U.S. Technology in the Global Marketplace
- Global Trends in Market-Oriented Knowledge-Intensive Service Industries
- U.S. Global Position in Market-Oriented Knowledge-Intensive Service Industries
- U.S. Global Position in Other Services
- Importance of High-Technology Industries to Manufacturing
- U.S. Global Position in Medium- and Low-Technology Manufacturing Industries
- U.S. Exports of Manufacturing Industries
- Trade Balance of High-Technology Industries
National investments in S&E, technological innovations developed from related activities, and R&D performed in all sectors of the economy, almost certainly play an important role in supporting U.S. competitiveness. This section of the chapter takes a closer look at both the industries that perform the bulk of R&D in the United States and recent trends of high-technology and lower-technology industry activity in the global marketplace.
Policies in many countries reflect a belief that a symbiotic relationship exists between investment in S&T and success in the marketplace: S&T supports industry’s competitiveness in international trade, and commercial success in the global marketplace provides the resources needed to support new S&T. Consequently, a nation’s economic health is a performance measure for the national investment in R&D and S&T.
At least to some degree, S&T is important for growth and competitiveness of all industries. However, the Organisation for Economic Co-operation and Development (OECD) has identified 10 industries in services and manufacturing that have a particularly strong linkage to S&T:
- Knowledge-intensive service industries. Communications services, financial services, business services (including computer software development), education services, and health services (OECD 2001). These five service industries incorporate sciences, engineering, and technology in either their services or the delivery of their services. Knowledge-intensive service industries are further divided into industries that are either largely market driven and known as market oriented (communications, financial, and business services) or are largely provided by the public sector (education and health services) (see sidebar, "U.S. Global Market Position in Education and Health Services").
- High-technology manufacturing industries. Aerospace, pharmaceuticals, computers and office machinery, communications equipment, and scientific (medical, precision, and optical) instruments. These five science-based industries manufacture products while spending a relatively high proportion of their revenues on R&D.
This section presents revenue and trade data for the market-oriented knowledge-intensive services and high-technology manufacturing industries in 70 countries (see sidebar, "Comparison of Data Classification Systems Used"). S&T is not exclusive to knowledge-intensive services and high-technology manufacturing; therefore this section will also examine the U.S. market position in other services and industries.
A critical issue is how to credit companies’ output to industries and countries, given that production has become more global and dispersed across companies and industries. Companies increasingly use subsidiaries or contract other companies in a variety of industries located within and across national borders to help create their output.
Two measures are used in this chapter: gross revenue and value-added revenue, referred to as value added. Gross revenue is the value of the industry’s shipments or services, equivalent to the industry’s sales, including domestic and imported supplies and inputs from other industries. Gross revenue is an appropriate measure of the industry’s impact on the national or global economy, because the industry’s use of inputs boosts output in other domestic industries or countries.
Value added is gross revenue sales minus purchases of domestic and imported supplies and inputs from other industries. It is a more suitable indicator of an industry’s direct contribution to the national economy because it excludes inputs from other industries and countries. In addition, value added adjusts for differences in the mix of labor, capital, and inputs used by an industry, which can vary across countries. The crediting of value-added output to regions or countries is imperfect, however, because a country receives credit on the basis of where the company reported the activity, which may be different from where the activity occurred.
Trade data are available for high-technology manufacturing industries but not market-oriented service industries. Trade data are on a gross-revenue basis, and country shares of world trade volume encompass inputs purchased from other industries and countries.
Another issue is classifying industries within a manufacturing or service category. In the data used here, companies are assigned to a single manufacturing or service industry on the basis of the largest share of the company’s shipment of goods or delivery of services. This method of categorizing company activity is imperfect, because an industry classified as manufacturing may include services, and a company classified as being within a service industry may include manufacturing or directly serve a manufacturing company. Furthermore, the single industry classification is not a good measure for companies that have diversified activities in many categories of industries.
Global Trends in Market-Oriented Knowledge-Intensive Service Industries
The service sector has been growing faster than the manufacturing sector for at least two decades and is driving economic activity around the world
The United States, the EU, and Asia are the leading providers of market-oriented knowledge-intensive services, comprising nearly 90% of global value-added activity in 2005. The United States has the largest share among the three, responsible for about 40% of world service revenues on a value-added basis, a share that has remained constant for the past decade
The third-leading provider of market-oriented knowledge-intensive services, Asia, shows a steady rise in world share over the past two decades
U.S. Global Position in Market-Oriented Knowledge-Intensive Service Industries
The United States holds the leading position in all three industries that comprise market-oriented knowledge-intensive services (business, communications, and financial services)
Business services, which include computer and data processing and commercial R&D, generated $3.4 trillion in 2005 as measured by value added, making this the largest knowledge-intensive industry
Financial services accounted for 34% of global value-added revenues generated by market-oriented knowledge-intensive service industries in 2005
The smallest of the knowledge-intensive industries ($1.1 trillion in 2005), communications services, is arguably the most technology driven. Provision of local and national communications services, however, is not fully open and competitive in many markets. In the United States, competition and new technologies have led to reductions in prices to consumers. In this industry, U.S. companies again hold a lead position, generating revenues equal to 39% of world value-added revenues in 2005
U.S. Global Position in Other Services
Commercially oriented services not classified as knowledge intensive include the wholesale and retail, restaurant and hotel, transportation, and real estate industries. These four industries incorporate S&T in their services or delivery of their services, but at a lower intensity compared with knowledge-intensive services. For example, inventory control incorporating IT technology has enabled the retail sector to cut costs and more precisely tailor and match inventory to meet customer demand.
The United States is leading in value added on a constant dollar basis within three of these four service industries: wholesale and retail, restaurant and hotel, and real estate
Importance of High-Technology Industries to Manufacturing
High-technology industries are driving growth in manufacturing activity worldwide. Between 1986 and 2005, high-technology manufacturing gross revenue rose from $1.1 trillion to $3.5 trillion in constant dollars
High-technology industries spend a relatively high proportion of their revenues on R&D compared with other manufacturing industries
U.S. Global Position in High-Technology Manufacturing Industries
The United States, the EU, and Asia collectively dominate global activity in high-technology manufacturing industries (more than 90% of world activity), similar to their strong position in market-oriented knowledge-intensive services. U.S. high-technology manufacturers rank second, as measured by their share of world value added, compared with the EU and Asia
The EU has a sizably smaller world share than the United States or Asia
- Japan’s share of world value added peaked in 1989 at 29%, nearly doubling its level in the early 1980s before declining steeply in the late 1990s. In 2005, Japan’s high-technology manufacturers accounted for 16% of world value added. As a result of the decline in its world share, Japan’s country ranking slipped from first to second.
- China’s world share rose from 2% in the late 1980s to 4% by 1997, then accelerated sharply to reach 16% in 2005, just 0.1 percentage point below Japan’s share. The fifth-ranked country by world share in 1998, China rose to third-ranked in 2005, overtaking the UK and Germany.
- South Korea’s world share nearly doubled from 2% in 1993 to almost 4% in 2005. Its country ranking moved from 10th to 5th during this period, overtaking Italy, France, and the UK.
- India’s world share, although doubling between 1989 and 2005, remained very small, at less than 0.5%.
High-Technology Industries and Domestic Production
Increasingly, manufacturers in countries with high standards of living and labor costs have moved their manufacturing operations to locations with lower labor costs. High-technology industries and their factories are coveted by local, state, and national governments because these industries consistently show a larger share of value added to gross revenue in the final product than do other manufacturing industries. (Value-added revenue equals gross revenue excluding purchases of domestic and foreign supplies and inputs.)
In the United States, high-technology industries created about 20% more value-added per dollar of gross revenue than other manufacturing industries
During the 1990s, manufacturing output in the United States and other high-wage countries continued to shift into higher value-added, technology-intensive goods, often referred to as high-technology manufactures
Asia’s manufacturing production is also driven by high-technology industries
Global Competitiveness of Individual High-Technology Industries
The global market for communications equipment is the largest of the high-technology markets, as measured by share of global value added, accounting for nearly half of the total output of high-technology industries in 2005
The United States has a leading position, as measured by its world share of value added, in scientific instruments, aerospace, and pharmaceuticals compared with Asia and the EU. The United States is ranked second of the three economies in communications equipment and office machinery and computers
Communications equipment. In this industry, U.S. manufacturers reversed downward trends evident during the 1980s to grow and gain market share in the mid- to late 1990s, partly because of increased capital investment by U.S. businesses (see sidebar, "U.S. IT Investment"). The U.S. share of world communications equipment value added grew by more than 20 percentage points between 1995 and 2005 to reach 34%
Computers and office machinery. The trends in the office and computer machinery manufacturing industry were similar to those in communications equipment. The United States, which was the second-ranked country by its world value added in 1995 (13%), doubled its share over a decade, surpassing Japan in 2000, to become the largest country until 2003, when it was overtaken by China
Pharmaceuticals. As a result of varying degrees of public financing and regulation of pharmaceuticals throughout the world, as well as differing national laws governing the distribution of foreign pharmaceuticals, market comparisons in this industry may be less meaningful. The United States, the EU, and Asia accounted for 90% of global value-added revenue in 2005
Scientific instruments. In 2001, the industry that produces scientific instruments (medical, precision, and optical instruments) was added to the group of high-technology industries, reflecting that industry’s high level of R&D within advanced nations
In Asia, Japan and China are the largest producers of scientific instruments. As in some other high-technology manufacturing industries, Japan’s share of value-added global revenue in this industry is declining while China’s share is increasing
Aerospace. The U.S. aerospace industry has long maintained a leading position in the global marketplace. The U.S. government is a major customer for the U.S. aerospace industry, contracting for military aircraft, missiles, and spacecraft. Since 1989, production for the U.S. government has accounted for approximately 40%–60% of total annual sales (AIA 2005). The U.S. aerospace industry position in the global marketplace is enhanced by this longstanding customer-supplier relationship.
In recent years, however, the aerospace industry’s manufacturing share has fallen more than any other U.S. high-technology industry. Since peaking at 73% of global value-added revenue in 1987, the U.S. share fell to 58% in 1999 and continued to decline to less than half of global value-added revenue in 2005
U.S. Global Position in Medium- and Low-Technology Manufacturing Industries
S&T is used in many industries, not just high-technology manufacturing and services. Manufacturing industries not classified as high technology are divided into three categories: medium-high technology, medium-low technology, and low technology. Relevant industries include motor vehicle manufacturing and chemicals production excluding pharmaceuticals (medium-high technology), rubber and plastic production and basic metals (medium-low technology), and paper and food product production (low technology).
These industries use advanced manufacturing techniques, incorporate technologically advanced inputs in manufacture, and/or perform or rely on R&D in applicable scientific fields. The U.S. value added world share in medium- and low-technology industries is lower than its share of high-technology industries, but the U.S. global position in these industries is fairly strong
- Medium-high-technology industries: These industries produced $1.7 trillion in year 2000 constant dollars of value added in 2005. Although the United States is ranked third (23%) after Asia and the EU in share of world value added, it has the largest share of any individual country. U.S. and EU shares fell slightly between 1996 and 2005 while Asia’s share increased from 32% to 37%, largely because of the doubling of China’s world share from 4% to 8%.
- Medium-low-technology industries: The United States is also ranked third in these industries compared with Asia and the EU, although it has the largest share of any single country. Between 1996 and 2005, Asia’s share grew 4 percentage points to 35%, largely because China’s world share rose from 4% to 11%. Japan’s share fell from 20% to 15%.
- Low-technology industries: The United States is ranked first in these industries, which produced $2 trillion in constant dollars in value added in 2005. The U.S. share of low-technology industry value added has remained steady during the past decade (30% in 2005). Asia’s share rose slightly during this period, even though Japan’s share fell from 18% to 14%, because China’s world share doubled from 4% to 9%.
In addition, some industries are not classified as either manufacturing or services (see sidebar, "U.S. Global Market Position in Other Industries").
U.S. Exports of Manufacturing Industries
High-Technology Manufacturing Industries
Data on international trade attribute products to a single country of origin and in some cases to a single industry. For goods manufactured in more than one country, the United States and many other countries determine country of origin on the basis of where the product was "substantially transformed" into the final product. For example, a General Motors car destined for export to Canada that was assembled in the United States with components imported from Germany and Japan will be labeled "Made in the USA." The country where the product was "substantially transformed" may not necessarily be where the most value was added, although that often is the case.
In this chapter, trade in U.S. high-technology products is counted in two different ways. The contrasting methods may attribute products to different countries of origin (see sidebar, "Classifying Products in Trade").
During the 1990s, U.S. high-technology industries accounted for about one-fifth of world high-technology exports, approximately twice the level of all other U.S. manufacturing industries. Starting in the late 1990s, however, the U.S. world export share declined continuously across all five high-technology manufacturing industries, dropping to an average of 12% in 2005
The drop in the U.S. export share coincided with the rapid rise of China’s high-technology export industries that began in 1999
Medium- and Low-Technology Manufacturing Industries
Compared with trends for high-technology industries, the United States has historically had lower world export shares in non-high-technology manufacturing industries, although these, too, have converged somewhat starting in the late 1990s. The U.S. share of world exports in medium-high-technology industries was 11% in 2005, nearly equal to its share in high-technology industries
The United States ranks third in exports of medium-low-technology industries, with a world share in 2005 of 7%
Trade Balance of High-Technology Industries
U.S. high-technology industries consistently exported more than they imported throughout the 1980s to early 1990s, in contrast to the consistent deficits recorded by other U.S. manufacturing industries. The trade balance of high-technology industries shifted from surplus to deficit in the late 1990s, however, because imports of high-technology manufacturing industries grew almost twice as fast as exports during that decade
Two industries are driving the U.S. high-technology industry trade deficit: communications equipment and office machinery and computing. In 2005, these two industries ran a collective deficit of more than $140 billion in constant dollars
Two other high-technology industries, scientific instruments and aerospace, are not contributors to the trade deficit. The U.S. aerospace industry registered a $22 billion trade surplus in 2005, continuing its trend of sizable trade surpluses since the late 1990s. The U.S. scientific instruments manufacturing industry had a modest $1 billion surplus in 2005.
 See OECD (2001) for discussion of classifying economic activities according to degree of "knowledge intensity."
 In designating these high-technology manufacturing industries, OECD took into account both the R&D done directly by firms and R&D embedded in purchased inputs (indirect R&D) for 13 countries: the United States, Japan, Germany, France, the UK, Canada, Italy, Spain, Sweden, Denmark, Finland, Norway, and Ireland. Direct intensities were calculated as the ratio of R&D expenditure to output (production) in 22 industrial sectors. Each sector was weighted according to its share of the total output among the 13 countries, using purchasing power parities as exchange rates. Indirect intensities were calculated using the technical coefficients of industries on the basis of input-output matrices. OECD then assumed that, for a given type of input and for all groups of products, the proportions of R&D expenditure embodied in value added remained constant. The input-output coefficients were then multiplied by the direct R&D intensities. For further details concerning the methodology used, see OECD (2001). It should be noted that several nonmanufacturing industries have equal or greater R&D intensities. For additional perspectives on OECD's methodology, see Godin B. 2004. The new economy: What the concept owes to the OECD. Research Policy 33:679–90.
 Data are extracted from the Global Insight World Industry Service database, which provides information for 70 countries that account for more than 97% of global economic activity. The Global Insight data on international country activity within the service and manufacturing industries are expressed in 2000 constant dollars. Constant dollar data for foreign countries are calculated by deflating industry data valued in each country's nominal currency.
 Compared with the extensive data available for the manufacturing industries, national data that track activity in many rapidly growing service sectors are limited in the level of industry aggregation and types of data collected. For example, export and import data are currently not available for many services.
 Gross revenue includes inputs or supplies purchased from other industries or services. Knowledge-intensive service and high-technology manufacturing industry data are expressed in 2000 constant dollars. Constant-dollar data for foreign countries is calculated by deflating nominal domestic currency with a sector-specific price index constructed for that country, then converting the result to U.S. dollars based on average annual market exchange rates.
 Asia is defined in this section as consisting of China, India, Indonesia, Japan, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand. China includes Hong Kong.
 One of the earliest quantitative analyses of R&D was done in 1955 by R.H. Ewell, supported by the National Science Foundation. This study showed a definite correlation between research and productivity. Also see Godin B. 2004. The obsession for competitiveness and its impact on statistics: The construction of high-technology indicators. Research Policy 33:1217–29.
 This conclusion is derived from an examination of weighted U.S. data from the Bureau of Labor Statistics Occupational Employment Survey concerning average annual pay during the period 1997–2001.
 Global Insight's data show that U.S. high-technology industry manufacturers' share of value added to total output was 20% higher than the share of all other U.S. manufacturing industries.
 This conclusion is derived from an examination of weighted U.S. data from the Bureau of Labor Statistics Occupational Employment Survey on average annual pay from 1997–2001.
 Europe's success in growing its aerospace industry and China's efforts to develop a semiconductor industry are two examples.
 In February 1996, the Telecommunications Act became U.S. law. This Act was the first major telecommunications reform in more than 60 years. It facilitated competition between cable companies and telephone companies and may have contributed to increased U.S. manufacturing activity in both the communications and computer hardware industries.
 In 1999, the State Department's responsibilities under the International Traffic in Arms Regulation were expanded to include research activity formerly covered under the Commerce Department's export regulations. The transfer placed scientific satellites, related data, and certain computer components and software on the U.S. Munitions List. Related research activities and the country of origin of researchers working on related research activities also became subject to many of the same regulations controlling exports of sensitive products.
 Like the United States, other national governments usually have strong ties to their aerospace industries, often supporting and funding R&D and serving as major customers.
 Unlike the previous section that examined data on industry manufacturing value added (domestic content), the value of exports reported in this section reflects the final value of industry shipments exported, not just the value resulting from domestic production. Exported shipments will, therefore, often include the value of purchased foreign inputs.
 EU exports exclude intra-EU exports.
 The U.S. trade balance is affected by many other factors including currency fluctuations, differing fiscal and monetary policies, and export subsidies between the United States and its trading partners.