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Chapter 6. Industry, Technology, and the Global Marketplace

Knowledge- and Technology-Intensive Industries in the World Economy

The first section of this chapter examines the role of KTI industries in the global economy. (For an explanation of KTI industries, please see “Chapter Overview.”) Data on value added in these industries can be used to examine their growing importance in the global economy, the United States, and other major economies. (For a discussion of value added and other measures of economic activity, see sidebar, “Industry Data and Terminology”). For context, selected data are presented on wealth, productivity growth, and ICT infrastructure of selected economies, with a focus on the United States and other economies in which KTI industries play a particularly large or rapidly growing role.

Growth of Knowledge- and Technology-Intensive Industries in the World and Major Economies

KTI industries—commercial KI services, public KI services, and HT manufacturing—are a major part of the global economy, making up 27% of world gross domestic product (GDP) (appendix tables 6-16-3). Among the KTI industries, the commercial KI services—business, financial, and communications—have the highest share (16% of GDP) (appendix table 6-4).

The public KI services—education and health—are the second largest (9%) (appendix tables 6-3, 6-5, and 6-6).[5] The HT manufacturing industries—aircraft and spacecraft, communications, computers, pharmaceuticals, semiconductors, and testing, measuring and control instruments—are much smaller, with a 2% share (appendix table 6-7).

The KTI share of the world economy remained roughly constant between 1997 and 2012 (appendix tables 6-2 and 6-3). Among the KTI categories, the commercial KI services share gained 1 percentage point to reach 16% (appendix table 6-4). The expansion of commercial KI services reflects the continued shift in developed economies to services and the tendency for businesses and other organizations to purchase various services rather than maintain organizational units to provide them. This has spurred the growth of the business services industry. In developing economies, rapid economic growth and higher per capita income have stimulated demand for various services, including the commercial KI services of communications and financial services.

The share of public KI services stayed stable at 9% between 1997 and 2012 (appendix tables 6-3, 6-5, and 6-6). The growth of education and health care in line with world GDP growth has occurred due to increased demand for and access to education and health care services, the aging of populations in many countries, and other demographic factors and technological advances, such as online education and electronic medical records. The share of HT manufacturing declined 1 percentage point to reach 2% (appendix table 6-7).

Patterns and Trends of Knowledge- and Technology-Intensive Shares of Developed Economies

The KTI share of developed economies is much higher than that of developing economies due to their much larger share of KI services (figure 6-1; appendix tables 6-2 and 6-3). KTI shares vary widely among developed economies:

  • The United States has the largest KTI share of any large developed economy (40%), followed by Australia (39%) and the United Kingdom (36%) (figure 6-2). These countries have larger shares in KI services, particularly in commercial KI services (22%–28%). The commercial KI services' shares of Australia and the United States are due, in part, to their higher shares in financial services (14% and 8%, respectively) relative to other developed economies (appendix tables 6-3 and 6-8). Some research suggests that the large size of financial sectors in the United States and other developed economies has fostered slowed economic growth and greater economic instability (Palley 2007:2–3).
  • The EU, Japan, Canada, and South Korea have KTI shares of 29%–30%, with considerably smaller shares than the United States in commercial KI services (14%–18% versus 24%) (figure 6-2). The EU and South Korea have smaller shares of financial services (5%–7%) compared to Australia and the United States.

Between 1997 and 2012, the KTI share of developed economies grew from 29% to 32% due to increases in the commercial and public KI services (figure 6-1; appendix tables 6-26-6). The HT manufacturing share fell from 3% to 2% (appendix table 6-7). The context for this development is the continued shift from manufacturing to services in developed economies.

Trends in the KTI share varied somewhat among the developed economies:

  • The KTI shares of the United States, the United Kingdom, and Australia rose 6–9 percentage points from 1997 to 2012 to reach 39%–40% in Australia and the United States and 36% in the United Kingdom (figure 6-2; appendix tables 6-2 and 6-3). In the United States, the increase in the KTI share occurred largely from a rise in the share of financial services (from 7% to 8%) and public KI services (from 11% to 13%) (appendix 6-5, 6-6, and 6-8).
  • The EU's and Japan's KTI shares rose 3 percentage points to reach 30% and 29%, respectively.
  • South Korea's share rose 6 percentage points to reach 29%.
Patterns and Trends of Knowledge- and Technology-Intensive Shares of Developing Economies

The KTI share of developing economies is much lower than that of developed economies due to smaller shares of KI services (figure 6-1). The KTI shares of individual developing countries vary widely, reflecting considerable differences in their stage of development and level of per capita income (figure 6-3; appendix tables 6-2 and 6-3). Among the larger developing countries, Turkey, which has a relatively high per capita income, has the highest KTI share (23%). Five countries—Brazil, China, India, Mexico, and South Africa—have KTI shares of 19%–21%. Indonesia has the lowest KTI share of any large developing economy (14%).

The KTI share of developing countries as a group edged up from 18% to 20% between 1997 and 2012 (figure 6-1). The commercial KI share grew slightly from 11% to 12%. The shares of public KI services and KI services were flat, as were shares of HT and non-HT manufacturing (figure 6-4). The shares of agriculture, construction mining, and utilities grew substantially in many of these countries, reflecting the continuing importance of resource extraction to their economies and growing domestic and global demand for food, energy, and minerals.

Trends of individual developing countries varied widely (figure 6-3):

  • Turkey's KTI share had the largest increase among larger developing countries, rising 7 percentage points to reach 23%; most of the increase occurred in commercial KI services.
  • Mexico's KTI share gained 5 percentage points to reach 21% due to increases in commercial KI services. Its HT manufacturing share fell from 2% to 1% (appendix tables 6-26-4 and 6-7).
  • China's KTI share grew by 3 percentage points to reach 20% due entirely to a rise in its HT manufacturing share as it became the primary location for global production of electronic products.
  • India's KTI share rose from 16% to 19% due an increase in commercial KI services.
Information and Communications Technology Infrastructure

Many economists regard ICT as a general-purpose platform technology that fundamentally changes how and where economic activity is carried out in today's knowledge-based countries, much as earlier general-purpose technologies (e.g., the steam engine, automatic machinery) propelled growth during the Industrial Revolution.[6] Thus, ICT facilitates broad development of new markets (e.g., for mobile computing, data exchange, and communications) and of new methods, products, organization, and processes. It also raises worker productivity in non-ICT industries.

Because of the shift to knowledge-based production, ICT infrastructure can be as important as or more important than physical infrastructure to raising living standards and remaining economically competitive. A World Bank study of developed and developing countries estimated that a 10 percentage point increase in broadband penetration raises economic growth by 1.2–1.4 percentage points (World Bank 2009:45).

This section examines two broad ICT indicators: an index of ICT infrastructure available to business, consumers, and the public sector; and data on ICT spending by consumers and businesses as a share of GDP. The indexes of ICT infrastructure are composite indicators developed by the Connectivity Scorecard that are composed of the following elements:

  • The ICT consumer infrastructure measures include data on fixed broadband coverage and penetration, 3G coverage and penetration, wireless telephone penetration, and Internet download speeds.
  • The ICT business infrastructure measures include Internet servers and personal computers per capita, ICT investment per capita, and business usage of broadband and mobile data.
  • The ICT public sector infrastructure measures include government, health care, and education spending on ICT and a United Nations indicator of online e-government services.[7]

For developing countries, indexes have fewer components due to lack of data availability.

Developed countries. The U.S. ICT infrastructure compares favorably to other large developed countries as measured by these ICT indicators (figure 6-5):

  • U.S. businesses invest heavily in and intensively utilize ICT business infrastructure.
  • The United States also scores high in public sector infrastructure because of high investment by government, education, and health care sectors in ICT and an extensive number of e-government services.
  • The United States scores moderately high in consumer infrastructure. The United States is ahead of Western European countries (except Sweden) in deployment of high-speed broadband but trails Japan and South Korea on this measure.

Other countries that have similar scores to the United States are the United Kingdom, Sweden, and Canada (figure 6-5). These countries were early adopters of ICT, and their business sectors are ICT intensive, particularly in the United States and the United Kingdom, which have large sophisticated service industries.

European countries—including France, Germany, and Italy, which were later adopters of ICT—have substantially lower scores in ICT business and public sector infrastructure compared to the United States (figure 6-5). Their business and public sectors are less-intensive users of ICT and invest less in ICT, and their public sectors provide fewer e-government services. Italy and Greece have the weakest index scores among developed countries and, in this respect, are more comparable to developing countries.

South Korea and Japan have the highest scores in consumer infrastructure, which reflects extensive government programs to provide near-universal broadband coverage and 3G networks (figure 6-5). However, these two countries score far weaker in business and public sector ICT infrastructure.

Developing countries. Separate ICT infrastructure indexes for major developing countries show wide variations among them, reflecting in part their level of per capita income (table 6-1; figure 6-6). The three Asian countries—China, India, and Indonesia—have the lowest index scores among the larger developing countries. Indonesia and India have very low scores in the consumer, business, and public sectors because their domestic ICT usage and access for consumers and businesses are limited and uneven, even though India has a high level of ICT service exports and a large pool of skilled ICT workers. China scores somewhat higher on consumer infrastructure, with comparatively higher broadband and fixed-line usage by its populace. China's relatively weak score in ICT business infrastructure reflects very low penetration of secure Internet servers and limited international Internet bandwidth.

Developing countries outside of Asia have generally higher index scores, with wide variations (figure 6-6). South Africa has the highest score in public sector infrastructure among developing countries but far weaker scores in business and consumer indexes, which are close to those in the Asian countries. Brazil's and Mexico's scores are comparatively higher in the consumer and public sectors, with somewhat lower scores in business infrastructure, particularly for Mexico. Turkey is strong on consumer infrastructure, moderate on business, and poor in the public sector.

Information and Communications Technology Share of Business and Consumer Spending

Among developed countries, the United States and Canada have the highest ICT spending of businesses and consumers as a share of their GDP (figure 6-7). The next highest are South Korea and the United Kingdom, with 5%, followed by Australia, the EU, and Japan, with 4%.

The ICT business spending share is arguably a more important indicator than ICT consumer spending because of the large impact that businesses have on overall economic growth, employment, and productivity. The United States has the highest share of ICT business spending (4.4%), closely followed by Canada (4.0%). The high ICT business spending shares of these two countries coincide with their high scores on ICT business infrastructure (discussed in the previous section). Although scoring as high as the United States and Canada on ICT business infrastructure, the United Kingdom has a lower ICT business spending share of GDP that is nearly the same as the EU average. Japan and Australia have some of the lowest shares in ICT business spending.

Many developing countries have ICT spending shares that are comparable to developed countries (figure 6-8). South Africa, which has the highest share among larger developed countries, matches the levels of Canada and the United States, although South Africa's ICT business spending share is less than that of Canada and the United States. Three countries—Brazil, China, and Turkey—have ICT shares roughly the same as the EU, with similar levels of ICT business spending. India and Indonesia have the lowest ICT spending shares, with their ICT business spending GDP share at 2% or less, coinciding with their low index scores in ICT business infrastructure.

Productivity

Productivity, which is the ratio of production outputs to resource inputs, is considered a key source of economic growth and an indicator of development. The rise in the KTI concentration of economic activity and in business investment in ICT and other knowledge-based assets in many countries has been associated with elevated or rapid productivity growth. This association is evidence that knowledge has become a crucial factor in productivity growth. Business investment in knowledge-based assets—computerized information and software, intellectual property, and economic competencies, including brand equity and training—are estimated to account for 20%–25% of productivity growth in Europe and 27% in the United States between 1995 and 2007 (OECD 2012:2). Because the most accurate measure of productivity, output per hour, is unavailable for many developing countries, GDP per employed person is the proxy measure used here.[8]

After growing at the same pace as developed countries in the late 1990s, labor productivity of developing countries accelerated to reach 6% per annum in the mid-2000s (figure 6-9; appendix table 6-9). The rapid advancement in productivity of developing countries has been attributed to economic liberalization; investment in education, R&D, and physical infrastructure; foreign direct investment and technology transfer by subsidiaries of MNCs; and the migration of workers from agriculture to manufacturing and services. The pace of productivity growth declined in the late 2000s due to cyclical effects of the 2008–09 global recession. Some observers also believe that productivity growth will continue to moderate because China and other fast-growing countries have begun transitioning to a more consumer- and services sector–driven economy, which typically results in lower productivity growth (Conference Board 2013:10).

Productivity growth trends among the large developing countries varied widely (figure 6-10; appendix table 6-9):

  • China registered the fastest growth of any large developing economy, growing at an average annual rate of nearly 10% between 2003 and 2012, up from 8% between 1997 and 2003.
  • India grew the second fastest, increasing at an average annual rate of nearly 6% between 2003 and 2012, up from 4% between 1997 and 2003.
  • Three countries—Brazil, Indonesia, and South Africa—had negative growth between 1997 and 2003, followed by modest positive growth between 2003 and 2012. Indonesia had the strongest performance among these countries, with an annual growth rate of 4% between 2003 and 2012. South Africa grew by 3%, with Brazil growing the slowest (1%).

In the developed countries, productivity growth declined from 2% in the early 2000s to negative growth during the 2008–09 recession before rising to about 1% in 2011–12 (figure 6-9; appendix table 6-9). Although the 2008–09 recession was a major factor in the slowdown, productivity growth of developing countries had been slowing prior to the recession. The recovery in productivity growth following the recession has been weak.

Productivity in the United States grew faster than almost all developed countries between 1997 and 2012, with annual average growth of 2.2% between 1997 and 2003 slowing to 1.2% between 2003 and 2012 (figure 6-11; appendix table 6-9). Only South Korea, whose transformation to become a fully developed country is relatively recent, grew faster. Observers and researchers have attributed the United States' better performance relative to the EU and Japan to several factors, including faster adoption of ICT technology, more-flexible labor markets, high-quality research universities, and an influx of highly skilled immigrants.

Rapidly rising living standards, expressed as per capita GDP, accompanied the acceleration of productivity growth in developing countries and narrowed their gap with developed countries (figure 6-12; appendix table 6-10). Despite sustained rapid productivity growth by China and several other developing countries, however, their gap with the United States and other developed countries is substantial and is likely to remain for some time, even if China sustains current growth rates. This is because the gap between the levels of per capita GDP in the United States and the developing world is very large. For example, U.S. per capita GDP in 2012 was $49,000 on a purchasing power parity (PPP) basis compared to $10,500 in China, about one-fifth the level of the United States.

Notes
[5] Data on the health care sector include social services.
[6] See Bresnahan and Trajtenberg (1995) and DeLong and Summers (2001) for discussions of information and communications technologies and general-purpose technologies.
[7] These information and communications technologies (ICT) infrastructure indexes originate from the Connectivity Scorecard, which has developed a variety of ICT indexes for developed and developing countries. The ICT infrastructure indexes are benchmarked against the best-in-class country among developed and developing countries. The business ICT infrastructure index is composed of metrics on business hardware and software and penetration of business lines. The consumer infrastructure index is composed of indicators on penetration of telephone lines and broadband. The government infrastructure index is composed of metrics related to e-government capacity and the share of schools connected to the Internet. More information on the methodology can be found at http://www.connectivityscorecard.org/methodology/.
[8] Gross domestic product (GDP) per person employed is an imprecise measure of labor productivity. For example, labor productivity using this measure is skewed in countries that are major petroleum exporters because their GDP is boosted by their petroleum exports, with little input from labor.
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