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Having a strong domestic manufacturing base is vital to the United States maintaining its world leadership in innovation. That is because advanced manufacturing provides an important institutional foundation for learning and developing process skills and capabilities that are increasingly intertwined with core R&D in some of the industries most important to the country’s economic future. These include advanced and specialty materials, biologics, nanotechnology, and precision mechanical devices.

Since joining the Harvard Business School in 2007 (after a long career at IBM, Kodak, Silicon Graphics, and other companies), I have visited hundreds of factories. They include ones that produce a million notebook computers a week, a significant proportion of the world’s ibuprofen and acetaminophen, sophisticated biopharmaceuticals, microchip engine controllers for 40% of the world’s cars, key components for iPhones, commercial jet engines, scientific instruments, heavy construction equipment, tools for making semiconductors, and solar panels.

With the exception of two jet-engine factories and two plants that make heavy equipment, all were located outside the United States. If that surprises you, you’re not alone. Most Americans have no idea where the stuff they buy comes from and don’t appreciate how much of the U.S. manufacturing base has disappeared.

A Lot of Manufacturing Is Knowledge Work

Most Americans believe factory work is mechanical, snapping together plastic parts or assembling electronic devices. No thinking required; just put in these four screws 2,400 times a day.

There certainly is a great deal of such routine manual labor going on in the world, but there is also an enormous amount of sophisticated knowledge work. Many of the jobs in the most advanced semiconductor-manufacturing plants are as complex as a lunar-landing mission. Making parts for an iPhone is a challenging mix of materials science, mechanical engineering, precision fabrication, and managing mind-boggling complexity in the supply chain. Producing biologics involves enough biochemistry, chemical engineering, and cell biology to make a graduate student wince.

Working in these plants are inventive people who are the source of important ideas for making products better or in different ways. The best factories routinely conduct scientific experiments to improve their processes, and the best factory managers are teachers and innovators as well as leaders of people.

When R&D and Manufacturing Must Be Near

Manufacturing provides the foundation for many kinds of innovations. If manufacturing processes are immature or the know-how needed to develop the product or process to produce the product is tacit and not well codified, you cannot innovate in a country if the factories are on the other side of the world. R&D and manufacturing must be located close to each other so their people can together figure out how to develop a product that can be manufactured at a cost and level of quality that will make it a commercial success.

This is why I cringe when I see pharmaceutical makers shipping more and more of their production and development capability offshore, or when I see semiconductor tool makers move their manufacturing from the U.S. to Asia.

The bottom line is if a country loses the ability or the capacity to manufacture, its innovation space will be truncated. To me, that is why we have to manufacture in the United States.

This post is part of the HBR Insight Center on American Competitiveness.

Something odd and interesting happens to a lot of people who become very successful. Once the initial thrill wears off, they come to perceive their success as “a catastrophe” and even as “a kind of death,” as the playwright Tennessee Williams famously put it, after The Glass Menagerie became a smash hit in 1944. Athletes, scientists, generals, entrepreneurs, executives, performers, and politicians have expressed this paradox in different words. Paul Samuelson, an economist who won the Nobel Prize in 1970, later concluded that, “After winners receive the award and adulation, they wither away into vainglorious sterility.”

Understanding this bizarre inversion, or perversion, of success is one of the things that I set out to do in my book, Hannibal and Me: What History’s Greatest Military Strategist Can Teach Us About Success and Failure, inspired by a famous line in a Rudyard Kipling poem: “Meet with Triumph and Disaster, and treat those two Impostors just the same.”

The idea that disaster, or failure, can be an impostor is in some ways more intuitive. In places such as Silicon Valley, it has become almost fashionable to fail fast, early, and often — in a sense, to fail into success and call it innovation. Even in our wider society, a lot of people are discovering that their personal disasters paradoxically liberated them to start anew, to live the life they actually wanted but needed an excuse to start living.

The other impostor — triumph, or success — can be the more sinister and cunning of the pair. Success adjusts its weapon to its victim. Some people succumb to hubris, the arrogant overconfidence that often follows success (think Tiger Woods or Eliot Spitzer). Others fall prey to less spectacular but more insidious manifestations of the impostor, such as distraction or paranoia.

But perhaps the subtlest ruse of success, and the one I will focus on in this post, is its way of imprisoning its owner. Specifically, it seems to be the successful person’s imagination that is taken captive.

Success often comes from a feat of freedom by somebody’s “impudent” imagination (Albert Einstein’s word). Consider Pablo Picasso circa 1907. How did this young man (in his twenties) have the outrageous idea to draw a group of prostitutes in a brothel as though their faces were primitive African masks and their limbs disembodied cubes? Nothing of the sort had ever been done before. It was a leap of the imagination, a shocking transgression, an idea that required his imagination to burst out of all restrictions. And then it became a painting, Les Demoiselles d’Avignon, which was Picasso’s triumph.

Or take a similar feat of free imagination in a military context. In 218 BCE, the Carthaginian general Hannibal decided to attack the Roman empire. Hannibal was also in his twenties, and he too had an outrageous idea. He would invade Italy by marching a huge army, including war elephants, through Spain and France and then across the uncharted and terrifying Alps in the snow of winter. This was considered physically impossible. Reasonable people, such as the Romans, did not “allow” it as a strategy, and thus did not plan for it. But that’s what Hannibal did. And then, in Italy, he routed and slaughtered the much larger Roman armies three times, killing about a quarter of Italian men in the process.

In the field of physics, Albert Einstein is an example of this intellectual freedom. “Imagination is more important that knowledge,” he said. And what sorts of things did he imagine? All sorts of silly things, including what it would be like to ride alongside a beam of light at the same speed, how elevators would accelerate through space and how painters would fall downward through them, or how blind beetles would crawl on curved benches. This is the mental state whence, in the miracle year of 1905 (when he, too, was in his late twenties), sprang the series of short papers that changed forever how we think about time, space, light, energy and the universe.

But the question is what happens next to these triumphant heroes. What is it like to be successful, what is the equivalent of what Tennessee Williams called a “storm of royalty checks beside a kidney-shaped pool in Beverly Hills”?

Often, nothing much happens at first. Many successful people do not crash and burn. In Hannibal’s case, he stayed in Italy for sixteen years in total, undefeated the entire time. Well into his middle age, he was still considered invincible. Nor, however, was he able to produce more triumphs to build on his early ones to achieve the end toward which his successes were supposed to be means, that end being the defeat of Rome. As we know today (just by looking around at the Roman columns on our government buildings), Rome would eventually win this war.

So Hannibal found, in Italy, his prison of success, a prison that was lush and huge and consisted of all Italy, but which was a prison nonetheless because it shackled his imagination. Yes, there were many factors involved (not least on the Roman side, which supplies the other main character in my book, an aristocrat named Scipio). But the relevant point to make here is this: If Hannibal had suffered a military disaster of some sort, Hannibal would have had to evacuate Italy. It would have been humiliating, but that disaster might have liberated him. He would have had to adopt a different strategy, and the overall war might have gone in a new direction. Hannibal was still victorious, however, and victors don’t flee. Nor do they have big, bold ideas such as Alpine crossings.

Albert Einstein also enjoyed more than a decade of continued success after his miracle year in 1905. Like Hannibal, he remained “undefeated” in the world of physics. In fact, a solar eclipse eventually proved his theories right and made him a superstar. But from about 1925 onward, Einstein also saw himself as trapped in a frustrating mental prison. He himself could not accept ideas he had helped to bring about (such as quantum physics with its inherent uncertainties).

Instead, a new generation of up-and-coming young scientists was building on Einstein’s ideas. They were freethinking, irreverent, imaginative, iconoclastic, and in every other way exactly as Einstein had been a few decades earlier. And Einstein could not handle it. As he grew older, he closed his mind. “He could no longer take in certain new ideas in physics,” said Max Born, one of the younger generation. “Many of us regard this as a tragedy.”

Every prison has a gate with a lock and a key. Tennessee Williams eventually found that key and produced more great and creative plays. Pablo Picasso also broke out, at least one more time (with Guernica). So it is possible, albeit difficult, to escape the prison of success before it turns into failure. The first step in any good escape is to realize that you’re captive to begin with.

The realities of globalization, with increasing emphasis on emerging markets, present corporate leaders with enormous challenges in developing the leaders required to run global organizations. Too many multinational companies — particularly Japanese, Indian, German, and some American ones — still concentrate vital decisions in the hands of a small group of trusted leaders from their home country. They hire technical specialists, local experts, and country managers from emerging markets but rarely promote them to corporate positions. Instead, they groom future global leaders from the headquarters nation by sending them on overseas appointments.

This approach worked relatively well for companies selling standard products in developed markets, but as multinationals transition into truly global organizations relying on emerging markets for growth, it’s far from adequate. In order to adapt to local cultures and market needs, companies must shift to decentralized, collaborative decision-making. That requires developing many leaders capable of working anywhere.

To address these needs, new approaches for developing global leaders are required:

• The diversity of top leadership should reflect the diversity of the firm’s customers.
• Global leaders must be effective in aligning employees around the company’s mission and values, empowering people to lead, and collaborating horizontally rather than managing vertically.
• Rather than concentrating on the on the top 50 leaders, global companies need to develop hundreds, even thousands, of leaders comfortable operating in a variety of cultures.
• Developing global leaders with cultural sensitivities and collaborative skills requires greater focus on emotional intelligence, self-awareness, and empowerment than on traditional management skills.

To understand these approaches, let’s examine what leading global companies are doing:

Create diversity among senior leadership. To make sound decisions, companies need a diverse set of leaders who have deep understanding of their local customers, especially those in emerging markets. Opportunities at the highest levels, including C-suite and CEO, must be open to people of all national origins. Atlanta-based Coca-Cola is a pioneer in geographic diversity. As early as the 1960s, the company was run by South African Paul Austin. Since that time, Coca-Cola has had Cuban, Australian, and Irish CEOs, leading to today’s CEO, Turkish-American Muhtar Kent.

Over the past decade two Swiss companies, Nestle and Novartis, have made dramatic shifts from Swiss-dominated boards and executive leadership to a diverse set of nationalities. Both now have non-Swiss majorities on their boards and several business units based outside Switzerland. Nestle’s executive board represents ten different nationalities, while 80% of Novartis executives come from outside Switzerland.

Focus on values, not hierarchy. The characteristics of successful global leaders today are quite different than traditional hierarchical managers. They need high levels of emotional intelligence and self-awareness to unite people of different cultures, many who are new to the enterprise, around the organization’s mission and its values and empower them to make decisions without waiting for higher-level directions.

Samuel Palmisano, IBM’s chairman and former CEO, recognized that IBM’s traditional hierarchical structure would not be effective in the 21st century because it was dominated by product and market silos. In 2003 he reorganized the company into an “integrated global enterprise” based on leading by values and collaboration, and uses special bonuses to empower leaders to extend IBM’s culture globally.

Broaden the reach of leadership development. Collaborative organizations like IBM’s require far more leaders than the traditional focus on a select group of top leaders. With flatter organizations and decentralization of power, corporations must develop savvy global leaders capable of operating locally and globally simultaneously. IBM’s former chief learning officer recently estimated that IBM will need 50,000 leaders in the future.

Unilever has more than half of its business in Asia, and that percentage will continue to increase. The company has undertaken a major initiative to develop 500 global leaders in intensive leadership development programs to prepare them for expanded roles. According to CEO Paul Polman, “Unilever’s Leadership Development Programme prepares our future leaders for an increasingly volatile and uncertain world where the only true differentiation is the quality of leadership.”

To be effective in global roles, leaders require experience working and living in multiple countries. Extensive travel overseas is no substitute for living there, gaining fluency in local languages, and deeply immersing in the culture. German chemical maker Henkel, whose executives come from a diverse set of countries, insists they live in at least two different countries before being considered for promotion.

New methods for developing global leaders. Developing global leaders necessitates a shift from focusing on management skills to helping leaders be effective in different cultures by increasing their self-awareness, emotional intelligence, and resilience. Dean Nitin Nohria at Harvard Business School recently sent 900 MBA students overseas to work with companies in countries where they have neither lived nor worked.

It’s not enough just to work overseas. To process and learn from their experiences, individuals should utilize introspective practices like journaling, meditation or prayer, and develop support networks of peers like True North Groups. There they can consult confidentially with people they trust about important decisions and have honest conversations about their dilemmas, mistakes, and challenges. These experiences enable leaders to develop the self-mastery and appreciation and acceptance of people from diverse backgrounds required to become effective global leaders.

These methods of developing global leaders for the future are still in their nascent phase, but there is little doubt that they will have a profound impact on developing global leaders in the years ahead.

The longest line on a busy Saturday afternoon in a celebrated New York department store is at the returns desk: bad news in these troubling times when every dime counts. First in line is 18-year old Jayne, decked out in the latest Ugg boots and designer jeans. Jayne is returning the dress she bought on Thursday and wore on Friday.

Next in line Dorothy Dodds, an elegant octogenarian, who is returning an expensive evening dress which she recently wore at two black-tie dinners on her voyage from England on Cunard’s Queen Mary 2. Apparently, it was inexplicably tight. Having had her return garment accepted, Dorothy quickly secretes the $450 of store vouchers she has received in her recently-purchased crocodile skinned shoulder bag.

Further back in the line are Natasha and her baby son Louis. Natasha is returning a pashmina, worn recently at a cousin’s wedding. She gives a broad grin and a knowing wink to the person behind her, as a refund of $225 is credited to her store credit card. She also receives a goodwill discount voucher of 10% as part of the store’s customer loyalty initiative.

Meanwhile, in the store’s security office two teenagers who have been apprehended for shop-lifting stand forlornly. But have they really committed a worse crime than the likes of Jayne, Dorothy or Natasha?

Welcome to the growing community of deshoppers, whose activities are costing U. S. retailers an estimated $16 billion a year. It is a significant part of the broader problem of retail crime which threatens the profitability and competitiveness of stores, products and retail businesses worldwide.

Over the last ten years we have been researching deshopping in Britain through two mass market retail case studies and surveys of 150 independent retailers and over 500 consumers. What we’ve found is disturbing:

• Deshopping seems to be addictive and a growing number of people are serial offenders. What’s more, they pass on the dark arts to their family and friends.
• Increasingly, deshoppers are operating in packs when returning goods, suggesting that the activity is becoming organized.
• All types of shops are vulnerable: Small ones because they are perceived to have fewer defenses and shop assistants are more anxious to please and large chain stores because they provide more anonymity (you can buy in one location and return in another, for example).

Some corporations are responding by requiring stricter return criteria. This can be helpful but indiscriminately applied it can also create offense with customers making legitimate returns. A more nuanced approach to customer returns is required, and it should work on at least four fronts:

• Training. Managing returns effectively and fairly requires a dedicated, trained staff capable of distinguishing deshoppers from bona fide customers.
• Communication. Retailers should be up-front about the problem. By acknowledging the problem in customer and staff communications the chances of abusing genuine customers can be reduced and deshoppers may even be shamed into changing their minds before making a return.
• Comprehensive, consistent, and manageable policies and processes. Remember that unethical shoppers are more likely to succeed undetected if there is opportunity and weaknesses among internal controls.
• Watchfulness. Surveillance technology can help you identify serial unethical shoppers. Of course, it is imperative to measure the effectiveness of these tools and the effect they have on consumer behavior.

As retailers look to an uncertain future, they need to commit to making policy changes. Shaving just a small amount of shrinkage could make a substantial improvement to their bottom line.

Leverage is the mantra of the times in philanthropy, and rightly so. People want to know that the charities they support are using donations as effectively as possible. Donors and institutional funders are more demanding, more discerning, and less detached. They’re no longer content with writing a check and securing their place in heaven. They want results.

But they’re looking for them in the wrong places. They’re missing the greatest leverage point of all: the multiplying effects of smart investments in fundraising. If you want to maximize the social effects of your donation, why would you buy, for example, $100,000 worth of great educational programming for inner city kids when the same $100,000 directed toward fundraising could generate enough money to buy $1 million worth of it?

Even the wealthiest and most sophisticated are oblivious to the opportunity — in fact, they actively avoid it. They follow conventional wisdom and direct their money to the programs of carefully vetted organizations, scrupulously avoiding fundraising support. Or they back new approaches by leading thinkers in philanthropy — models that also bypass fundraising investment — and think they’re on the cutting edge. Either way, they’re squandering the real and massive potential of their capital.

The venture philanthropy movement, for instance, gets it only half right. Donors are strongly urged to seek out the organizations with the best, most innovative programs and fund those programs. And we should be looking for organizations with breakthrough programs. But once we find them, we should direct giving not toward the programs but toward the organizations’ fundraising and development operations so that they can multiply the funds available for programs.

The notion of catalytic philanthropy, while important, leaves the same half of the real potential unaddressed. In a nutshell, catalytic philanthropy exhorts the individual donor to take the bull by the horns. Instead of addressing a social problem by writing a check to an existing charity, donors create a new effort from the ground up. They take responsibility for all aspects of a particular social initiative, from accountability for results to mobilizing a campaign for change. But even here, donors aren’t being coached to invest in the fundraising apparatus of their initiative. The founding donor can create a great model, but who’s going to expand it and whence will those funds come?

Even capacity-building, though better than not-capacity-building, is missing the larger opportunity. It lumps fundraising in with finance, human resources, leadership training, technology, and other administrative functions. But fundraising alone has the capacity to multiply money. Indeed, it has the capacity to multiply the money available for the other components of capacity-building. So if you want to build capacity, don’t fund technology and HR, fund the fundraising for those things.

The cutting edge is investment in fundraising. Yet everyone tries to suppress it, invoking a flawed theory of social change that says the less you spend on fundraising, the more you have for programs. That’s true if it’s a zero sum game. But it’s not. Imagine a $10 million pie with $8 million going to programs and with the 20% fundraising slice taking $2 million away from programs. The last thing we want to do is make that a $3 million slice, leaving only $7 million for programs. But that’s not how it works. If done correctly, the extra million enlarges the pie — substantially. A $10 million pie becomes a $15 million pie, and the $7 million available for programs grows to $12 million.

Charities invest in fundraising because the money they get back is greater than the money they put in. There are longstanding, proven correlations between the amount spent on the various fundraising methods and how much each will return. Those correlations are all positive. A Giving USA study found that a dollar invested in a major gift program produces, on average, $24 in revenue. A dollar invested in a direct mail program produces $10. A dollar invested in a special event produces $3.20.

Fundraising multiplies the potential of charitable gifts. There’s nothing radical about this. It’s only radical to those who have no experience with it. That lack of experience, endemic among donors, is a significant liability. It’s one reason that charitable giving has remained constant in the U.S. at 2% of GDP ever since we have been measuring it, and has not budged. How could it? Donors don’t want charities to spend money on fundraising. But imagine, if we could move that 2% to 2.5% or 3%, we could put our dreams on steroids. Each half a point represents $75 billion — annually.

That dream won’t come to pass by funding programs, because program funding cannot multiply anything. It is a paradox, I know, but funding programs annihilates our real potential to fund programs.

The smart money is in multiplication.

It’s obvious to anyone paying attention that the United States needs well-educated, technically skilled workers if it’s to remain competitive in the global marketplace. Just as obvious: We need a robust middle class with adequate disposable income and a sense that our economic system is working in a reasonably fair way. Yet business leaders and policy makers behave as if they don’t believe either of those things:

• they tolerate K-12 student performance that’s falling fast relative to that of comparable countries;
• companies invest far less than they used to in worker training;
• many jobs go unfilled because companies say they can’t find workers with the skills they need;
• we have a large and growing population of people who have been unemployed for so long that they are no longer looking for work;
• wages have been stagnant for three decades (except in the case of top earners),
• the gap between high-income earners and lower- and middle-income workers is greater than at any time since the 1920s, and
• unions are attacked as part of the problem, not (as they could be) part of the solution to these challenges.

It’s a perfect recipe for decline and a terrible legacy to leave to our children and grandchildren.

As I argue in the March issue of HBR, this disconnect is the result of a market failure. Simply put, what’s good for individual U.S. companies is no longer automatically good for business nationwide, for U.S. workers, or for the economy. It often makes economic sense for individual firms to close a U.S. plant, to send work to wherever it can be done effectively at the lowest cost, and to minimize labor expenses through other means. Indeed, business executives will say that they owe it to shareholders to do exactly that.

But the overall needs of the U.S. business community are much better aligned with those of the U.S. economy as a whole. U.S. multinationals continue to derive 60% of their sales from the U.S. market, according to Commerce Department data. These firms rely on U.S. customers’ personal-income growth and their purchasing power; a well-educated workforce that has the right technical skills; and a regulatory environment that rewards companies for taking a longer-term view. All of these objectives lie beyond the reach of individual firms but within their power to achieve collectively.

As in a classic market failure, individual firms are not shouldering the true costs of their actions. They benefit from minimizing their own labor costs while society picks up the tab in the form of slow economic growth, unemployment, welfare, and so on. Then there’s the tension between short- and long-term objectives: Activities that make sense for individual firms at one end of the value chain, right now (for instance, shipping jobs overseas and cutting costs wherever possible) can backfire at the other end. Down the road, the middle class may not be robust enough to create demand, and the workforce may not be trained well enough to drive innovation.

It’s impossible to fix this market failure without first fixing how we talk to each other. Leaders from government, business, labor, and education seem to have lost the knack of tackling problems together when the stakes are high — as we’ve done in other moments of national emergency, such as the Great Depression or World War II. Instead, we seem to delight in ideological posturing and finger pointing. In a future post, I’ll suggest ways to jump-start a process for fixing the market failure I’ve described.

For now — what do you think of the “tragedy of the commons” I’ve described? Do you agree that there’s a disconnect between individual companies’ interests and the interests of the society at large? Should business leaders start working with other stakeholder groups to respond to this national emergency?

This post is part of the HBR Insight Center on American Competitiveness.