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Chapter 6. Industry, Technology, and the Global Marketplace

Knowledge- and Technology-Intensive Industries in the World Economy


Science and technology are widely regarded as important for the growth and competitiveness of all industries and for national economic growth. The Organisation for Economic Co-operation and Development (OECD 2001 and 2007) has identified 10 categories of service and manufacturing industries—collectively referred to as KTI industries—that have a particularly strong link to science and technology.[2] Although a number of other taxonomies exist, they do not allow examination of worldwide production and trade data.

  • Five knowledge-intensive service industries incorporate high technologies either in their services or in the delivery of their services. They include financial, business, and communications services (including computer software development and R&D), which are generally commercially traded. They also include education and health services, which are primarily government provided and location bound.
  • The five high-technology manufacturing industries include aerospace, pharmaceuticals, computers and office machinery, communications equipment, and scientific (medical, precision, and optical) instruments.[3] These industries spend a high proportion of their revenues on R&D, and their products contain or embody technologies developed from R&D. Aerospace comparisons will reflect, in part, government funding for military aircraft, missiles, and spacecraft and differences in national commercial and civilian flight regulations. Global comparisons of pharmaceuticals gross domestic product (GDP) shares or market revenues may be influenced by differing national regulations covering foreign pharmaceuticals.
  • Information and communications technology (ICT) is a subset of KTI industries. It consists of two high-technology manufacturing industries—(1) computers and office machinery and (2) communications equipment and semiconductors—and two knowledge-intensive service industries—(1) communications and (2) computer services—that are classified under business services. ICT is used in a wide variety of economic sectors and is considered an important driver of economic growth.

The OECD classification of knowledge-intensive service and high-technology manufacturing industries is an imprecise measure for a number of reasons. For example, high-technology manufacturing and knowledge-intensive service industries may produce non-high-technology products or non-knowledge-intensive services, and technologically advanced manufacturing industries are excluded if they do not spend a high proportion of their revenues on R&D.

This section examines the prominence of KTI industries in the global economy. The value added of these industries as a share of GDP is presented as an indicator of their relative importance in the major and world economies (see sidebar, "Industry Data and Terminology," for a discussion of value added and other measures). Selected data are presented on the economic wealth and productivity growth of these economies, with particular focus on the United States and other economies that are knowledge and technology intensive.

KTI industries have become a major part of the global economy. Value added of these industries was almost $16 trillion in 2007, representing 29% of world GDP compared with a 26% share 15 years ago (figure 6-1 ; appendix tables 6-1 and 6-2 ). The share increased during the past decade before leveling off in 2002. The increase in the worldwide share of KTI industries was concentrated in five regional/national economies, which conduct nearly 90% of global R&D—the United States, the EU, Japan, the Asia-9, and China.[4]

The United States had the highest concentration of KTI industries (38% of GDP in 2007), 4 percentage points higher compared with its level in 1992 (figure 6-2 ; appendix tables 6-1 and 6-2 ). The percentage point increase in the corresponding shares of the EU and Japan was similar, reaching 30% and 28%, respectively, in 2007.

China's KTI industries increased their share of GDP from 21% to 23% (figure 6-2 ; appendix tables 6-1 and 6-2 ). The Asia-9's share climbed from 19% to 22% during this period. The shares of three Asia-9 countries/economies—the Philippines, South Korea, and Taiwan—rose by about 10 percentage points, reaching a 25% to 30% share of their GDP in 2007, significantly higher than the Asia-9 average. India's share was 18% in 2007, 3 percentage points higher than it was 15 years ago.

An increase in the intensity of the Asia-9 and China's KTI industries coincided with liberalization of their economies, increases in R&D expenditures, and adoption of policies to encourage high-technology industry production and trade. The KTI shares of other developing economies in Latin America, Africa, Central Europe/Asia, and the Middle East have grown little or have stagnated and are comparatively low (appendix tables 6-1 and 6-2 ).

Value added of commercial knowledge-intensive services amounted to $10 trillion in 2007, representing about 60% of the value added of all KTI industries (appendix table 6-3 ). Commercial knowledge-intensive services increased their share of world economic activity from 15% to 17% over the 15-year period, driving the increase in the KTI share of world GDP (figure 6-1 ; appendix tables 6-2 and 6-3 ). Value added of U.S. commercial knowledge-intensive services increased from 19% of U.S. GDP to 24%, the highest share of the knowledge-based economies (figure 6-3 ). The EU and Japan experienced a similar percentage point increase in the commercial knowledge-intensive share of their GDP. The share for China and the Asia-9 increased by 1 to 2 percentage points, reaching 14% and 13%, respectively, in 2007. Their considerably lower shares reflect their stage of development.

As a share of the global economy, ICT value added rose from 4% in 1992 to 5% in 2007 (figure 6-1 ; appendix tables 6-2 and 6-4 ). ICT shares in the developed economies edged up or remained steady (figure 6-4 ). China's ICT value-added share of its GDP doubled, climbing from 5% in 1992 to 9% in 2007. The Asia-9's share was steady at 5% during this period. A major factor in the rise of China's ICT intensity is that it became a major world exporter of ICT goods. The trend of the high-technology manufactures' share in the five economies was similar to that for ICT (figure 6-4; appendix table 6-5 ).

The relatively high and growing intensity of KTI industries in the United States, the EU, Japan, China, and the Asia-9 coincided with elevated living standards, as measured by GDP per capita. The United States, the EU, and Japan account for about half of the world's economic activity and also have the highest living standards (figure 6-5 ; appendix table 6-6 ). The United States has the highest per capita income among these economies ($31,260 in 1990 purchasing power parity [PPP][5]), 26% higher than Japan and 40% higher than the EU. The Asia-9 and China, each with economic production approximately the size of Japan's, have far lower per capita incomes. However, per capita income varies widely in the Asia-9. The per capita income of India, Indonesia, the Philippines, and Vietnam is less than $4,500 (1990 PPP), whereas South Korea, Singapore, and Taiwan have standards of living similar to that of the EU.

China and the Asia-9 have made remarkable progress in raising their living standards over the past decade and a half. China's per capita income grew at an annual average rate of almost 8%, resulting in per capita income more than tripling since 1992 (figure 6-6 ; appendix table 6-6 ). The Asia-9 economies grew at an annual average rate of 4%, resulting in almost a doubling of per capita income. Singapore, South Korea, and Taiwan grew slightly faster than the Asia-9 average, resulting in living standards rising from middle to high income. India's per capita income doubled from $1,300 to $2,800, propelled by 5% growth during this period. The per capita income of other developing economies has grown at half the rate (or less) of the Asia-9.

Many economists and policymakers regard productivity growth as the single most important factor in maintaining and advancing living standards. Standard productivity measures, such as labor or multifactor output per hour, are not available for many countries. A proxy measure—GDP per employed person—is used here, spanning 1992 to 2007 (appendix table 6-7 ).[6]

Labor productivity growth was much lower for the developed economies than the developing economies, but productivity levels were much higher (appendix table 6-7 ). Labor productivity growth rates for the United States, the EU, and Japan averaged less than 2% annually (1.7%, 1.8%, and 1.3%, respectively) (figure 6-5 ). In contrast, China's labor productivity grew at an estimated 8% annual rate. Productivity growth of the Asia-9 economies averaged roughly 4%, ranging from India's 5% to 3-4% for Singapore, South Korea, and Taiwan.

Despite impressive gains, productivity levels in China and the Asia-9 remain far below those of the United States, the EU, and Japan (figure 6-7 ; appendix table 6-7 ). China's gap with the United States decreased by 10 percentage points from 1992 to 2007 but remains at one-fifth the U.S. level. The Asia-9's gap narrowed slightly to 16% (from 12%) of the U.S. level. However, the labor productivity levels of Singapore, South Korea, and Taiwan are equivalent to those of the EU and Japan.

ICT has been identified by many economists and policymakers as vital for national economic growth and the competitiveness of all industries.[7] Bresnahan and Trajtenberg (1995) and others have identified ICT as a "general-purpose technology" that has the potential for pervasive use in a wide range of sectors because (1) it can be used with a variety of inputs and technologies and (2) it is subject to falling prices that stimulate further demand and use.[8] ICT is regarded as crucial for the growth of today's knowledge-based economies in much the same way that earlier general-purpose technologies (the steam engine, metal forging, and automatic machinery) were crucial for growth during the Industrial Revolution. Thus, adoption and diffusion of ICT may be an important indicator of future economic and productivity growth and of a country's capacity to innovate.

Three ICT indicators are presented here:

  • ICT intensity: ICT spending as a share of GDP
  • The World Bank's Knowledge Economy Index (KEI): a measure of per capita diffusion and adoption of ICT[9]
  • National share of global ICT spending: a measure of the scale of the economy's demand for global ICT products and services.

The United States ranks highest in the share of global ICT spending, scores highest in the KEI index, and ties with China in having the highest ratio of ICT spending to GDP (figure 6-8 ). The EU and Japan score nearly as high in the KEI index but have a lower intensity of ICT spending than the United States. China and the Asia-9 have greater ICT intensity and a higher share of global ICT spending than other developing regional/national economies. However, China and the Asia-9 score lower in the KEI index compared with Latin America, the Middle East, and Central Europe/Asia. ICT index scores vary widely within the Asia-9: The developed economies score at the same level as the United States, but India and other developing economies score at only half the Asia-9 average.

The relatively low standing of China and the Asia-9 in the KEI index, despite their relatively high share of global ICT spending, may be due to China's and India's very large populations and because China and some Asia-9 countries/economies are net exporters of ICT goods. The benefit that China and some of the Asia-9 derive from ICT exports may come at the cost of not using cheaper and more powerful ICT products throughout their domestic economy and populace.[10]

Notes

[2] See OECD (2001) for a discussion of classifying economic activities according to degree of "knowledge intensity." A different, product-based classification of the Census Bureau is used in part of the discussion on trade.
[3] 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 United Kingdom, 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 non-manufacturing industries have equal or greater R&D intensities. For additional perspectives on OECD's methodology, see Godin (2004).
[4] The combined estimated R&D expenditures of these regions/countries were $969 billion (2007 purchasing power parity) of an estimated $1.1 trillion in global R&D expenditures in 2007.
[5] Purchasing power parity is the exchange rate required to purchase an equivalent market basket of goods.
[6] This is an imprecise measure for comparing productivity growth, especially between developed and developing economies. One reason is that productivity is more difficult to measure in the service sector, and services typically have a far larger part of GDP in developed compared with developing economies.
[7] See Atkinson and McKay (2007:16–17), for a discussion and references to the impact of IT on economic growth and productivity.
[8] See Bresnahan and Trajtenberg (1995) and DeLong and Summers (2001) for a discussion of ICT and general-purpose technologies.
[9] This index is composed of three measures: telephones per 1,000 people, computers per 1,000 people, and Internet users per 10,000 people. Country scores on measures are normalized on a scale of 1–10, with 10 being equivalent to the highest score received by a country.
[10] See Mann (2006:90–92), for a discussion of the economic benefits of importing versus exporting ICT.
 

Science and Engineering Indicators 2010   Arlington, VA (NSB 10-01) | January 2010

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