U.S. Technology in the Global Marketplace

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).[6] 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.[7] 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[8] (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 (figure 6-5figure.). The World Bank estimates that services constituted 68% of global economic activity in 2003 compared with a 56% share in 1980. Market-oriented knowledge-intensive services constitute a large and growing part of the service sector’s output.[9] The worldwide gross revenue generated by market-oriented knowledge-intensive services more than doubled from $4.5 trillion in 1986 to $11.5 trillion in 2005, on a constant dollar basis (table 6-4table.).[10] Market-oriented knowledge-intensive service revenues grew at an average annual inflation-adjusted rate of 4.8% compared with 2.7% by other services during this 20-year period (table 6-4). In 1986, gross revenues of market-oriented knowledge-intensive services comprised 22% of all services; by 2005, their share had increased to 30%.

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 (figure 6-6figure.; appendix tables 6-4 and 6-5Excel.). The EU is the next leading provider of high-technology services. Its share of world revenues, however, slipped from 26% in the mid-1990s to 25% in 2005 because of declines in service industry activity in Germany and Italy.

The third-leading provider of market-oriented knowledge-intensive services, Asia, shows a steady rise in world share over the past two decades (figure 6-6figure.; appendix tables 6-4 and 6-5Excel.). [11] Over the past 10 years, Asia’s world share rose by 2 percentage points to 22%. China, and to a lesser degree India, have driven the increase in Asia’s world share. Between 1996 and 2005, China’s growth in revenues was nearly twice the rate of the average for all of Asia, and its share of world revenues increased from 2.3% to 4.9%. India’s revenues also grew considerably faster than Asia’s average growth rate, although from a low level: India’s world share rose from 0.7% to 1.1% during this period. Japan’s revenues grew slower than the average rate for all of Asia, and its share of world revenues fell from 14.1% to 12.6% during this period.

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) (table 6-5table.; appendix tables 6-4 and 6-5Excel.). The U.S. market is large and mostly open, which benefits U.S. industries in the global market in two important ways. First, supplying a domestic market with many consumers offers U.S. producers scale effects resulting from potentially large rewards for new ideas and innovations. Second, the relative openness of the U.S. market to foreign competitors in these three industries pressures U.S. producers to be innovative to maintain domestic market share.

Business 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 (table 6-5table.; appendix tables 6-4 and 6-5Excel.). The United States has a leading position in this industry, and its share of global revenues (43% in 2005) has remained constant for the past decade. The EU and Asia rank second and third, respectively, in business services, and their world market shares have also remained essentially flat during this same period.

Financial Services

Financial services accounted for 34% of global value-added revenues generated by market-oriented knowledge-intensive service industries in 2005 (table 6-5table.; appendix tables 6-4 and 6-5Excel.). The United States is also a leader in this industry, with a world share of 38% in 2005, 1 percentage point higher than its share in 1996. Asia is ranked second in financial services, with a world share of 30% in 2005, 3 percentage points higher than its 1996 level. China’s world share increased from 4% in 1996 to 8% in 2005. The EU ranked third in financial services, with a 19% share of world financial services industry revenues in 2005. Its share has declined by 4 percentage points over the past decade, primarily driven by declining revenues in industries within Germany and Italy.

Communications Services

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 (figure 6-7figure.; appendix tables 6-4 and 6-5Excel.). The U.S. world share in 2005, however, was 3 percentage points less than its share a decade ago. From 1996 to 2005, Asia’s world market share jumped 6 percentage points, overtaking the EU in 2005 with a level of 23%. China and India drove Asia’s ascent, with their communications industries averaging close to an annual average growth rate of 20% over the last decade. China and India’s world shares more than doubled during this period, reaching 7% and 2%, respectively, in 2005. Japan’s world share remained unchanged at 9%.

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 (figure 6-8figure.; appendix tables 6-6 and 6-7Excel.). The U.S. world market share has remained relatively constant during the past decade, although its position has changed in some industries. In the largest of these, wholesale and retail ($4.3 trillion in value added in 2005), the U.S. world share rose from 30% in 1996 to 35% in 2005, coinciding with the rapid rise of Wal-Mart and other retailers that compete aggressively on price and use sophisticated technology to manage their inventories.

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 (figure 6-9figure.). Average annual growth during this 20-year period was 6%, more than double the rate for other manufacturing industries. In 2005, the high-technology share of all manufacturing output was 18% compared with 10% in 1986.

High-technology industries spend a relatively high proportion of their revenues on R&D compared with other manufacturing industries (table 6-6table.). R&D can lead to innovation, and companies that innovate tend to gain market share, create new product markets, and use resources more productively (NRC, Hamburg Institute for Economic Research, Kiel Institute for World Economics 1996; Tassey 2002).[12] High-technology industries also tend to develop high-value-added products, export more, and, on average, pay higher salaries than other manufacturing industries.[13] Moreover, industrial R&D performed by high-technology industries benefits other commercial sectors by developing new products, machinery, and processes that increase productivity and expand business activity.

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 (figure 6-10figure.; appendix tables 6-8 and 6-9Excel.). After moving up sharply in the late 1990s, the U.S. share has remained essentially flat at 34%–35% since 2001. U.S. consumption of high-technology manufactured goods also exhibited a sharp increase in the late 1990s (see figure 6-11figure. in sidebar, "Consumption of High-Technology Manufactured Goods"). Asia has ranked first in high-technology manufacturing value added since 1987, with the exception of 2001. The United States, however, has the largest share of any country in high-technology industries since overtaking Japan in 1997.

The EU has a sizably smaller world share than the United States or Asia (figure 6-10figure.; appendix tables 6-8 and 6-9Excel.), and its world share has fallen continuously from 25% in 1995 to 18% in 2005. Reduced manufacturing activity in four EU countries (Italy, the United Kingdom [UK], Germany, and Spain) led to the EU share’s decline over the past 10 years.

Several Asian countries, mainly China and Japan, have had dramatic shifts in their market positions during the past two decades (table 6-7table.; appendix tables 6-8 and 6-9Excel.):

  • 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 (figure 6-12figure.).[14] High-technology industries also generally pay higher wages than other manufacturing industries.[15] Recognition of these contributions has led to intense competition among nations and localities to create, attract, nurture, and retain high-technology industries.[16]

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 (figure 6-13figure.). In 1990, high-technology manufacturing accounted for about 14% of all U.S. manufacturing value added. Growth in demand for communications and computer equipment increased the high-technology share of U.S. manufacturing to 19% in 2000 and 24% in 2005. The EU also saw high-technology manufactures account for a growing share of its total domestic production, although to a lesser degree. In 1990, high technology accounted for 10% of EU manufacturing value added, but by 2005 this had risen to 14%.

Asia’s manufacturing production is also driven by high-technology industries (figure 6-13figure.). The high-technology share of Asia’s total manufacturing value added increased from 16% in 1990 to 22% in 2005. Japan’s share, however, remained flat between 2000 and 2005. China’s high-technology share of its total manufacturing more than doubled from 11% in 1990 to 28% in 2005, exceeding the comparable figure for the United States. India’s share grew modestly from 6% to 9% during this period.

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 (table 6-9table.; appendix tables 6-10 and 6-11Excel.). [17] Pharmaceuticals are the next largest segment, comprising 19%, followed by scientific instruments (14%), office machinery and computers (14%), and aerospace (8%).

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 (table 6-9table.; appendix tables 6-10 and 6-11Excel.). The large size and openness of the U.S. market that benefits U.S. service industries similarly benefits high-technology manufacturing industries. Additionally, the U.S. government influences the size and growth of the nation’s high-technology industries through 1) investments in industrial R&D purchases of new products, 2) laws regulating sales to foreign entities of certain products produced by each of the five high-technology industries, and 3) policies that create an enabling environment by promoting innovation, investment, and entrepreneurship.[18]

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% (figure 6-14figure.; appendix tables 6-10 and 6-11Excel.). Asia’s world share slipped by about 10 percentage points because of the rapid decline of Japan, which had been the world’s leading supplier of communications equipment until 2000. Japan’s share fell from 42% to 23% during this period. China’s world share tripled, rising from 5% to 15%. The EU’s world share decreased from 19% to 12%, led by losses by Italy and the UK.

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 (figure 6-15figure.; appendix tables 6-10 and 6-11Excel.). Japan, which had been the largest country producing computer and office machinery equipment for most of the past two decades, had a sharply lower value added share, from 45% in 1995 to 9% in 2005. China’s progress, however, was remarkable; its share of world value added expanded from 2% in 1995 to 46% in 2005. This rapid rise resulted in China surpassing both Japan in 2002 and the U.S. in 2003 to become the largest producing country in this industry.

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 (table 6-9table.; appendix tables 6-10 and 6-11Excel.). The United States is the leader by a small margin, and its world share has fluctuated between 30% and 35% over the past decade. The EU’s world market share was roughly steady during the past decade. In Asia, Japan, China, and South Korea are the largest producers of pharmaceuticals (appendix tables 6-10 and 6-11). Although Japan still has the larger domestic industry, China’s share has grown steadily while Japan’s has generally declined. In 1995, domestic production by Japan’s industry accounted for 21% of global value-added revenue, but by 2005 this proportion had fallen to 13%. In 2005, China’s pharmaceutical industry accounted for an estimated 8% of global value-added revenue, quadruple its share in 1995. South Korea’s share of global value added edged up from 2% to 3%, and India’s share doubled from 1% to 2% during this period.

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 (table 6-6table.). The United States is the leading producer of scientific instruments, accounting for 40% of global revenue on a value-added basis in 2005 (table 6-9table.; appendix tables 6-10 and 6-11Excel.). The U.S. position has strengthened since 1995, as measured by world share, which rose 4 percentage points. Ranked second, the EU lost 3 percentage points in world share between 1995 and 2005, resulting from declines on the part of the UK, Italy, and Germany.

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 (appendix tables 6-10 and 6-11Excel.). In 1995, Japan’s industry producing scientific instruments accounted for 15% of world value-added output; however, its share declined to about 11% in 2005. China’s industry, which accounted for 2% of global value-added revenue in 1995, tripled to 6% in 2005.

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 (table 6-9table.; appendix tables 6-10 and 6-11Excel.). European aerospace manufacturers, particularly within Germany and the UK, made gains during this time. By 2005, the EU accounted for 27% of world aerospace value-added revenue, up from 19% in 1985 (appendix tables 6-10 and 6-11).[19] Asia’s share of the global aerospace market reached 5% by the mid-1990s and then, accelerating sharply, grew to 16% in 2005, driven by gains in Japan and China. Japan’s share of value-added global revenue rose from 3% in 1996 to almost 7% in 2005. China’s aerospace industry grew just as rapidly, and exceeded 6% 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 (table 6-10table.; appendix tables 6-12 and 6-13Excel.):

  • 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.[20] 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 (figure 6-17figure.; appendix tables 6-14 and 6-15Excel.). Losses in communications equipment and office machinery and computers, which collectively account for nearly 60% of U.S. high-technology exports, primarily drove the decline in U.S. export share (figure 6-18figure.; appendix tables 6-16, 6-17, 6-18 and 6-19Excel.).

The drop in the U.S. export share coincided with the rapid rise of China’s high-technology export industries that began in 1999 (figure 6-17figure.; appendix tables 6-14 and 6-15Excel.). Between 1999 and 2005, China’s export share more than doubled from 8% to 19%. China surpassed Japan in 2001, the EU in 2002, and overtook the United States in 2003, becoming the world’s largest exporter as measured by world market share.[21] China’s rise in market share has been driven by its exports from the office machinery and computers and communications equipment industries (appendix tables 6-16, 6-17, 6-18 and 6-19Excel.). Between 2000 and 2005, China’s world export share in office machinery and computers tripled from 10% to 30% and its share in communications equipment more than doubled from 10% to 21%. Japan’s share of world high-technology industry exports fell from 17% in the early 1990s to 9% in 2001 and has remained essentially flat.

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 (table 6-12table.; appendix tables 6-12 and 6-13Excel.). This makes the United States the third-ranked exporter in these industries behind Japan (13%) and the EU (excluding intra-EU exports) (12%). The market position of these three economies has not changed over the past decade. China, however, has made rapid strides; its world export share in these industries has doubled from 4% in 1996 to 8% in 2005.

The United States ranks third in exports of medium-low-technology industries, with a world share in 2005 of 7% (table 6-12table.; appendix tables 6-12 and 6-13Excel.). The EU at 13% of world share and China at 11% of world share are the first- and second-ranked exporters in these industries. The U.S. share of exports of low-technology industries in 2005 was 8%, ranked third behind the EU (14%) and China (16%). China’s world export share is nearly double that of the United States, having grown 5 percentage points since 1996.

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.[22] 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 (figure 6-19figure.; appendix tables 6-14 and 6-15Excel.). In 2000, the deficit was $32 billion in constant dollars, equivalent to 4% of gross revenues of U.S. high-technology manufacturing industries; in 2005, the deficit widened to $135 billion, amounting to 14% of gross revenue.

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 (figure 6-20figure.). The emergence of large deficits in these industries coincided with rising domestic output, stimulating imports of components. The deficit in office machinery and computing was not only a major driver of the overall trade deficit but was also quite large when viewed as a share of gross revenue of this industry. In 2005, this industry’s trade deficit represented about a 60% share of gross revenues, the largest share of any U.S. high-technology industry (appendix tables 6-18 and 6-19Excel.). The pharmaceuticals industry ran a deficit of $13 billion in 2005.

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.


[6] See OECD (2001) for discussion of classifying economic activities according to degree of "knowledge intensity."

[7] 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.

[8] 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.

[9] 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.

[10] 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.

[11] 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.

[12] 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.

[13] 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.

[14] 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.

[15] 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.

[16] Europe's success in growing its aerospace industry and China's efforts to develop a semiconductor industry are two examples.

[17] 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.

[18] 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.

[19] 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.

[20] 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.

[21] EU exports exclude intra-EU exports.

[22] 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.

Right-click on image to save.