In several research papers, such as my Pittsburgh decline of steel study , I have stressed the "green city" benefits of U.S deindustrialization. New York City is a "greener" city today in part because it has lost 1 million manufacturing jobs since the early 1950s. But, in the middle of a deep recession --- we need to find meaningful work for people to do. Given that new factories are cleaner than old regulation exempt factories, any new factories that are built in the U.S today would offer a "win-win" of jobs without severely impacting the local environment.
This LA Times article provides a case study of A123 Systems. This battery maker can more than double the fuel efficiency of a hybrid by replacing the hybrid's battery with the A123 "better battery". Now, I have always wondered why Toyota doesn't buy this product and upgrade its battery but that is a question for another day. It may be an issue of product differentiation that Toyota doesn't want to lose Prius sales by offering the "green current Prius" and the "super green Prius armed with the A123 battery".
In the article, Don Lee sketches the tradeoffs that MIT Professor Yet-Ming Chiang faces. Dr. Chiang hints that he wants to build his product in the United States but that China offers certain attractions for mass producing his battery there;
"The obstacles here are rooted in the sad history of manufacturing's decline in the United States: Despite the promise of Chiang's batteries, many on Wall Street and in Silicon Valley were incredulous when he and other leaders at A123 asked for capital to build factories in America — Asia, yes, but Michigan, why would you want to?
Even more daunting, nearly all of the world's battery manufacturing industry is in Asia, where plants can be built faster and supplies and equipment are much easier to get than in the United States. These days, it's hard to find Americans who even know how to build a battery factory.
That's why A123 had to give in and build its first plants in China, where the company could move into production quickly to show auto industry customers that it could deliver on future contracts."
It is interesting that the article does not discuss differential wages and health benefits in the U.S and China and how much this nudges a factory to locate there. The article claims that the attraction to building a new factory in China is the absence of redtape and the existing human capital and infrastructure for getting the project up and going without delays.
But, there is a cost of having a factory in China. Dr. Chiang, is aware that his private secrets for what makes his product great will become common knowledge there. So, the attraction of locating his factory in Michigan is a combination of Obama Stimulus money and the implicit guarantee that his intellectual property will be safe here. If intellectual property protection helps to rebuild U.S manufacturing, will be an interesting trend to revisit.
His firm expects to create 400 Michigan jobs at its new factory by the end of the year. Is that a big number? How will the Obama team know if they have "over-paid" in terms of the incentives package they offered? Don't forget Tim Bartik's work on the economics of local development. He asked; "who gets the new jobs?" A Mayor may hope that the unemployed and discouraged not in the labor force workers will get these jobs but Bartik showed that migrants from other areas will move in and grab roughly 90% of the new jobs. So, this Michigan effort will move 40 currently unemployed people to gainful employment.
Returning back to China, suppose you a high up official in the central government --- do you have the right incentives to protect Western intellectual property as a commitment device so that your nation will continue to attract firms like A123 to locate within your borders. If you view your home market size as too tempting for foreign companies to pass up on, then you may choose to take the gamble of not offering foreign firms such guarantees.