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Chapter 6. Industry, Technology, and the Global Marketplace

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

The fourth section of this chapter examines several innovation-related measures in industries, with a focus on KTI industries. OECD defines innovation as the “implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method” (OECD/Eurostat 2005:46–47). Innovation is widely recognized as instrumental to the realization of commercial value in the marketplace and as a driver of economic growth. New ICT technologies, for example, have stimulated the creation of new products, services, and industries that have transformed the world economy over the past several decades.

This section presents data on how innovation activity varies among U.S. industries, using information from NSF's BRDIS. The section also includes three indicators of activities that can facilitate innovation but do not themselves constitute innovation. Two of these, patents and trade in royalties and fees, are indicators of invention—they protect intellectual property in inventions that can have value for commercial innovations. The third indicator concerns early stage financing for U.S. HT small businesses, which can be an important milestone in the process of bringing new products and services to market.

Innovation Activities by U.S. Businesses

BRDIS provides innovation indicators that are representative of all U.S.-located businesses with five or more employees. Survey results indicate which kinds of companies introduced new goods, services, or processes between 2008 and 2010.[21] Data from the 2010 survey suggest that U.S. KTI industries have a much higher incidence of innovation than other industries.

In the U.S. manufacturing sector, five of the six HT manufacturing industries—aircraft; communications; computers; pharmaceuticals; and testing, measuring, and control instruments—reported rates of product and process innovation that were at least double the manufacturing sector average (figure 6-28). Most of these industries reported significantly higher rates of innovation in both goods and services, suggesting that high rates of innovation by manufacturing companies go hand-in-hand with innovations in services.

Several of these industries—notably, aerospace; computers; pharmaceuticals; and testing, measuring, and control instruments—reported higher-than-average rates of process innovations, particularly in production methods, logistics, and delivery methods. Innovation is also higher in several commercial KI services industries in comparison to other nonmanufacturing industries (figure 6-29).[22] Software firms lead in incidence of innovation, with 69% of companies reporting the introduction of a new product or service, compared to the 9% average for all nonmanufacturing industries. Innovation is also three to four times higher than the nonmanufacturing average in three other industries—computer systems design, data processing and hosting, and scientific R&D services.

Global Trends in Patenting

To foster innovation, 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.[23] Inventors obtain patents from government-authorized agencies for inventions judged to be “new . . . useful . . . and . . . nonobvious.”[24]

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, and not all foster innovation—patents may be obtained to block rivals, negotiate with competitors, or help in infringement lawsuits (Cohen, Nelson, and Walsh 2000). In HT industries, where innovation is cumulative, firms may build “thickets” of patents that impede or raise the cost of R&D and innovation (Noel and Schankerman 2009:2).

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.[25] Although U.S. patents are naturally skewed toward U.S. inventions, these market attributes make U.S. patent data useful for identifying trends in global inventiveness.

This section also deals with patents filed in all three of the world's largest patenting centers: the United States, the EU, and Japan. Because of the high costs associated with patent filing and maintenance in these three patent offices, inventions covered by these patents are likely to be valuable.

U.S. Patent and Trademark Office Grants

The USPTO granted inventors more than 250,000 patents in 2012 (appendix tables 6-40 and 6-41). U.S. inventors were granted 120,000 patents, making them the largest recipient, with a share of nearly one-half of patents granted worldwide. Japan, the next largest, was granted 51,000 patents. The EU, ranked third, received 36,000 patents. Other developed economies, largely South Korea and Taiwan, were together granted the same number as the EU. Developing countries received 9,000 patents (less than 4% of total patents). China and India received by far the largest number of patents granted to developing countries.

The number of USPTO patents remained essentially flat at 170,000 patents between 2003 and 2009 before rising rapidly to reach 250,000 in 2012 (appendix table 6-40). The rapid growth in 2010–12 may reflect recovery from the recession, along with USPTO efforts to decrease its backlog of patent applications. The United States enacted a new patent law in 2011 that was aimed in part at reducing the backlog of USPTO patent applications.

Between 2003 and 2012, the number of USPTO patents granted to U.S.-based inventors grew from 87,000 to 120,000 patents, trailing the pace of growth of all patents (appendix table 6-40). As a result of U.S. growth lagging behind overall growth, the U.S. share fell 5 percentage points to reach 48% (figure 6-30). The decline in the U.S. share likely indicates increased technological capabilities abroad, globalization that makes patent protection in foreign countries more important, and patenting by U.S.-based inventors located abroad, such as patents granted to inventors located in subsidiaries of U.S. MNCs.

Patents granted to Japan and the EU grew slightly slower than the growth of overall patents, resulting in their shares slightly declining to 20% and 14%, respectively (figure 6-30; appendix table 6-40). Slow growth of USPTO patenting by Japan and the EU may indicate sluggish economic activity or an increased preference to patent in their home patent offices.

Patents granted to other developed economies rose three times faster than growth of all patents to reach 37,000 patents (appendix table 6-40). South Korea and Taiwan led growth of these developed economies, with their patent grants rising to 13,000 and 11,000, respectively.

Patents granted to developing countries rose exponentially (but from a very low base) to reach 9,000 patents (table 6-7; figure 6-30; appendix table 6-40). China and India led growth of developing countries, with their patents reaching 5,000 and 2,000 patents, respectively.

U.S. Patent and Trademark Office Patenting Activity by U.S. Companies

Patenting by U.S. industry provides an indication of inventive activity, mediated by the relative importance in different industries of patenting as a business strategy.

According to the NSF BRDIS survey, U.S. KTI industries account for a large share of USPTO patent grants (figure 6-31; appendix table 6-42). The BRDIS data on USPTO patents are not comparable with the USPTO patent data presented in the previous and following section.[26] U.S. HT industries were granted 29,000 of the 58,000 patents granted to all U.S. manufacturing industries in 2011. The HT industry share of patents granted to all manufacturing industries (50%) is far higher than its share of value added of all manufacturing industries (19%). The U.S. semiconductor industry was issued the largest number of patents (10,000) among these HT industries, followed by 2,000 to 5,000 each for aerospace, computers, communications equipment, pharmaceuticals, and testing, measuring, and control instruments.

U.S. commercial KI services received 46% of the 43,000 patents issued to nonmanufacturing industries in 2011 (figure 6-31; appendix table 6-42). These industries' share of patents is much higher than their value-added share of all nonmanufacturing industries (32%), similar to the position of HT manufacturing industries. The software industry accounted for 10,000 patents, more than half of the patents issued to commercial KI services; professional and technical services were ranked second, with 6,000 patents. Two industries in professional and technical services—scientific R&D services and computer systems design—reported significant patenting activity.

U.S. Patent and Trademark Office Patents Granted, by Technology Area

This section discusses trends in four broad, NSF-classified technology areas that are closely linked to science or KTI industries—ICT; biotechnology and pharmaceuticals; medical electronics and medical equipment; and automation, control, and measuring technologies. This NSF classification assigns patents to technology areas on the basis of information contained in the patents; it is not comparable to patent data from BRDIS presented in the previous section, which classify patents based on the industry of the company to which the patent was issued.

Patents granted in the four broad, NSF-classified technology areas make up more than half of all U.S. patents:

  • The largest area is ICT, which consists of networking, information processing, telecommunications, semiconductors, and computer systems (table 6-8; appendix tables 6-436-47). It accounts for nearly 40% of all USPTO patents.
  • Health-related technologies consist of two broad areas, biotechnology and pharmaceuticals and medical electronics and medical equipment. These two technology areas each have shares of 6% (appendix tables 6-486-51).
  • A fourth broad area includes automation and control and measuring and instrumentation technologies, with a share of 6% (appendix tables 6-52 and 6-53).
  • Between 2003 and 2012, USPTO patents granted in ICT technologies more than doubled, compared to a 50% increase in patents in all technologies (appendix tables 6-436-47). Trends varied widely among the five ICT technology areas:
    • Patents granted in information processing and networking at least tripled to reach 14,000 and 24,000, respectively.
    • Patents in telecommunication nearly doubled to reach 17,000.
    • Patents in computer systems lagged overall growth (55%) to reach 15,000.
    • Patents in semiconductors grew the slowest (18%) to reach 16,000.
  • Biotechnology and pharmaceuticals trailed growth of patents in all technologies (36% versus 50%) (appendix tables 6-48 and 6-49). Growth was particularly weak in pharmaceuticals, which grew 16%. This weak growth coincides with consolidation of the pharmaceutical industry in the last several years, stronger price and safety regulation of drugs in many developed countries, increased competition from generics, and little growth in U.S. Food and Drug Administration approval of new drugs.
Positions of Major Patenting Regions and Countries in Selected Technology Areas

This section presents shares of the United States, the EU, and several Asian countries in these four broad technology areas averaged over 2010–12. A technology area share greater (less) than the share of all patents signifies that patents by a region, country, or economy are concentrated (weaker) in a particular technology.

ICT. U.S. patenting activity is concentrated in the broad ICT technology area, with a share 4 percentage points higher than its share of all patents (figure 6-32). However, the U.S. position varies widely among the individual technology areas:

  • The United States is highly concentrated in two areas—information processing and networking—with shares more than 10 percentage points higher (appendix tables 6-43 and 6-44).
  • The United States has average activity in two areas—computer systems and telecommunications (appendix tables 6-45 and 6-47). The United States is weak in semiconductors, with its share more than 10 percentage points below its share of all patents (appendix table 6-46).

EU patenting activity in ICT is comparatively low (figure 6-32). Several studies suggest that the EU has lagged behind the United States in ICT technology, but the pattern may also reflect a preference of EU inventors to patent in the European Patent Office.

In Asia, Japan and Taiwan have similar ICT patterns, with an overall weakness in ICT (figures 6-32 and 6-33). They have weaker activity in three technologies—networking, information processing, and telecommunications (appendix tables 6-436-45). They have concentrated patenting activity in computer systems and semiconductors (appendix tables 6-46 and 6-47).

Biotechnology and Pharmaceuticals. The United States is concentrated in this area, with a high concentration in biotechnology and a somewhat high concentration in pharmaceuticals (figure 6-32; appendix tables 6-48 and 6-49). The EU is highly concentrated in this area, with very strong activity in pharmaceuticals and above-average activity in biotechnology. South Korea and Taiwan are weak in this area (figure 6-33).

Medical Electronics and Equipment. The United States has a very high concentration in medical electronics and equipment with a share that is 20 percentage points higher than its share of all patents (figure 6-32; appendix tables 6-50 and 6-51). The United States is equally strong in the two individual technology areas. The EU's patenting activity is average in this area, and South Korea and Taiwan have much weaker activity (figure 6-33).

Automation and Control; Measuring and Instrumen-tation. The United States has a somewhat higher concentration in automation and control and average activity in measuring and instrumentation (figure 6-32; appendix tables 6-52 and 6-53). The EU has higher-than-average concentration in these two technology areas. South Korea and Taiwan have weaker activity in these two technology areas (figure 6-33).

Patenting 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. These triadic patents serve here as an indicator of higher-value inventions, although growing patent activity in China, India, South Korea, and other locations may limit the utility of this measure. The number of triadic patents is strongly correlated with expenditures on industry R&D, suggesting that countries with higher patenting activity make greater investments to foster innovation (OECD 2009:36).

Between 2000 and 2010, the number of triadic patents grew slightly from 45,000 to 49,000 (figure 6-34; appendix table 6-54). During this period, the United States, the EU, and Japan had roughly equal numbers of triadic patents.[27] South Korea's filings rose much faster than overall growth, resulting in its share of triadic patents doubling from 2% to 4%. Filings by all other countries remained at less than 1% of all triadic patents during this period.

Trade in Royalties and Fees

Firms trade intellectual property when they license or franchise proprietary technologies, trademarks, and entertainment products to entities in other countries. Trade in intellectual property can involve patented and unpatented techniques, processes, formulas, and other intangible assets and proprietary rights; broadcast rights and other intangible rights; and the rights to distribute, use, and reproduce general-use computer software. These transactions generate revenues in the form of royalties and licensing fees. Trade in royalties and fees is a rough indicator of technology transfer across the global economy and the international value of an economy's intellectual property. However, differences in tax policies and protection of intellectual property also likely influence the volume and geographic patterns of global trade in royalties and fees (Gravelle 2010:8; Mutti and Grubert 2007:112).

Global exports of royalties and fees were estimated at $241 billion in 2011 (figure 6-35). The United States, the EU, and Japan are collectively the largest global exporters, with a global share of 85%.

The United States is by far the world's largest exporter of royalties and fees, with exports of $121 billion and a large and growing surplus (figure 6-35). The volume and geographic patterns of U.S. trade in royalties and fees have been influenced by U.S.-based multinationals transferring their intellectual property to low-tax jurisdictions or their foreign subsidiaries to reduce their U.S. and foreign taxes (Gravelle 2010:8; Mutti and Grubert 2007:112). The EU is the second largest, with exports of $54 billion. The EU has a small deficit in trade of royalties and fees. Japan is the third largest, with exports of $29 billion, and has a substantial trade surplus.

Exports of major developing countries are much lower than those of developed countries (figure 6-36). Developing countries are typically net importers of royalties and fees as they seek to acquire technology from abroad to foster development of their economies. China is the largest developing country exporter of royalties and fees, with $743 million (figure 6-36). Brazil is the second largest, with $590 million, followed by India ($300 million). These three countries have had growing deficits in their trade of royalties and fees.

U.S. High-Technology Small Businesses

Many of the new technologies and industries seen as critical to U.S. innovation and economic growth are identified with small businesses. Many large HT businesses invest in and acquire small businesses as part of their efforts to develop and commercialize new technologies. Biotechnology, the Internet, and computer software are examples of industries built around new technologies in whose initial commercialization microbusinesses—those with fewer than five employees—played an important role. Trends in the number of microbusinesses in emerging or established HT sectors may point to innovative industries with future areas of growth. This section covers patterns and trends that characterize microbusinesses operating in HT industries as classified by the Bureau of Labor Statistics (BLS), which is different than OECD's HT classification. Two sources of financing for HT small businesses—venture capital and the U.S. government's SBIR—are also examined using data from Dow Jones and other sources.

Characteristics of Microbusinesses in U.S. High-Technology Industries

The number of microbusinesses in industries classified as HT by BLS is about 320,000, two-thirds of all firms operating in these industries (table 6-9; figure 6-37; appendix table 6-55).[28] Services account for 95% (300,000) of U.S. HT microbusinesses; manufacturing accounts for 4% (12,000), with the remainder in other industries (e.g., agriculture, mining, and construction). Similarly, services dominate employment in HT microbusinesses, with a very small share employed in manufacturing.

Three HT services—management, scientific, and technical consulting; computer systems design; and architectural and engineering—dominate HT services with a collective share of more than 80% of all firms and employment (table 6-9). In HT manufacturing, four industries—navigational, measuring, electromedical, and control instruments; other general purpose machinery; industrial machinery; and semiconductors—are large employers with a collective share of nearly 50%.

Entrepreneurial Investment in HT 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. (In this section, business denotes anything from an entrepreneur with an idea to a legally established operating company.) Often, entrepreneurs rely on friends and family for financing. However, when they need or can get access to larger amounts of financing, venture capital investment and SBIR financing are often critical to financing nascent and entrepreneurial HT businesses. This section examines patterns and trends of these two types of financing in the United States and internationally (venture capital only).

Venture capital investment. The United States accounted for $29 billion in venture capital, nearly 70% of global venture capital in 2012 (figure 6-38; appendix table 6-56). Europe and China are the next largest, accounting for $6 billion and $4 billion, respectively. Venture capital financing in India was $1 billion. Much of the financing occurring outside of the United States probably originates from U.S.-based venture capital firms.

Between 2005 and 2012, global venture capital financing rose by 30% to reach $42 billion (figure 6-38). After falling sharply during the recession, venture capital bounced back to its pre-recession level in 2011 before falling $8 billion in 2012. Venture capital invested in the United States grew more slowly than outside the United States, with the result that the U.S. share of global venture capital fell from 75% to 70% (figure 6-38). The expansion of venture capital outside of the United States coincides with the globalization of finance, greater commercial opportunities in rapidly growing developing countries, and the decline of yields on existing venture capital investments in U.S. companies. In China, venture capital grew from $1 billion in 2005 to $4 billion in 2012, resulting in its global share more than doubling to reach 10% (figure 6-38). Venture capital investment in India grew from $300 million to $1.4 billion, with India's global share rising from 1% to 3%.

Venture capital investment is generally categorized into four broad stages of financing:

  • Seed supports proof-of-concept development and initial product development and marketing.
  • First round supports product development and marketing and the initiation of commercial manufacturing and sales.
  • Expansion 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 includes acquisition financing and management and leveraged buyouts. Acquisition financing provides resources for the purchase of another company, and management and leveraged buyouts provide funds to enable operating management to acquire a product line or business from either a public or a private company.

In 2012, later stage venture capital investment comprised 60% ($17 billion) of total U.S. venture capital investment, up from 50% in 2005 (figure 6-39; appendix table 6-56). Knowledgeable observers have attributed the shift to later-stage investment because of a desire for lower investment risk, a decline in yields on existing investments of venture capitalists, and a sharp decline in IPOs and acquisitions of venture capital–backed firms, which has required venture capital investors to provide additional rounds of financing.[29]

In contrast to the predominance of later-stage investment, investment in the seed stage, the earliest stage, amounted to 1% ($300 million) of total U.S. venture capital investment (figure 6-39; appendix table 6-56). Despite the amount tripling in value between 2005 and 2012, seed's share of venture capital investment remained at 1% or less. Investment in the first-round stage, which follows seed, represented 21% ($6.0 billion) of venture capital investment in 2012. Investment in this stage remained constant, resulting in its share falling 6 percentage points to 21% in 2012. Financing of the expansion stage, which follows first round, represented 18% ($5.0 billion) of venture capital investment in 2012. Investment in this stage stayed constant between 2002 and 2012, resulting in its share falling from 22% to 18%.

Five technologies—biopharmaceuticals, business support services, consumer information services, medical devices and equipment, and software—dominate U.S. venture capital financing (table 6-10). During 2009–12, these five technologies accounted for more than 60% of total and seed stage investment.

Software led these technologies in venture capital investment, receiving $19.2 billion in 2009–12 (table 6-10; appendix table 6-56). Total and early stage investment in software rose between 2005 and 2012, resulting in software's share of total investment remaining steady (23%) and its share of early stage investment increasing from 16% to 34%. Biopharmaceuticals was second, receiving $14.7 billion. Total investment in biopharmaceuticals fell from $4.0 billion in 2005 to $3.4 billion in 2012, resulting in its share falling from 17% to 12%. Seed stage financing dropped from $7 million to $6 million during this period. Consumer information services received $13.5 billion in 2009–12. Total venture capital investment in this technology area rose from less than $700 million in 2005 to $2.8 billion in 2012. Growth in early stage financing was also rapid, rising from less than $10 million to $79 million, resulting in its share more than doubling from 11% to 26%.

Small Business Innovation Research Financing. The U.S. federal government's SBIR program provides early stage public financing to help U.S. small or start-up companies to commercialize technology derived from federal R&D. (For more information on SBIR, see chapter 4, “Small Business Innovation-Related Programs.”) The SBIR program provides financing in two phases:

  • Phase I funds the evaluation of the scientific and technical merit and feasibility of a company's new ideas.
  • Phase II funds further scientific and technical review and requires a commercialization plan.

SBIR provided $2.3 million in financing for nearly 6,000 awards in 2010 (figure 6-40).[30] The majority of SBIR financing occurs in Phase II, which provided $1.4 million to fund more than 4,000 awards in 2010. The next largest financing stage, Phase I, provided $0.5 million for nearly 2,000 awards in 2010. The remainder ($0.3 million) provided funding for technical assistance, commercial outreach, and other activities. After nearly doubling from $1.1 million in 2000 to $2.0 million in 2004, SBIR financing grew far more slowly in the latter half of the decade to reach $2.2 million in 2010. Between 2000 and 2010, Phase II financing lagged the overall growth of SBIR financing, resulting in the share of Phase II declining from 77% to 64%. In contrast, Phase I's share of SBIR financing remained roughly steady at 20%–24% during this period.

Notes
[21] The National Science Foundation (NSF) Business R&D and Innovation Survey's (BRDIS's) definition of innovation is very similar to the Organisation for Economic Co-operation and Development definition. For more information, see NSF, BRDIS, http://www.nsf.gov/statistics/srvyindustry/about/brdis/.
[22] Business R&D and Innovation Survey data are not available for the entire U.S. service sector.
[23] Two legal concepts define who has the right to the grant of a patent—first to file and first to invent. In a first-to-file system, the patent is granted to the first person to file for protection. In the first-to-invent system, the patent is granted to the person who is determined to be the first inventor. The first-to-file system is used in all countries, including the United States, which switched to a first-to-file system in March 2013 after the enactment of the America Invents Act of 2011.
[24] 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 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 the U.S. Patent and Trademark Office, “What Is a Patent?” (http://www.uspto.gov/patents/index.jsp#).
[25] The Japan Patent Office is also a major patent office but has a much smaller share of foreign patents than the U.S. Patent and Trademark Office and the European Patent Office.
[26] The Business R&D and Innovation Survey data are collected from a sample of U.S. firms, whereas the U.S. Patent and Trademark Office data are from administrative records of all U.S inventors, including individuals and nonprofits.
[27] Triadic patent families with coinventors residing in different countries are assigned to their respective regions, countries, or economies on a fractional-count basis (i.e., each region, country, or 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 Organisation for Economic Co-operation and Development.
[28] The high-technology (HT) definition used here is from the Bureau of Labor Statistics and differs from that used in earlier sections. See Hecker (2005) for a definition and the methodology for determining HT industries.
[29] Another possibility is that the behavior of venture capital investors changed because fewer opportunities for attractive risky investments were available in the 2000s than in the 1990s.
[30] Data on number of awards are available at http://www.sbir.gov/awards/annual-reports.
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