three key takeaways—regional one dominated by massive, vertically-integrated collaboration between public, private, and civic companies to a more distributed mix of small, actors; targeted institutional intermediaries that medium, and large firms. In this new environment, address market and coordination failures; and research and development, particularly applied incentive-based investments to support small research, and skills training are underprovided in and medium sized businesses—should guide U.S. the market because individual firms fear they will practitioners and policymakers seeking to adapt not recoup their full investment if a competitor reaps German skills and innovation best practices to support the benefits of a new innovation or poaches a well- manufacturing here at home. trained technician. In november 2014 the Global cities Initiative, a other advanced nations have done a better job of joint project of brookings and JpMorgan chase, addressing the market failures that inhibit industrial brought 40 U.S. business, civic, and government competitiveness. Germany is an oft-cited example of leaders to Munich and nuremberg, Germany to learn an advanced economy that has been able to sustain more about the German model for manufacturing manufacturing as a relevant source of employment, competitiveness. for U.S. practitioners and growth, and exports. Manufacturing in Germany policymakers interested in applying German best accounts for 20 percent of employment, nearly twice practices in their own places, this paper serves to the share as in the United States, and generates document the key discussion themes and potential 22 percent of national Gdp and 82 percent of total lessons from that trip. It provides a brief overview of goods exports. German manufacturing succeeds in the current state of manufacturing in each country the global marketplace even as the sector pays higher (Section I), the German systems for innovation average wages than in the United States. (Section II) and vocational education and training Germany’s manufacturing sector benefits from a (Section III), and concludes with examples of how U.S. concerted federalist policy effort to support clusters leaders are applying the most successful elements of globally competitive manufacturers, particularly of these German systems to the american context its small and mid-sized Mittelstand firms, through (Section Iv). n powerful public-private collaborations on applied research to support innovation and a dual model Le SSon S of vocational education to sustain a highly trained fro M workforce. Ger Many 3i . M a n u fa C T u r i n G i n T h e u n i T e d s T a T e s a n d G e r M a n Y The STa Te of U.S.Man Ufac TUrin G U.S. manufacturing stands at a crossroads. t he first decade of this century saw one in 10 U.S. factories close, a one-third decline of the manufacturing workforce, and skyrocketing trade deficits. t hese setbacks, decades in the making, exposed serious weaknesses 1 in U.S. industrial competitiveness. yet recent trends signal a tentative optimism. Manufacturing has rebounded in the post-recession period: Since 2009, the sector has grown faster than the economy as a whole, and since 2010 manufacturing has 2 and recent global dynamics—from rising labor costs abroad to new energy created nearly 800,000 new jobs. sources at lower prices and technologies at home—present new cost advantages over asia and e urope and 3 suggest that the sector’s recovery may not simply be cyclical. for the country to seize on manufacturing’s recent momentum, however, it must rebuild what harvard business School researchers Gary pisano and Willy Shih call the “industrial commons”—the concentrations of research institutions, skilled workers, and suppliers that form the backbone of america’s most competitive 4 Manufacturers thrive when they draw on the collective knowledge and spillovers from industrial hubs. clusters of similar firms and deep pools of labor, which in turn are anchored by supportive institutions such 5 t hese networks, which as universities, research institutes, community colleges, and industry consortiums. concentrate in regional economies, are together responsible for the key driver of industrial competitiveness: Brookin Gs a highly trained workforce that can use technology to translate basic and applied research and development 6 Me Tropo Li Tan (r &d) to large-scale commercial innovations. po Li CY experts point to several factors to explain U.S. manufacturing’s decline, including macro factors such as tax pro Gra M and trade policy, but insufficient investments in people and technology partly explain why the sector became 4susceptible to global competition over the past several decades. t he further opening of the global “ r evitalizingU.S. trading system; the effective doubling of the globally manufacturingwill connected labor pool; and sustained advances in information, communication, and transportation requirerenewed technologies allowed companies to distribute different public-private-civic stages of production where they could be completed 7 to remain profitable most efficiently and effectively. partnershipsthatdeliver in this new environment, american companies needed to either cut costs or become more innovative. Many theworkforceand U.S.-based producers chose the former, offshoring technologiesdemanded their operations and outsourcing any responsibilities 8 t his deemed non-essential to their supply chain. by21stcenturyindustry.” phenomenon, coupled with automation, shrunk the average manufacturing establishment size from almost 70 employees in the late 1970s to 41 9 employees in 2006. the positive spillover effects that many of these 15 In this way, t he downsizing and offshoring of american r &d activities had on other industries. manufacturing firms disrupted the longstanding offshoring diminished the competitiveness of multiple 16 even when american researchers model for innovation in manufacturing. Since industries at once. the 1960s, the U.S. government has limited its develop radical innovations, defined as the creation involvement in innovation to the financing of basic of a new industry due to technological or scientific research through universities, research institutions, breakthrough, U.S. manufacturers are often unable and general research grants, while the private to bridge the “valley of death” between the basic sector transformed these basic knowledge inputs research phase and industrial production due to lack 17 into new products, technologies, services, and of capital and other key resources. 10 t his model worked well for business models. t he valley of death widens without support american manufacturing because highly integrated for pre-competitive (applied) research, defined companies developed r &d capabilities in-house that by competence centre for Materials Science and allowed them to translate pure scientific knowledge technology as the “middle ground of focused 11 into new products (e.g. bell Labs, parc, etc.). cutting-edge research that lies between fundamental Significantly, technological breakthroughs by basic research conducted mainly in universities large manufacturers also spilled over to small and and proprietary research performed in corporate 18 for instance, U.S. companies medium-sized enterprises (SMes), allowing them to laboratories.” participate in new industries or to innovate within developed the technology behind semiconductors, 12 existing supply chains. but more foreign manufacturers (at times buoyed however, the offshoring of production to cheaper by government support) attracted their production locales separated it from manufacturers’ domestic and have since improved on the original innovation, 13 t hese cost-cutting moves r &d operations. a process that helps them accrue significant benefits 19 t he trade balance for discounted the fact that innovation occurs most of the late technology cycle. successfully when r &d and production are tightly semiconductors has fallen dramatically over the last linked, ideally co-located so engineers and production decade, with the United States retaining a slim trade workers can make adaptations and bring products to surplus of 1.6 billion as of august 2014, as compared 14 20 t he United market more quickly. to a 24 billion surplus in 2006. Le SSon S t he offshoring of different manufacturing States’ core innovative competencies—world-class fro M industries not only affected the innovation capacity universities, entrepreneurial dynamism, and a strong Ger Many of firms within one industry, but also diminished venture capital system, among others—have not been 5enough to maintain its manufacturing market share in for several decades the supply of technical workers even the most high-tech industries. remained healthy due to the long-run decline in t he changing structure of U.S. manufacturers also manufacturing employment demand and then 24 now, altered the hiring, training, and retention of industrial the Great r ecession’s acute rise in layoffs. workers. as with r &d, the responsibility of training however, as manufacturers recover and ramp up american manufacturing workers historically rested hiring they are faced with an impending wave of baby with a group of large, vertically integrated companies. boomer retirements, and are concerned they do not In the post-war period, young people flocked to have a sufficient pipeline of talent in high-demand manufacturing with the realistic expectation that occupations that require significant levels of technical 25 as employers turn to the education one firm could offer them a stable career with expertise. advancement potential. In turn, employers invested system, there is a clear need for manufacturers long-term in their employees with the realistic and educators to work together to rebuild training expectation that a more productive workforce pipelines, but existing policies and practices are 26 would benefit the company’s bottom line, not a ill-equipped to recreate such pipelines at scale. 21 competitor’s. at the same time, the U.S. youth unemployment facing new cost constraints, manufacturers had rate stands at 14 percent, causing policymakers to less capacity to train their workforce internally. question current approaches to helping young people 27 at the same time, fewer young americans viewed transition from school to work. manufacturing as a promising career as automation Why Ger Many? and global pressures reduced job certainty and held 22 In a world of short tenure, high Germany offers an example of an advanced economy back wage growth. turnover, and flat or declining real wages, workers that has been able to sustain manufacturing as a hesitated to invest in their own skills, the education relevant source of employment, growth, and exports. system moved decisively away from providing Manufacturing in Germany accounts for 20 percent of vocational pathways, and firms had less incentive employment, nearly twice the share as in the United 28 Manufacturing generates 22 percent of to train their employees for the long term, choosing States. instead to search for experienced workers in the total German Gdp and 82 percent of German goods 23 29 In stark contrast to the United States’ 667 marketplace. exports. billion manufactured goods trade deficit, Germany’s 30 trade surplus in manufacturing is about 425 billion. t hese strong labor market, growth, and trade outcomes reflect Germany’s ability to infuse technology into its manufacturing sector to remain “ManufacturinginGermany globally competitive. Medium and high-technology industries account for a larger share of the sector’s accountsfor20percent total output in Germany (58 percent) than in the 31 ofemployment,nearly yet a cross-national United States (42 percent). comparison reveals that Germany invests only twicetheshareasin marginally more in public r &d as a share of its theUnitedStates,and economy; U.S. universities exhibit much greater scientific impact; and entrepreneurship (as measured generates22percentof by new firm creation) is actually lower in Germany. t hree statistics may help explain Germany’s nationalGDP.” Brookin Gs advantage in manufacturing. first, 86 percent of Me Tropo Li Tan private-sector r &d occurs in manufacturing, a much po Li CY higher share than the 64 percent in the United 32 pro Gra M Second, Germany translates research into States. 6Table 1. Germany vs. the u nited states on k ey economic indicators Germany united s tates economic output Share of GDP in Manufacturing 22% 12% Share of Manufacturing GDP in Medium & High-Tech Manufacturing 58% 42% Trade Total Exports as a Share of GDP 52% 14% Share of Merchandise Exports in Manufacturing 82% 62% Trade Balance in Manufactured Goods 425 billion -668 billion innovation Total Researchers Per 1000 Workers 8.22 8.08 R&D Expenditures as a Share of GDP 2.98% 2.79% Share of Corporate R&D in Manufacturing 86% 68% Number of Top 50 Universities in Leiden Impact Rankings 0 39 Patents per 1000 Researchers 53.03 38.74 New Firm Entrants as a Share of Total Firms 7.90% 8.50% Workforce Share of Employment in Manufacturing 20% 10% Average Hourly Compensation in Manufacturing 45.79 35.67 Share of Graduates in STEM Fields (OECD Rank/36) 3 33 Youth Unemployment Rate 8% 14% Source: World Bank and OECD national accounts data; OECD Science and Technology Indicators; CWTS Leiden Ranking; OECD Entrepreneurship at a Glance data; U.S. Bureau of Labor Statistics. new products and technologies more effectively. qualifications that translate into high wages. t he In 2011, Germany produced 53 patents per 1,000 average compensation for a manufacturing worker in researchers, compared to 39 patents per 1,000 Germany is 46 per hour, 28 percent more than in the 35 researchers in the United States. finally, Germany’s United States. ability to translate research into new products derives In these ways Germany offers an illustrative model from its rich base of graduates in SteM (science, for industry growth. Many factors contribute to technology, engineering, and mathematics) fields. Germany’s strong global position in manufacturing In a ranking of 36 oecd countries on their share and trade, including a series of economy-improving of graduates in SteM fields, Germany ranked third, federal reforms during the 2000s as well as an 36 but Germany also benefits well ahead of the United States at 33rd. In 2012, undervalued currency. more than 800,000 German students participated from its concerted federalist policy effort to support in an apprenticeship program in the manufacturing clusters of globally competitive manufacturers, 34 partly as a result of these apprenticeship sector. particularly its Mittelstand firms, through powerful Le SSon S programs, manufacturing companies do not suffer as public-private collaborations on applied research to fro M dramatically from shortages in the supply of skilled support innovation and a dual model of vocational Ger Many technical workers, and employees receive valuable education to sustain a highly-trained workforce. n 7Brookin Gs Me Tropo Li Tan po Li CY pro Gra M 8i i . G e r M a n Y ’ s i n n o va T i o n s Y s T e M nnovation—the act of taking an idea or technology and transforming it into a sellable product or process—remains the key to raising the living standards of 37 Manufacturing’s most important economic contribu- any advanced economy. I tion, therefore, may be its role as a significant source of innovation. a two- year study found that manufacturing firms were more likely to create new products 38 In turn, innovation remains a critical and processes than non-manufacturing firms. input to manufacturing, especially as information and digital technologies such as robotics, advanced materials, and complex software systems increasingly pervade 39 the sector. German manufacturers have been particularly aeronautics, space and transport, health sciences, 41 and successful in translating research into new products advanced materials, It, and particle physics; and technologies due to a dense network of ➤➤ other research associations such as the Leibniz universities, public research organizations, state association and the Max planck Institutes. t he Max and federal governments, industrial research planck Institutes are one of the most prestigious 40 organizations, and foundations (figure 1). research institutions in the world and focus on organized by a highly-coordinated federal technology fields such as astronomy and astrophysics, com- strategy, these institutions work collaboratively and plex systems, genetics, neuroscience, biosciences, across multiple levels of government to support chemistry, material science, computer science, 42 manufacturing through basic scientific research, particle and quantum physics, and microbiology. applied industrial research, innovation incentives, and basic research matters for manufacturing in a targeted strategies to develop industry clusters and couple of ways. first, as the main producers of pure new technologies. scientific knowledge, basic research institutions provide the theoretical foundation for applied Ba Sic re Search–The Pla Tfor M research and discover new research fields with 43 for in DUSTrial innova Tion Second, basic potential application to industrial use. Germany employs a strong platform for basic research laboratories are a vehicle for the federal scientific research that resembles the institutional government to shape the priorities of its broader structure in the United States. basic scientific industrial technology policy through grants and 44 research occurs in a plethora of German institutions, research bonuses. including: ➤➤ a large network of universities and applied science universities; ➤➤ n ational laboratories such as the helmholtz association (the equivalent of the U.S. department of energy’s national Laboratories). as Germany’s Le SSon S largest research institution, the helmholtz associa- fro M tion serves as the umbrella organization for dif- Ger Many ferent research entities in earth sciences, energy, 9f igure 1. Germany’s innovation system Source: Brookings modification of graphic from “Research in Germany” portal, the central information platform of the initiative to “Promote Innovation and Research in Germany” by the Federal Ministry of Education and Research (BMBF). aPP lie Dre Search an DThe on investment is high but equally high levels of f ra Unhofer Socie Ty uncertainty prevent firms from investing significantly Where Germany’s innovation system begins to in r &d. t his is especially true for small and mid-sized differ from the United States’ is in its network of companies, where lower revenues at times prohibit applied research institutes. t he fraunhofer Society r &d. fraunhofer reduces firm uncertainty in a key (fraunhofer) is perhaps Germany’s best known way. t hanks to its vast network of researchers, which and most important applied research institution. covers virtually all areas of science, fraunhofer’s Its purpose is to help translate basic research and scientists can interpret complicated experimental nascent technologies into viable commercial products. findings and their consequences in ways that lead 48 t he fraunhofer has 67 institutes and 23,000 employees to practical applications for the private sector. in Germany as well as an international presence that contracts they establish with firms, therefore, serve 45 each institute includes seven U.S.-based centers. as a research subsidy: fraunhofer charges companies cultivates a distinct specialization (e.g. applied to cover just the costs of developing a project, but do polymer research, electric nanosystems, etc.) which not include the historical costs fraunhofer incurred fall under broader industries such as microelectronics, to develop the institutional knowledge it uses in the materials and components, production, surface project. fraunhofer undertakes anywhere between technology and photonics, life sciences, information 6,000 and 8,000 industry projects per year, including 46 49 approximately 70 percent t he size of these technology, and defense. famous inventions like the Mp3. of fraunhofer’s revenue is generated by contracts projects varies significantly, ranging from less than 50 with industry and public institutions; state and federal €1,000 to several million euros. 47 Brookin Gs governments contribute the remaining 30 percent. fraunhofer also offers flexibility to manufacturers. Me Tropo Li Tan put simply, f raunhofer helps manufacturers bridge firms may not have the in-house capabilities or po Li CY the valley of death, which often occurs at a stage of resources to address a particular technical challenge pro Gra M production development where the potential return so they contract with fraunhofer to perform 1 0pre-production research or develop a prototype. implement r &d, thus maximizing the likelihood they at other times, fraunhofer simply allows private will adopt new technologies. sector researchers access to specialized machinery t he federal government, via the federal Ministry for 51 to test prototypes and conduct advanced research. economic affairs and energy (bMWi), provides direct often f raunhofer and industrial scientists work funding for SMes through the c entral SMe Innovation hand-in-hand on a project, promoting the mobility program (ZIM-Solo). c ompanies that have fewer of scientists between universities and the industrial than 250 employees can apply for a non-refundable 52 r esearch suggests that, through these myriad world. research subsidy to cover expenses associated with supports, fraunhofer has been the most prominent the development of r &d projects, either in-house 53 actor in Germany’s promotion of firm-level r &d. or by a research institution, as well as consulting In addition to supporting individual firms, services for the implementation of new processes fraunhofer helps consolidate regional clusters by and technologies. t he funds, up to €350,000, can establishing industry or technological specializations cover up to 55 percent of r &d activities and up to 50 54 57 t hese specializations within its individual institutes. percent of the consulting services. typically coincide with the industrial base of the State governments also have a wide range of tools region in which they reside and complement the to promote innovation. State-level funding facilitates research expertise of other research institutions collaboration between universities, other research and universities. together, these networks form the institutions and firms. In b avaria, the Ministry of backbone of a regional innovation ecosystem, but economic affairs, Infrastructure, t ransport and collaboration is not limited to only within the region. technology provides funds for joint research through t he fraunhofer network has also facilitated “long programs such as the new Materials development distance” collaboration, which occurs when the program, Microsystem t echnologies program, and closest fraunhofer facility is not specialized in the Information and communication technologies 58 technology of interest for a particular firm. program. t he German federation of Industrial r esearch State governments also provide innovation associations are a less discussed but still relevant vouchers to SMes to support their r &d activities. part of Germany’s applied research ecosystem. Innovation vouchers allow firms to conduct additional t hey provide a series of services to support the research themselves or redeem the voucher at a advancement of r &d in SMes by promoting, alongside research institution of their choosing. t he effect the federal and state governments, relevant research of the innovation vouchers is twofold. first, they 55 t hey diffuse relevant areas for the industry. promote the participation of SMes in r &d activities information among SMes, directing many firms that, due to high financial cost and uncertainty to the right research institutions, and serve as on the return of the investment, would not have project managers for joint research projects. t hey occurred otherwise. Second, the vouchers also also facilitate the pooling of resources to avoid the provide additional funding for research institutions, problems of funding shortfalls, personnel or training particularly for applied research organizations, to 56 59 t he state gaps, and technology and equipment inadequacies. conduct risky research at a lower cost. of bavaria offers innovation vouchers through its i nnova Tion incen Tive S program for the Introduction of t echnologies (baytp), t he collection of organizations involved in supporting while also offering loans and capital for recently 60 innovation in manufacturing—research centers, created start-ups in high-tech industries. universities, firms, and research consortiums—benefit from a robust offering of incentives from Germany’s federal and state governments. t he system has Le SSon S multiple tools to foster innovation, which translate fro M into multiple options for companies to access and Ger Many 1 1SMar Tf e Derali SMor Ganize D In many occasions federal funds complement aro Un DTechnolo Gie San D state-led innovation initiatives. for example, two r e Gional cl USTer S clusters selected as part of the Leading-edge cluster Germany organizes basic research, applied research, competition also received support from the bavarian and firm-level incentives around a concerted Ministry of economic affairs, Infrastructure, t ransport federalist strategy that sets general policies and and technology’s cluster offensive. t he funds research guidelines, establishes funding levels, provided by the state government were utilized to decentralizes administrative tasks, and defines cover expenses not included or sufficiently funded in 66 priority technologies, regions, and clusters. the Leading-edge cluster c ompetition funds. Germany’s federalist strategy begins with its t he main takeaway: Germany’s innovation national innovation policy, the high-tech Strategy system offers several types of resources and 2020 (ht S). t he ht S provides incentives to increase collaboration between science and industry and, in doing so, sets the framework for basic and applied research. t he strategy provides €15 billion “Germany’scomprehensive for research related to cross-cutting technologies innovationstrategyhelps that have broad applicability across multiple manufacturing industries, dispensing the funding firmsengageinr&D,fosters in a competitive process that requires collaboration 61 among public, private, and civic institutions. collaborationbetween Similarly, the federal Ministry for economic affairs researchersandtheprivate and energy’s ZIM-c oop scheme provides funding for r &d projects undertaken by several companies or sector,andenhances 62 between a firm and research institutes. thecompetitivenessof Germany’s strategy also recognizes that innovation typically occurs amid regional clusters of research manufacturersandthe institutions, firms, and universities. In 2007 the regionaleconomiesinwhich federal Ministry of education and r esearch launched the Leading-edge cluster c ompetition, a research theyreside.” contest that provides funds of up to €40 million to five clusters, selected every 18 months, to develop key technologies that have the potential to impact 63 t he initiative asks for joint an entire supply chain. proposals by the private sector, research institutions, incentives for different actors with a significant and universities to develop new technologies, role in the innovation process. t his multi-targeted products, and processes. t hese programs are not and multilevel approach increases the likelihood “top-down” in the traditional sense. r ather, they that firms will engage in r &d, fosters collaboration decentralize administrative and managerial tasks to between researchers and the private sector, and project management institutions well-versed in the promotes accumulation of research and technical innovation needs of firms; a structure that reduces knowledge within manufacturers and the regional duplicity of efforts, minimizes bureaucracy costs, and economies in which they reside. t hanks to this 64 as of 2014, three improves project management. organized effort, a wide variety of firms, particularly different cohorts of five clusters each have been Germany’s Mittelstand, have been able to reap the Brookin Gs selected, all revolving around one key technology and benefits of public and private research to outperform 67 Me Tropo Li Tan involving a regional component. preliminary results international competitors. po Li CY show that participating SMes were more likely to 65 pro Gra M conduct r &d. 1 2 p hoto by d arren Jack LIns T u d Y T o u r : e x a M i n i n G G e r M a n Y ’ s i n n o va T i o n M o d e L 68 a T e s G he Global cities Initiative study tour examined Germany’s multi-faceted innovation system through a visit to the mid-sized industrial software house eSG in Munich and a workshop between leading U.S. t and German practitioners and policymakers. following a tour of eSG’s software simulators, a series of executives at eSG and public officials described the purposeful German approach to technology inno- vation. participants were impressed by the rigor of eSG’s internal “road-mapping” of the direction of the global systems software business and its self-funded research programs, which allow employees to apply for three-week mini sojourns to try out new ideas in preparation for more substantial investigations. buttressing eSG’s company-level efforts are a multi-dimensional set of supportive institutions and activities. Jurgen niehaus, the ceo of the German “competence cluster” Safet rans, noted how his industry association supports r &d activities in e SG’s embedded systems industry through a variety of workshops, exchanges, and outlook exercises. florian holzapfel, the chairman of the department at flight dynamics at the nearby technical University of Munich, described a university heavily oriented toward applied technical work on avionics and the dynamics of aerial platforms. and Manfred Wolter from the state of bavaria’s technology ministry detailed a carefully structured suite of sub-national programs aimed at strengthening the region’s research infrastructure, providing r &d funding, and encouraging tech transfer, especially to small and medium-sized businesses. t he american participants were ▲ impressed by the deliberateness of a fully worked-out system aimed at surrounding firms with everything Representatives they might need to innovate. and yet, German workshop attendees also reflected on the possible from ESG shortcomings of their system, which prompted a frank dialogue about the strengths and weaknesses of demonstrate two contrasting, but highly successful, innovation systems. While the americans were struck by the strong the simulators embrace of regional collaboration and the sophistication of government’s engagement in technology they use to test development, the Germans remained envious of american-style business dynamism. the information along those lines, participants heard from american experts from clemson University’s International technology center for automotive r esearch (cU-Icar ) and techShop, a national network of maker spaces that systems that will provides entrepreneurs access to tools, software, and workspace. Several university-based former eSG be embedded in employees applauded american entrepreneurship and worried about the inertia of the highly procedural automobiles and German system. others perceived a weakness in Germany on the production of “radical new ideas” and aircraft. worried about a lack of attention to start-ups and small companies, latter of which is a specific focus of the techShop model. t he encounter played out as a balanced weighing of two successful, but imperfect, national innovation systems with each having much to learn from the other. Le SSon S fro M Ger Many 1 3 p hoto by d arren Jack LIni i i . G e r M a n Y ’ s W o r k f o r C e T r a i n i n G s Y s T e M f innovation continues to be the key to raising living standards, human capital 69 While the term innovation may remains a critical determinant of innovation. invoke radical breakthroughs such as the internet or the iphone, research I suggests that most firm-level innovation is actually incremental in nature, 70 Manufacturing epitomizes and therefore relies on a broad swath of the workforce. this phenomenon: t he complex, capital-intensive systems that increasingly define manufacturing demand qualified production workers who possess the practical knowledge, creativity and adaptability to implement and improve new processes 71 and it is workers’ ability to complement machines that increas- and technologies. 72 ingly determine their productivity, and therefore the wages they can command. Brookin Gs Me Tropo Li Tan po Li CY pro Gra M 1 477 The DUal Sy STe M: Germany is actively pursued the university track. eDU ca Tion an DWork promoting greater participation in university-based t he German education and training system has been higher education. t his emphasis has led to recent particularly adept at preparing its manufacturing reforms that aim to ease the transition from the dual 73 t his workforce to complement new technology. system to university, which according to an oecd 78 preparation begins relatively early in the education review has not historically been a common pathway. system as compared to other countries. German students are 74 t he f igure 2. Germany’s Workforce and s kills pipeline tracked at an early age. school system closely follows the performance of primary school pupils to assess their ideal educational path. When students finish primary school (at the age of 10-12), parents, students, and educators together decide on one of three common lower secondary schools: general secondary school (Hauptschule), Intermediate School (Realschule), and Grammar 75 Upon School (Gymnasium). completion of lower secondary school three pathways to employment emerge—45 percent of students enter the dual system (Dual Berufsausbildung), 15 percent pursue full-time vocational education and training (Fachoberschulen and Berufsfachschulen), and 30 percent Source: Brookings Institution with information from the Federal Institute for Vocational Education continue Gymnasium en route to 76 and Training (BIBB). university. t he most common pathway to a job is the dual system, through which students obtain field-specific The role of eMPloyer S, workplace skills in one of 349 occupations (as of 2013) Govern Men T,an Do Ther that cover all aspects of the economy. t raining occurs Social Par Tner Sin The  mainly through a two- to three-year apprenticeship at DUal Sy STe M a firm, where students train three or four days a week. from the very beginning of the journey from school Students spend the remaining one or two days per week at a part-time vocational school (Berufsschule) to work, dual system participants establish close 79 companies sign where they receive more theoretical training. relationships with employers. according to the most recent statistics, 1.46 million contracts with young people under private law and young people participated in apprenticeships in 2011. provide them an hourly wage just below that of Le SSon S While this is still the dominant pathway to the labor an entry-level worker. on-the-job training typically fro M force, participation in the dual system declined 3.2 comprises two-thirds of the curriculum in the dual Ger Many percent between 2010 and 2011, as more young people system and the contents of the curriculum as well 1 5as supervision are the responsibility of the hiring t raining act of 1969 (updated in 2005). Ihk experts company, with active monitoring by the industrial assist companies with vocational training, register chambers of commerce and state government the training contracts, help conceive occupational to ensure training is in accordance with national examinations, examine trainees and instructors, and occupational standards. firms also contribute about withdraw training permission in case companies 85 t here is no equivalent two-thirds of the overall costs (approximately violate training standards. €5.6 billion in 2010) of the dual system through american organization that provides the scope and on-the-job training (states cover the remaining depth of firm-level support provided by the Ihk s in 80 twenty-two percent of German companies costs). the German workforce system. 81 offered on-the-job training in 2011. on the public sector side, the federal government, employers participate in the dual system for through the federal Ministry of education and several reasons. evidence suggests that German r esearch (bMbf), the f ederal Ministry of economics manufacturers do not recoup the cost of training and technology (bMWi), and the f ederal employment 82 r ather, they apprentices during the apprenticeship. agency (ba ), supervises the implementation of the are viewed as a human capital investment that will general guidelines established in the vocational pay off as apprentices become more skilled full-time t raining act. t he nationally-organized advisory 83 Skills workers upon completion of their training. committee for the federal Institute for vocational investments are justified because access to qualified education and t raining (bIbb ) facilitates dialogue labor provides firms a productivity advantage over between the private sector, state government, their competitors, given that many technical skills unions, and local officials to establish occupational 84 86 additionally, solid worker remain relatively scarce. credentials. protections from the country’s powerful labor unions t he Länder (state) governments, represented by make firing workers more difficult than in countries their ministries of education and economic affairs, like the United States. apprenticeships allow German are responsible for vocational schools, overseeing manufacturers to evaluate young workers before the Ihk s, and promoting cooperation between the hiring them full-time, and significant investments in school-based and work-based aspects of the dual skills are more attractive to companies when they system. State governments contribute about one- know workers will be in their factories long-term. third of the costs of the dual system (approximately 87 Individual state governments are Manufacturers in Germany are better able to €3.1 billion). participate in the education and workforce system advised by Länder vocational training committees because they are organized by a network of that include representatives from relevant state supporting chambers of commerce, government, and ministries, employer associations and chambers, and labor organizations. workers. and the c onference of State Ministers of t he dual system relies heavily on the national education (kMk) decides on common approaches and network of 80 regional chambers of industry and national recognition of the types of school, curriculum 88 commerce (Ihk), which employers are required by law standards, and qualifications. to join and serve two critical functions. first, the Ihk s Workers, typically via the country’s powerful are the organizing voice for industry in the workforce labor unions, participate in various stages of the system. Instead of an individual employer having to dual system—advising state and national vocational spend the time and resources to establish a specific, education and training committees, negotiating one-off collaboration with a vocational school, it occupational credentials, and sitting on works 89 can engage the system under the umbrella of the councils. Ihk s. further, Ihk s represent firms during training Brookin Gs regulation negotiations with the federal government, Me Tropo Li Tan state government, and trade unions. Second, the po Li CY Ihk s provide institutional support to ensure that pro Gra M firms comply with the standards of the v ocational 1 6The role of occ UPa Tional employees’ education, competencies, and skills match c er Tifica Tion Sin The  the needs of their open positions. credentials also DUal Sy STe M ensure portability across states: a company in bavaria t he high degree of collaboration between operates under the same certification system as a government, labor, and employees reflects itself in company in baden-Württemberg. t his regime differs the dual system’s establishment of nationally-defined, markedly from the highly decentralized, opaque industry-recognized occupational certifications, system of occupational credentialing in the United around which the social partners and government States. organize training. Upon completing an apprenticeship centralized certifications are not without or full-time vocational degree, German students are drawbacks, however. t hey may limit labor market accredited by the bIbb , based on their performance flexibility: t he barrier to entry for occupations can on examinations administered by the country’s be unnecessarily high for professions that do not chambers of commerce in areas such as industry, actually need formal training, or transitioning to health, agriculture, and commerce. approximately 60 a new occupation may be overly difficult because percent of Germans receive a relevant occupational workers must restart the training process to certification by the age of 20, either through the dual gain a new certification. In response to these 90 system or a full-time vocational school. critiques, policies have been put in place that count as of 2013 there were 349 different federally- qualifications obtained through the dual system recognized certifications, which are quite stringent or full-time vocational education towards other by international standards and remain a requirement occupational credentialing or the further pursuit of 91 95 for certifications to have lasting for employability. higher education. significance they must be continuously updated t he main takeaway: t he German education and new occupations must be added to keep pace and training system significantly aids innovation 92 96 t he first, the system with technological and economic change. within the manufacturing sector. process of upgrading training requirements and endows manufacturing workers with general skills certifications begins with industry. employers notify in different clusters of industries, providing a basic their chamber of commerce, who then pass along the foundation so they can accrue very specialized 97 Second, the occupational profiles request to the bIbb , where experts study it and, if on-the-job skills. deemed necessary, upgrade the training regulations. take into consideration best practices in human bIbb decisions receive input from an advisory capital development, with a strong emphasis on committee with members from the private sector, active learning and adaptability. t his approach state government, unions, and municipalities. for favors early-career apprenticeships in addition to occupational upgrades, the entire process takes about lifelong training, often supported by companies, so a year while a new occupation definition typically technical workers can improve production processes 93 almost one-third of existing takes two years. and effectively implement innovations along the 98 and third, the occupations have been created in the last 15 years to value chain as technologies change. respond to the rapid technological change occurring entire training system nimbly responds to industrial 94 in many industries. and occupational changes due to close cooperation a national credentialing system contributes to labor between companies, industrial chambers, research 99 drawing on market transparency and certainty. credentials jointly institutions, and government agencies. determined by employers and educators provide this collaborative system to train their workers has certainty for: 1) students, who have reasonable helped Germany’s world-renowned Mittelstand keep 100 confidence that their education investment will be their products at the cutting edge of global markets. recognized and rewarded by employers; 2) educators, Le SSon S who better ensure that the education they are fro M providing is economically relevant; and 3) employers, Ger Many who more clearly understand how prospective 1 7s T u d Y T o u r : o B s e r v i n G T h e d u a L s Y s T e M o n T h e f a C T o r Y 1 0 1 f L o o r a T s i e M e n s a n d s e i d e n a d e r he Global cities Initiative delegation visited two b avarian companies—Siemens and Seidenader— to understand the German approach to work-based education and training from the perspective of a t major multinational firm and a Mittelstand company, respectively. a fter touring Siemens’ nuremberg factory floor, participants heard from executive Jürgen Siebel about why the company invests significantly in its apprenticeship program. for starters, youth unemployment rates are still unacceptably high in most of the world—14 percent in the United States and well above 25 percent in parts of Southern europe—a threat to both economic competitiveness and societal stability. he argued that a skilled and flexible labor market is critical to sustaining a full and lasting recovery, preserving a strong industrial base, and therefore enhancing Siemens’ profitability. a chieving these outcomes requires a focus on what Siebel called a young person’s employability, the set of technical competencies and workplace norms required for success in any career. t he U.S. delegation heard firsthand from more than a dozen Siemens apprentices in the nuremberg training facility. here, young people from the ages of 16 to 21 learn everything from basic production (e.g. milling, drilling, filing, etc.) to more advanced skills such as mechatronics and electrical engineering. t hey are pursuing a range of educational credentials alongside work, from the dual system apprenticeship to community college and university degrees. Siemens hires the vast majority of its apprentices, 2,000 in Germany alone, into full-time employment after they ▲ complete their apprenticeship. american participants An apprentice remarked that beyond the first-class technical skills apprentices displayed, these young people’s soft at Siemens skills—their ability to work in teams, their confident presentation, and their full command of english—were demonstrates his perhaps even more impressive. Siemens, one of Germany’s largest and most prestigious companies, has final project—a the luxury of selecting the most talented apprentices from a highly competitive application process. model smart t he following day the delegation visited Seidenader, a 400-employee manufacturer of visual inspection grid—to Amy Liu machines for pharmaceutical products located just outside Munich. even though it is much smaller than of Brookings and Siemens, Seidenader maintains a similarly robust apprenticeship program. each year, the firm’s leadership Karin Norington- visits local schools, provides weeklong internships to high school students, and selects apprentice Reaves of the candidates based on interest and aptitude. t he firm’s strong recent growth has allowed it to bring in Chicago-Cook dozens of apprentices a year, training them for two to three years in technical and commercial occupations Workforce while they also attend school. Unlike at Siemens, where apprentices are educated in a separate training Partnership. facility, Seidenader’s apprentices work right alongside other employees on the production line, in machine installation and maintenance, and in sales and marketing. Management reports that the firm has hired about 90 percent of apprentices upon their completion of the program. two-thirds of Seidenader’s workers end up pursuing more education with support from the company—to gain new skills with hopes of a higher Brookin Gs income and more responsibility at the factory. Me Tropo Li Tan po Li CY Note: Siemens AG provides financial support to Brookings pro Gra M 1 8 p hoto by d arren Jack LIn

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