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Chapter 6. Industry, Technology, and the Global Marketplace

Innovation-Related Indicators of U.S. and Other Major Economies


Innovation—the creation of new or significantly improved products or processes, along with novel marketing activities and organizational methods—is widely recognized as instrumental to the realization of commercial value in the marketplace and as a driver of economic growth.[17] ICT technologies, for example, have stimulated innovation of new products, services, and industries that have transformed the world economy over the past several decades. However, direct measures of innovation for the United States and many other regional/national economies remain limited. (See the section on intangible assets in this chapter and sidebar, "Developments in Innovation-Related Metrics," in chapter 4.)

U.S. Trade in Intangible Assets

Intangible assets are those that embody knowledge content, for example, patents, trademarks, and licensing of computer software (Idris 2003). These can be traded (licensed for use). The United States has a longstanding surplus in trade of intangible assets with the rest of the world (figure 6-37 ).

U.S. receipts for exports of intangible assets were $83 billion in 2007, 14% higher than in 2006 (figure 6-37; appendix table 6-52 ).[18] U.S. imports (payments) were $25 billion (up by 5%), producing a $58-billion surplus. U.S. exports and imports of intangible assets have grown every year but one between 1992 and 2007, and the surplus has widened over the period.

About three-quarters of the intangible assets trade involved exchanges between multinationals and their affiliates, either with U.S. parents and their foreign affiliates or with foreign parents and their U.S. affiliates (appendix table 6-52 ).[19] Firms with marketable industrial processes may prefer affiliated over unaffiliated transactions to exercise greater control over the distribution and use of this property, especially when the intellectual property is instrumental to the firm's competitive position in the marketplace (Branstetter, Fishman, and Foley 2006). Differential tax policies may also affect a firm's choice of transaction mechanisms.

Despite the greater value of transactions among affiliated companies, both affiliated and unaffiliated transactions have grown at the same pace over the past two decades. These trends suggest a greater internationalization of U.S. business activity and a growing reliance on intellectual property and other intangible assets developed overseas.[20]


U.S. Trade in Industrial Processes

A major component of U.S. intangible assets trade is industrial processes—the use of patents, trade secrets, and other proprietary rights. These data are used as approximate indicators of relative comparative advantage in the creation of industrial technology and its subsequent diffusion.

Comparable data on trade in industrial processes are available only for 2006 and 2007. These data include the combined transactions among affiliated firms (i.e., among firms that are tied to one another by ownership rights) and unaffiliated ones.

U.S. exports of industrial processes were $37 billion in 2007, 45% of total intellectual property exports; U.S. imports were $18 billion, 72% of total intangible assets imports (figure 6-38 ). The resulting surplus, $19 billion, accounted for one-third of the overall surplus in U.S. trade in intangible assets.

The EU had the largest share of any economy (45%) in U.S. trade in industrial processes, followed by Japan (19%). Latin America, the Asia-9, and China had shares below 10% (figure 6-38 ). More than half of the U.S. surplus in 2007 was with the EU ($10.2 billion). The United States ran a surplus of $3–$4 billion with the Asia-9 and Latin America, and nearly a $1-billion surplus with China. These surpluses were partially offset by a $2.8-billion deficit with Japan.


Global Trends in Patenting

To foster inventiveness, nations assign property rights to inventors in the form of patents. These rights allow the inventor to exclude others from making, using, or selling the invention for a limited period in exchange for publicly disclosing details and licensing the use of the invention.[21] Inventors obtain patents from government-authorized agencies for inventions judged to be "new…useful…and…nonobvious."[22]

Patenting is an intermediate step toward innovation, and patent data provide indirect and partial indicators of innovation. Not all inventions are patented, and the propensity to patent differs by industry and technology area. Not all patents are of equal value; patents may be obtained to block rivals, negotiate with competitors, or help in infringement lawsuits (Cohen, Nelson, and Walsh 2000).

Indeed, the vast majority of patents are never commercialized. However, the smaller number of patents that are commercialized result in new or improved products or processes or even entirely new industries. In addition, their licensing may provide an important source of revenue, and patents may provide important information for subsequent inventions and technological advances.

This discussion focuses largely on patent activity at the U.S. Patent and Trademark Office (USPTO). It is one of the largest patent offices in the world and has a significant share of applications and grants from foreign inventors because of the size and openness of the U.S. market.[23] These market attributes make U.S. patenting data useful for identifying trends in global inventiveness.

This section also deals with a subset of patents that their owners presume to be of sufficient economic value to warrant the high costs associated with patent filing and maintenance in three of the world's largest markets: the United States, the EU, and Japan.[24]

Trends in Applications for USPTO Patents
Data on patent filings provide a more current look at inventiveness trends than do data on patents granted because of the long lead times.[25] As it turns out, trends in patent applications are a reasonable proxy for later trends in patents granted.

Inventors filed 456,000 patent applications with USPTO in 2008, unchanged from 2007, but nearly double the number a decade ago (figure 6-39 ; appendix tables 6-53 and 6-54 ). The strong growth of U.S. patent applications between the mid-1990s and 2007 coincided with a strengthening of the patent system and the extension of patent protection into new technology areas through policy changes and judicial decisions during the 1980s and 1990s (NRC 2004). The flattening of growth in 2008 may reflect the onset of the global financial crisis and economic downturn in 2008.

Inventors residing in the United States filed 232,000 of these applications in 2008, about 9,000 less than in 2007 and the first yearly decline since 1996 (figure 6-39 ; appendix tables 6-53 and 6-54 ).[26] The U.S. resident share continued to fall, dropping from 53% in 2007 to 51% in 2008, and down from 55% in 1996, which may be indicative of increased globalization and increased recognition by developing countries of the potential value of intellectual property. Most USPTO patents credited to the United States are owned by corporations (see sidebar, "U.S. Patents Granted, by Type of Ownership").[27]

Japan, the EU, and the Asia-9 are the main sources of inventors outside of the United States who file U.S. patent applications (figure 6-39 ; appendix table 6-54 ). Japan-based inventors filed 82,000 applications (18%) in 2008, followed by 65,000 by EU inventors (14%) and 46,000 (10%) by Asia-9 inventors, mostly from South Korea and Taiwan. China is ranked a distant fifth with a 1% share. The majority of applications from other regions originate from advanced countries, including Australia, Canada, and Switzerland.

The number of patent applications from Japan and the EU grew more slowly from 1995 to 2008 than those originating elsewhere (appendix tables 6-53 and 6-54 ). The Asia-9's number of applications rose at more than twice the average rate, driven by increases in South Korea and Taiwan, and increased the Asia-9 share from 5% to 10% (figure 6-39 ). Growth in the number of applications from India and China accelerated during this period but from very low levels. The location of China-based inventors shifted from Hong Kong (64% of China's patent applications in 1997) to mainland China (81% of China's patent applications in 2008).

USPTO patents granted among these five major world regions/countries reveal trends very similar to those observed for patent applications through 2008 (figure 6-39 ; appendix tables 6-56 and 6-57 ). However, the U.S. share edged down from 50% in 2007 to 49% in 2008, the first time the U.S. share has been less than half for the past four decades (USPTO 2008). The Asia-9's share rose from 9% to 10% and the shares of the EU, Japan, and China remained steady.

USPTO Patents Granted, by Technology Area
This section discusses trends in several technology areas. The biggest—information and communications technologies—accounts for nearly 40% of all USPTO patents (figure 6-40 and appendix table 6-60 ). Two smaller technology areas, aerospace and pharmaceuticals, are closely associated with their respective high-technology industries. Measurement and control equipment is linked with scientific instruments industries. Biotechnology, medical equipment, and medical electronics are important technologies for health care.

ICT Patenting. Patents in the largest single patent group, ICT—computers, semiconductors, and telecommunications—have risen rapidly and accounted for 65,000 (41% share) of the 158,000 patents granted in 2008, up from 22,000 (21%) in 1995 (figure 6-40 and appendix tables 6-58 and 6-60 ). The U.S. share of ICT patents (48%) was identical to its total share of patents; it was higher in computers (55%) and substantially lower in semiconductors (37%) (figures 6-39 and 6-41 ).

Japan ranked second in ICT patents (23% in 2008) (figure 6-41 ; appendix table 6-59 ). This area of strength, relative to its average share of 21%, reflects a higher-than-average share in semiconductors (29%) (figure 6-39 ; appendix table 6-62 ). Nevertheless, Japan's overall ICT share declined steeply during the decade, from 36% in 1995 to 23% in 2008, reflecting declining shares in all three ICT technologies (appendix tables 6-61 through 6-63).

The EU, fourth-ranked in ICT, was relatively weaker in these technologies compared with its overall share (figures 6-39 and 6-41 ; appendix tables 6-59 and 6-61 through 6-63). Its share has been roughly flat in all three ICT technology areas.

The Asia-9's share of ICT patents more than doubled, from 5% in 1995 to 13% in 2008, because of strong growth in all three technology areas (figure 6-41 ; appendix tables 6-59 , 6-61 , 6-62 , 6-63 ). The Asia-9 surpassed the EU in 2007 and ranked third in ICT patents. The majority of patents fueling this growth originated from South Korea and Taiwan. China's share of USPTO ICT patents was small (1%), but strong growth from a low base in computer and semiconductor patents was evident over the decade.

Patents in Other Technology Areas. The United States has a comparatively higher-than-average share of patents in aerospace and four technology areas connected with health: pharmaceuticals, biotechnology, medical equipment, and medical electronics (figures 6-39 and 6-42 ; appendix tables 6-64 through 6-68). Its share of aerospace patents fluctuated broadly above 60%. In the health-related areas, the U.S. share stayed above 60% in medical equipment and medical electronics, and was just below 60% in pharmaceutical and biotechnology patents.

The EU's patents position is relatively strong in aerospace, pharmaceuticals, biotechnology, measurement and control equipment, and medical electronics (figure 6-42 ; appendix tables 6-64 , 6-66 , 6-68 , and 6-69 ). Its share of patents in these technologies is about 20% compared with its 14% overall share (figure 6-39 ). Its share in medical equipment patents is close to its overall share.

As a group, the Asia-9 is relatively weaker in these technologies, as indicated by its patent shares in each technology area, which are half or less of the overall Asia-9 share; the exception is measurement and control equipment, which is near the average (7%) (figures 6-39 and 6-42 ; appendix tables 6-64 through 6-69). The Asia-9 share has risen over the past decade in measurement and control equipment, pharmaceuticals, and biotechnology. Its share has remained roughly stable in the other technologies.

China's share in pharmaceuticals, biotechnology, and measurement and control equipment is the same as its overall share (figures 6-39 and 6-42 ; appendix tables 6-65 , 6-66 , and 6-69 ). Its shares in aerospace, medical equipment, and medical electronics are 0.5%, significantly below its overall share (1%) (appendix tables 6-64 , 6-67 , and 6-68 ).

Patenting of Valuable Inventions: Triadic Patents
Using patent counts as an indicator of national inventive activity does not differentiate between inventions of minor and substantial economic potential. Inventions for which patent protection is sought in three of the world's largest markets—the United States, the EU, and Japan—are likely to be viewed by their owners as justifying the high costs of filing and maintaining these patents in three markets. That is, they are deemed to be substantially economically valuable.

The number of such "triadic" patents was estimated at about 51,600 in 2006 (the last year for which these data are available), up from 41,500 in 1997, and showing little growth after 2004. The United States, the EU, and Japan held basically equal shares (figure 6-43 ; appendix table 6-70 ),[28] and their nearly identical positions in triadic patents contrast with a far greater gap between them in USPTO patent applications and grants.

The United States, the EU, and Japan together accounted for more than 93% of triadic patents in 1997, but that share dropped to 87% by 2006 (figure 6-43 ; appendix table 6-70 ). The Asia-9's corresponding share increase from 1% in 1997 to 6% in 2006 was almost entirely driven by increasing South Korean high-value filings. Taiwan had much lower activity in triadic patent filings than in total USPTO applications and grants, and high-value patent filings by China and India, though increasing, remain minuscule.


U.S. High-Technology Small Businesses

Many of the new technologies and industries seen as critical to U.S. economic growth are also closely identified with small businesses, that is, those employing fewer than 500 people. Biotechnology, the Internet, and computer software are examples of industries built around new technologies in whose initial commercialization small businesses played an essential role.

This section covers patterns and trends that characterize small businesses operating in high-technology industries. It is based on data from the Census Bureau. Two sources of financing for high-technology small businesses are examined, using data from the National Venture Capital Association and the University of New Hampshire's Center for Venture Research.

Employment in High-Technology Small Businesses
Small firms (those with fewer than 500 employees) employed about one-third of all workers in industries classified by the Bureau of Labor Statistics (BLS) as high technology. In contrast, small firms accounted for slightly more than half of total employment in all industries[29] in 2006 (table 6-7 ). About one-half million small businesses operating in high-technology industries employed 5 million workers in 2006 (appendix table 6-71 ).[30]

In 2006, most workers in these high-technology small businesses (68%) were in the service sector (table 6-8 ; appendix table 6-71 ), concentrated in six BLS high-technology categories: architecture, computer systems design, consulting, management, commercial equipment and services, and R&D. These service industries collectively employed more than 85% of workers employed by all small businesses in high-technology service industries in 2006. The manufacturing sector employs most of the remaining workers in high-technology small businesses (30% in 2006).

Small business employment in high-technology manufacturing is similarly concentrated within a relatively small number of industries: motor vehicle parts, metal working, semiconductors, other machinery, fabricated metals, and navigational and measurement tools (table 6-8 ; appendix table 6-71 ). These six industries collectively employed more than half of all workers in all manufacturing high-technology small businesses and 15% of the entire high-technology small business labor force in 2006.

Financing of High-Technology Small Businesses
Entrepreneurs seeking to start or expand a small firm with new or unproven technology may not have access to public or credit-oriented institutional funding. Two types of financing, called angel investment and venture capital investment, are often critical to financing nascent and growing high-technology and entrepreneurial businesses. (In this section, business denotes anything from an entrepreneur with an idea to a legally established operating company.)

Angel investors tend to be wealthy individuals who invest their own funds in entrepreneurial businesses, either individually or through informal networks, usually in exchange for ownership equity. Venture capitalists manage the pooled investments of others (typically wealthy investors, investment banks, and other financial institutions) in a professionally managed fund. In return, venture capitalists receive ownership equity and almost always get to participate in managerial decisions.

Venture capital firms have categorized their investments into four broad financing stages, which are also relevant for discussion of angel investment:

  • Seed and startup supports proof-of-concept development (seed) and initial product development and marketing (startup).
  • Early funds support the initiation of commercial manufacturing and sales.
  • Expansion financing provides working capital for company expansion, funds for major growth (including plant expansion, marketing, or development of an improved product), and financing to prepare for an initial public offering (IPO).
  • Later-stage funds include acquisition financing and management and leveraged buyouts. Acquisition financing provides resources for the purchase of another company, and a management and leveraged buyout provides funds to enable operating management to acquire a product line or business from either a public or a private company.

Angel investor funds are concentrated in the seed-startup and early stages. During the 2007–08 period, they provided 80% of investment for these stages, compared with 20% in later stages (figure 6-44 ). Venture capital, however, is provided primarily for expansion and later-stage funding (figure 6-45 ; appendix table 6-72 ).

This section examines angel and venture capital investment patterns in the United States, focusing on the period from 2001 to 2008. The section examines (1) changes in the overall level of investment, (2) investment by stage of financing, and (3) the technology areas that U.S. angel and venture capitalists find attractive.

U.S. Angel Investment. According to data from the Center for Venture Research, angel investors provided $19 billion in financing in 2008, a sharp drop from $26 billion in 2007 following 5 consecutive years of increases (figure 6-46 ; appendix table 6-73 ).[31] An estimated 55,000 businesses received financing from angel investors in 2008, 1,600 fewer than in 2007 but 4,500 more than in 2006 (table 6-9 ). The average investment per business fell from about $455,000 in 2007 to $346,000 in 2008.

Although angel investors continue to concentrate on the riskiest stage of business development, they have become more conservative in their investment patterns. The share of angel funding going to seed-startup was 42% in the 2007–08 period compared with 47% in the 2002–04 period (figure 6-44 ).

Changes in the technology areas that attract angel investment may indicate changes in the parts of the economy that offer future growth opportunities. Healthcare services received the largest share of angel investment in 2008 (16%), 5 percentage points lower than its 2006 share (figure 6-47 ). Software received 13% of total angel investment in 2008, 5 percentage points lower than its 2006 share. Biotechnology received 11% of total investment in 2008, 7 percentage points lower than its 2006 share. The share of industrial/energy increased from 6% in 2006 to 8% in 2008, possibly reflecting opportunities that angel investors see in green and clean energy technologies.

Businesses receiving angel investment in 2007 employed about 200,000 workers (table 6-10 ). This figure is about the same as employment in the 2005–06 period. Each business employed an average of 3.5 workers in 2007, slightly lower than the average in 2005–06.

U.S. Venture Capital Investment. U.S. venture capitalists invested $28.1 billion in 2008, an 8% decline compared with the level in 2007 and the first decline since 2003 (figure 6-46 ; appendix table 6-72 ). The amounts of angel and venture capital investment have been very similar for the past 5 years. Since declining sharply in 2001 following the end of the dot.com boom, angel and venture capital investments have generally been strengthening, but in 2008 they remained well below their previous peaks.

Venture capitalists financed 3,300 firms in 2007, far fewer than the number of businesses financed by angel investors in the same year (57,000) (table 6-9 ; appendix table 6-72 ). Average venture capital investment has been about $8.5 million per firm for the past several years, much larger than the corresponding figure for angel investment.

The number of businesses funded by venture capital and the average amount of investment have been increasing during the past several years. The number of businesses was about 3,300 in 2007–08, one-quarter higher than the average for the 2002–05 period (table 6-9 ; appendix table 6-72 ). The average investment per business in 2008 ($8.6 million) was about $675,000 lower (not inflation adjusted) than that in 2007 but approximately $650,000 higher than the average for the 2002–03 period.

Venture capital investment has become generally more conservative than angel investment, and venture capital investments have more often been made in the later stages of business development. Capital provided for expansion and later-stage financing accounted for a combined share of 75% or more from 2002 to 2008 (figure 6-44 ; appendix table 6-72 ). Expansion financing accounted for half or more of all venture capital investment from 1996 through 2004, after which its share declined to 37% in 2007–08 as later-stage investments rose to 39%.

Venture capitalists have largely abandoned the seed-startup stage, which was 9% in the 1996–98 period, declined to 2% in the 2002–04 period, and recently recovered to a modest 5% (figure 6-45 ; appendix table 6-72 ). The factors behind the downturn are thought to be the desire for lowered investment risk, a shorter time horizon for realizing gains, and an increase in venture capital companies' base level for investment, which has come to exceed the amounts typically required for the earliest stages. The recent increase is thought to reflect the emergence of promising new investment opportunities after the closeout of holdings in mature companies (NVCA 2007a).

Venture Capital Financing, by Industry. Computer software had the largest share of venture capital funding of any industry in 2007–08 (18%) but registered a 5-percentage-point decline from 1999–2001 levels (figure 6-48 ; appendix table 6-72 ). Likewise, the share of telecommunications declined to 7% in 2007–08, about half of its 1999–2001 level.

Biotechnology received the second highest share of venture capital funding in 2007–08 (16%), slightly below the 2002–06 level but more than triple its share during the 1999–2001 period (figure 6-48 ; appendix table 6-72 ). The trend in medical devices and equipment was similar. Its share quadrupled from 3% during the 1999–2001 period to 13% in 2007–08.

Industrial/energy's share more than doubled from 6% in 2005–06 to 13% in 2007–08, similar to the trend in angel investment and thought to reflect investor interest in renewable and clean energy (figure 6-48 ; appendix table 6-72 ). Likewise, investments in clean technologies—a cross-cutting category of green and renewable energy—increased from a 9% share of venture investment in 2007 to a 15% share in 2008.


Innovation and Knowledge-Based Economic Growth

The World Bank developed its Knowledge Economy Index (KEI) to show the potential of countries to adopt, generate, diffuse, and harness knowledge in economic development. Knowledge is regarded as an important factor of innovation, given the shift of economic activity toward KTI industries and the growing importance of intangible assets.

The KEI is a simple average of four indicator scores that measure countries' relative standing in ICT, innovation, education, and economic incentive and institutional regime. In turn, the four component indicators are composed of several variables each. Countries are ranked in order of their scores on each variable, and scores are normalized on a scale of 0 to 10 compared with all countries: The top 10% of performers get a normalized score between 9 and 10, the next decile receives normalized scores between 8 and 9, and so on.

The 2005 KEI scores of the United States, Japan, and the EU were the highest among the major regions/countries/economies, followed by those of Taiwan, Singapore, and South Korea (figure 6-49 ; appendix table 6-74 ). Over a decade (1995–2005), the KEI scores of the United States, the EU, and Japan declined somewhat (figure 6-49; appendix table 6-74). The U.S. score fell largely because of a decline in the ICT sector, whose index value dropped from 9.8 to 8.9, and also because of weakness in the education sector. Japan's lowered KEI score reflected a decline in Japan's economic incentive regime; the EU's score was reduced because of a lowered education sector score.

Among the developing countries/economies, China, Taiwan, and Vietnam showed considerable improvement over the decade, albeit from very different levels (figure 6-49 ; appendix table 6-74 ). China improved its scores in all four component indicators, with the largest gains in the ICT and innovation scores. Although China's gap with the developed economies narrowed, its KEI score remains well below those of the developed economies.

Among the Asia-9, Taiwan and Vietnam showed solid increases (figure 6-49 ; appendix table 6-74 ). India's KEI index remained unchanged, thus widening the gap with China. India's modest score gains in innovation and economic incentive regime values were offset by weaknesses in ICT and education indicators, which remained in the 20% percentile range.

Among other developing countries, Brazil, Croatia, and Sri Lanka showed solid gains (appendix table 6-74 ). The improvement in Brazil's score reflected a large increase in its education score and a rise in its ICT score.

Notes

[17] There are widely different definitions of innovation, but common to these definitions is the commercialization of something that did not previously exist.
[18] Earlier data are not comparable because of a change in the data collected.
[19] An affiliate is a business enterprise located in one country that is directly or indirectly owned or controlled by an entity in another country. The controlling interest for an incorporated business is 10% or more of its voting stock; for an unincorporated business, it is an interest equal to 10% of voting stock.
[20] In addition, data on the destination of multinational corporate sales to foreign affiliates also suggest that market access is an important factor in the firms' decisions to locate production abroad. See Borga and Mann (2004).
[21] Rather than granting property rights to the inventor, as is the practice in the United States and many other countries, some countries grant property rights to the applicant, which may be a corporation or other organization.
[22] U.S. patent law states that any person who "invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent." The law defines nonobvious as "sufficiently different from what has been used or described before [so] that it may be said to be nonobvious to a person having ordinary skill in the area of technology related to the invention." These terms are part of the criteria in U.S. patent law. For more information, see USPTO, "What Is a Patent?," at http://www.uspto.gov/web/offices/pac/doc/general/index.html#patent. Accessed 19 June 2009.
[23] The Japan Patent Office (JPO) is also a major patent office but has a much smaller share of foreign patents compared with the USPTO and the European Patent Office (EPO).
[24] Although the USPTO grants several types of patents, this discussion is limited to utility patents, commonly known as patents for inventions. They include any new, useful, or improved-on method, process, machine, device, manufactured item, or chemical compound.
[25] USPTO reports that average time to process an application (pendancy) was 31.1 months for utility, plant, and reissue patent applications in FY 2006, compared with 18.3 months in FY 2003. Applications for utility patents account for the overwhelming majority of these requests. EPO reports that the average pendancy was 45.3 months in 2005.
[26] Unless otherwise noted, USPTO patents are assigned to countries on the basis of the residence of the first-named inventor.
[27] U.S. patenting data by type of ownership and by state are available only for U.S. patents granted.
[28] Triadic patent families with co-inventors residing in different countries are assigned to their respective countries/economies on a fractional count basis (i.e., each country/economy receives fractional credit on the basis of the proportion of its inventors listed on the patent). Patents are listed by priority year, which is the year of the first patent filing. Data for 1998–2003 are estimated by the OECD.
[29] The high-technology definition used here is from the Bureau of Labor Statistics and differs from that used in earlier sections.
[30] See Hecker (2005) for a definition and methodology for determining high-technology industries. Several industries identified by BLS as high technology before 2003 are not covered in the Census Bureau's data.
[31] Comparable data on angel capital investment before 2001 are not available.
 

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

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