Any manufacturing revival in the United States will face considerable challenges from huge gaps in the innovation system after decades of outsourcing and the poor fiscal policy that encouraged it, say researchers at MIT.

Compared with their German counterparts, small U.S. companies don't have access to enough resources to produce their innovations on a viable scale, the Production in the Innovation Economy project at MIT found. 

A key aim of innovation in manufacturing is to scale up new technology and bring it to a level of large-scale production. But many U.S. companies are stuck in slow growth, unable to bring their innovations to market.

Looking at 255 companies in the U.S., Europe and China over time, MIT professors found that the U.S. has lost significant ability to move new products and technologies to commercial production, a handicap that harms established companies and startups alike.

"Real change took place in the 1980s when you began to see scaling down and changes in financial markets that made it very desirable to move your production capabilities out of your own four walls and become an asset-light company," the co-director of the study, MIT's Suzanne Berger, told Manufacturing and Technology News.

This long trend has left "gaping holes in the industrial ecosystem that have started to have a huge impact" on U.S. manufacturing, Berger says. Although that shift to "asset-light" operations let companies use production capacity from outside providers and innovate more rapidly, the firms lacked supportive public policy to benefit from the shift.

Now the risk is that if young U.S. companies set out to market and export their technology globally, "their capacity for initiating future rounds of innovation will be progressively enfeebled," says Berger.

The venture capitalist crowd also has little connection to manufacturing innovation. Northeast and West Coast VCs, far removed from what manufacturers are building in the Midwest and South, are still convinced that software is more viable than hardware, Joanna Glasner writes on Reuters' Private Equity Hub.

"VCs don't like manufacturing companies because they have to make things," says Glasner. "That leaves them open to all sorts of supply chain risks. Also, margins are harder to forecast. And, with longer cycles from concept to marketable product than in software, there's greater likelihood one's gizmo will fall out of vogue before it hits store shelves."

The PIE project's key finding is that fiscal policy that grants capital to companies for their own products' commercialization, and state economic development offices that give tax credits or writeoffs to individual companies, significantly discourage risk sharing, risk pooling, "bridging" activities and training.

"If you are creating an institution that multiple actors want to participate in, even if one of them goes away, there is something left that has attractive power," Berger says. The study points out, for example, that rather than distribute benefits to individual companies, the recently created National Additive Manufacturing Innovation Institute in Youngstown, Ohio, fosters risk-reduction capabilities from players such as universities and training companies in areas where there's a lack of corporate R&D.

Seventeen similar institutes are proposed in President Barack Obama's $1 billion National Network for Manufacturing Innovation initiative.