The belief among U.S. academia and policymakers in the 1990s and 2000s that design/innovation could be perfectly separated from manufacturing was a cornerstone of their globalization strategy. This was rooted in several economic theories and a particular view of economic development. However, with hindsight, the consequences of this separation – the loss of industrial base, critical tacit knowledge, process innovation capabilities, and the feedback loop between design and production – have become painfully clear.
The “Smiling Curve” Theory
The “smiling curve” concept, popularized by Acer founder Stan Shih, posits that the greatest value-added activities in manufacturing lie at the two ends of the value chain. On the upstream side, research and development, design, and intellectual property creation generate high returns through innovation and technological differentiation. On the downstream side, marketing, branding, and customer services capture value through market control and consumer loyalty. In contrast, the middle segment of the curve—comprising manufacturing, assembly, and component production—represents the lowest value-added portion, characterized by thin profit margins and limited strategic leverage.
For advanced economies such as the United States, this framework encouraged a strategic focus on the high-value ends of the curve, emphasizing innovation, design, and brand management while outsourcing the lower-value manufacturing processes to countries with cheaper labor. This division of labor was widely regarded as an efficient and rational global allocation of productive activities, maximizing returns on intellectual capital while leveraging cost advantages abroad.
Comparative Advantage and Specialization
Classical economic theory holds that nations should specialize in producing goods and services in which they possess a comparative advantage. For the United States, endowed with world-class universities, advanced R&D institutions, and a robust legal framework for intellectual property protection, this advantage was believed to lie in innovation, design, and other knowledge-intensive activities. Manufacturing, by contrast, was regarded as the comparative advantage of developing economies with abundant and inexpensive labor.
This reasoning underpinned the belief that global specialization would yield mutual benefits: advanced economies would enjoy lower consumer prices, while emerging economies would gain industrial growth and employment opportunities. However, this logic was often misapplied. The United States increasingly concentrated on high-value, upstream activities such as R&D, design, and IP generation, while outsourcing lower-value, labor-intensive processes like assembly and fabrication to lower-cost countries such as China, Mexico, and Vietnam. This division of labor was assumed to maximize global efficiency, but it also contributed to a gradual erosion of domestic manufacturing capacity and industrial depth in the U.S.
The “Post-Industrial Society” Narrative
During the late 20th century, a combination of cultural and ideological assumptions contributed to a significant misjudgment of China’s trajectory. Shaped by the legacy of the Cold War, the United States believed it had “won history,” assuming that China would naturally democratize and follow Western economic models. This conviction was reinforced by a strong faith in neoliberal market principles, which held that markets, rather than states, would efficiently organize global supply chains. Concurrently, Silicon Valley’s hubris fostered the belief that software, intellectual property, and intangible assets would always deliver superior returns compared with physical production.
This mindset was intertwined with a broader narrative of post-industrial optimism. U.S. policymakers and thinkers widely assumed that advanced economies were naturally transitioning from manufacturing-based systems to knowledge- and service-based economies. The decline of Western manufacturing employment was interpreted not as a loss but as a marker of economic maturity. The future, it was believed, lay in intangibles such as software, brands, research and development, intellectual property, and finance. This perspective encouraged investment and policy attention toward services, technology, and financial sectors, often at the expense of industrial policy and support for domestic manufacturing capabilities.
The combined effect of these assumptions created a blind spot: a failure to anticipate that China, leveraging state-led industrial strategies and a long-term focus on manufacturing, could emerge as a powerful competitor in the global economy.
Corporate Drive for Efficiency and Shareholder Value
Milton Friedman’s principle of shareholder primacy profoundly shaped business thinking in the United States from the 1980s onward, influencing corporate governance, executive compensation, and strategic decision-making. It provided the intellectual foundation for the view that maximizing profits for shareholders equated to fulfilling a company’s social purpose.
Jack Welch, during his tenure as CEO of General Electric from 1981 to 2001, became a celebrated embodiment of this approach, widely recognized for championing shareholder value.
The combined forces of globalization and this focus on shareholder returns drove U.S. corporations to relentlessly pursue lower costs, with outsourcing manufacturing offering immediate savings that boosted profit margins and stock prices. In parallel, companies increasingly adopted asset-light strategies, divesting themselves of manufacturing plants and equipment to reduce capital expenditure and concentrate on core competencies such as design, marketing, and software.
Technological Facilitation
In The World Is Flat: A Brief History of the Twenty-First Century (2005, revised 2007), Thomas Friedman argues that digital technologies have become the infrastructure of globalization. Web browsers and search engines democratized access to information, while email and fiber-optic networks streamlined communication, and workflow software optimized production processes.
These advances, combined with digital design tools such as CAD/CAM and improvements in global logistics—including containerization and faster shipping—made it both technically and economically feasible to separate manufacturing from headquarters, integrate geographically dispersed suppliers into cohesive systems, and transmit design files instantaneously across vast distances, from a studio in California to a factory in Shenzhen. Together, these developments enabled the creation of the globally networked production chains that define twenty-first-century capitalism.
Loss of Critical Tacit Knowledge
Tacit knowledge represents the experiential, uncodified expertise that resides in the minds of skilled workers, engineers, and production managers. It encompasses the subtle adjustments to machinery, intuitive problem-solving on the factory floor, and the nuanced understanding of materials that cannot be captured in manuals or formal instructions. When factories closed or production moved overseas, this invaluable knowledge was often lost.
As a result, when the United States later attempted to revive certain manufacturing capabilities, it encountered significant challenges, as the accumulated expertise necessary to innovate or produce at scale was no longer available. Manufacturing processes rely on countless incremental improvements and feedback loops among engineers, operators, and designers, and the offshoring of production severs these connections, eroding the practical know-how that underpins industrial competence.
Erosion of Process Innovation Capabilities
Many significant innovations arise not only from the product itself but also from the processes used to manufacture it. Developing new, more efficient, or higher-quality production methods often demands close collaboration among designers, engineers, and factory personnel, with iterative experimentation on the factory floor. When manufacturing moved offshore, the U.S. largely lost its ability to drive these critical process innovations.
While American companies could still design cutting-edge products, the capability to invent revolutionary methods of production became concentrated elsewhere, particularly in China, slowing the overall pace of innovation for U.S. firms. This is especially true in industries such as semiconductors, batteries, and electric vehicles, where breakthroughs frequently emerge from the physical proximity of design and production teams. A prime example is the iPhone, whose development relied on Foxconn’s ability in Shenzhen to rapidly test, revise, and scale prototypes in close coordination with Apple’s design teams.
Breakdown of the Feedback Loop Between Design and Production
In an integrated system, designers benefit from immediate, direct feedback from the manufacturing floor regarding feasibility, cost, material performance, and production bottlenecks. This rapid feedback loop enables faster iteration, cost optimization, and higher product quality. When design is separated from manufacturing, however, companies lose these tight iteration cycles that drive breakthrough innovations. U.S. firms forfeited this “learning-by-doing” advantage, while Chinese companies gained it. With design teams located thousands of miles from production sites, the feedback loop becomes weakened or broken, communication slows, nuances are lost, and collaboration relies on formal reports rather than hands-on interaction. The result is longer development cycles, less optimal designs, and diminished capacity for continuous improvement.
Weakening of the “Industrial Commons”
As manufacturing declined in the United States, the nation experienced not just the loss of factories but the erosion of a complex supporting ecosystem, often referred to as the “industrial commons.” This ecosystem encompasses skilled workers, specialized suppliers, tool and die makers, vocational schools, applied research centers, and production infrastructure—elements that collectively enable innovation to be transformed into commercial products at scale. Once hollowed out, this industrial commons becomes extraordinarily difficult to rebuild, leaving the country ill-equipped to convert technological inventions into mass-produced goods. A striking example is lithium-ion batteries: although invented in the U.S., nearly all large-scale production now occurs in East Asia, particularly China, which strategically invested in the full ecosystem of raw materials, engineering talent, gigafactories, and supply chains. This highlights the profound disadvantage created when the supporting industrial infrastructure is allowed to atrophy alongside manufacturing itself.
Unintended Empowerment of Competitors (Especially China)
While the United States focused on design and high-level innovation, countries like China not only took on so-called “low-value” manufacturing but also systematically absorbed, reverse-engineered, and improved upon the processes and designs they encountered. By leveraging the scale of production, China was able to fund massive research and development efforts, develop its own intellectual property, and steadily climb the value chain in precisely the areas the U.S. believed it had secured permanent leadership.
The real-world consequences of this strategy became evident by the 2020s. China emerged as a manufacturing superpower, producing more goods than the next nine countries combined, a scale that further reinforced its capacity for innovation and efficiency. In contrast, the United States began to lag in critical sectors. While it still leads in semiconductor design, exemplified by companies like NVIDIA, it remains dependent on external fabrication, relying on TSMC for advanced chip production. In electric vehicles and battery manufacturing, China now dominates global supply chains. In telecommunications, Huawei leapfrogged U.S. players after American companies largely exited hardware production. Only recently has the U.S. sought to address this strategic miscalculation through re-industrialization efforts such as the CHIPS Act and the Inflation Reduction Act, reflecting a renewed recognition of the importance of a strong domestic manufacturing base.
Conclusion
The belief that the United States could permanently dominate design and innovation while offshoring manufacturing proved dangerously naïve. By relinquishing production, the U.S. ceded not only factories but also the very platforms that underpin future innovation. China, in contrast, leveraged production scale to build robust industrial ecosystems and accumulate tacit capabilities, transforming itself into the world’s preeminent manufacturing power and an unexpected competitor in innovation.
This confidence in the perfect separability of design and manufacturing reflected an intellectual oversimplification rooted in economic theories that prioritized efficiency above all else. It overlooked the organic, symbiotic relationship between conceptual innovation and practical production. The resulting hollowing-out was not merely a loss of jobs but a profound erosion of the foundational capabilities necessary for sustained, broad-based innovation and technological leadership in the 21st century.