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Chapter 6. Industry, Technology, and the Global Marketplace

Introduction

Chapter Overview

Policymakers in many countries increasingly emphasize the central role of knowledge, particularly research and development and other activities that advance science and technology (S&T), in a country's economic growth and competitiveness. This chapter examines the downstream effects of these activities on the performance of the United States and other major economies in the global marketplace.

This chapter covers two main areas. The first is knowledge- and technology-intensive (KTI) industries in both the service and manufacturing sectors. KTI industries are 10 categories of industries classified by the Organisation for Economic Co-operation and Development (OECD 2001, 2007) that have a particularly strong link to S&T:[1]

  • Five knowledge-intensive (KI) services industries incorporate high technology (HT) either in their services or in the delivery of their services. Three of these—financial, business, and communications services (including computer software and R&D)—are generally commercially traded. The others—education and health services—are publicly regulated or provided and remain relatively more location bound.
  • Five HT manufacturing industries spend a large proportion of their revenues on R&D and make products that contain or embody technologies developed from R&D. These are aircraft and spacecraft, pharmaceuticals, computers and office machinery, semiconductors and communications equipment (treated separately in the text), and scientific (medical, precision, and optical) instruments.[2] Trends in aircraft and spacecraft and pharmaceuticals are particularly sensitive to government policies. Aircraft and spacecraft trends are affected by funding for military aircraft, missiles, and spacecraft and by different national flight regulations. National regulations covering drug approval, prices, patent protection, and importation of foreign pharmaceuticals can affect pharmaceuticals.

This report gives special attention to KTI industries in information and communications technology (ICT). ICT combines the HT manufacturing industries of computers and office machinery, communications equipment, and semiconductors with the KI services of communications and computer programming (a subset of business services). ICT industries are important because they provide the infrastructure for many social and economic activities, facilitating innovation and economic growth.[3]

Industries that are less KTI, however, remain very important in the world economy and therefore receive some attention in the chapter (see sidebar, “Industries That Are Not Knowledge or Technology Intensive”).

The globalization of the world economy involves the rise of new centers of KTI industries.[4] Although the United States continues to be a leader in these industries, China, India, Brazil, and other developing economies have vigorously pursued national innovation policies in an effort to become major producers and exporters of KTI goods and services. Advances in S&T have enabled companies to spread KTI activity to more locations around the globe and to develop strong interconnections among geographically distant entities.

The second major focus of the chapter is innovation. Because innovation is closely associated with technologically led economic growth, the analysis of innovation in the chapter emphasizes the role of KTI industries. The measurement of innovation is an emerging field, and current data and indicators are limited. However, activities related to the commercialization of inventions and new technologies are regarded as important components of innovation indicators. Such activities include patenting, the creation and financing of new HT firms, and investment in intangible goods and services.

In recent years, innovations aimed at developing improved technologies for generating clean and affordable energy have become increasingly important in both developed and developing countries or economies. Clean energy has a strong link to S&T. Like ICT, energy is a key element of infrastructure, the availability of which can strongly affect prospects for growth and development. For these reasons, the chapter pays special attention to energy technologies.

Several themes cross-cut the various indicators examined in the chapter:

  • The HT manufacturing industries are the most globalized among the KTI industries. Two HT manufacturing industries—communications; semiconductors and computers—have the most complex global value chains, where China is the dominant locale for final production. Three industries—aircraft and spacecraft; testing, measuring, and control instruments; pharmaceuticals—are less globally integrated, with final production largely located in developed countries.
  • Globalization is increasing rapidly in the commercial KI services industries but remains substantially less than in the HT manufacturing industries. Data on trade and U.S. foreign investment suggest that these industries have substantial linkages among developed economies. Industries in developed economies also contract out some of their activities to developing economies.
  • Although KTI activity has increased in Brazil, India, Indonesia, Turkey, and other developing countries, China plays a unique role in this arena. Despite a per capita income comparable to that in other developing countries, China's economic activity in several KTI industries has grown unusually quickly and is now comparable to or exceeds that of the United States, the European Union (EU; see “Glossary” for member countries), and Japan.
  • KTI industries remain concentrated in developed countries despite much more rapid growth by China and other developing countries. Developed countries account for three-quarters of global production of commercial KI services industries, the largest category of KTI industries.
  • KTI industries in developing countries have fared better than those in developed countries in the aftermath of the 2008–09 global recession. Among the KTI industries in the developed countries, those in the United States rebounded more robustly from the economic downturn than those in other developed economies.
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Chapter Organization

The chapter focuses on the United States, the EU, Japan, and the large and rapidly developing economy of China. Other major developing countries, including Brazil, India, and Indonesia, also receive significant attention. The time-span is from the late 1990s to the present.

This chapter is organized into five sections. The first section discusses the prominent role of KTI industries in regional and national economies around the world.

The second section describes the global spread of KTI industries and analyzes regional and national shares of worldwide production. It discusses shares for the KTI industry group as a whole, for KI services and HT manufacturing overall, and for particular services and manufacturing industries within these groups. Because advanced technology is increasingly essential for non-HT industries, some data on these industries are also presented.

The third section examines indicators of increased interconnection of KTI industries in the global economy. Data on patterns and trends in global trade in KTI industries make up the bulk of this section. The section also presents data on U.S. trade in advanced technology products (ATP), examining trends in U.S. trade with major economies and in key technologies. Data on domestic and foreign production and on employment in U.S. multinational companies (MNCs) in KTI industries are presented as indicators of the increasing involvement of these economically important firms in cross-border activities. To further illustrate the effects of globalization on the United States, the section presents data on U.S. and foreign direct investment abroad, showing trends by region and for individual KTI industries.

The fourth section presents innovation-related indicators. It examines countries' shares in all patents granted by the United States in various technology areas. It next examines countries' shares of high-value patents. It presents innovation-related data on U.S. industries from the National Science Foundation's (NSF's) Business R&D and Innovation Survey (BRDIS). A discussion of U.S. HT small businesses includes data on the number of HT small business startups and existing firms, employment, and venture capital and Small Business Innovation Research (SBIR) investment by industry.

The last section presents data on clean energy and energy conservation and related technologies, which have become a policy focus in developed and developing nations. These energy technologies, like KTI industries, are closely linked to scientific R&D. Production, investment, and innovation in these energies and technologies are rapidly growing in the United States and other major economies.

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Data Sources, Definitions, and Methodology

This chapter uses a variety of data sources. Although several are thematically related, they have different classification systems. The sidebar “Comparison of Data Classification Systems Used” describes these systems and aims to clarify the differences among them. The discussion of regional and country patterns and trends includes examination of developed and developing countries using the World Bank's per capita income classification. Countries classified by the World Bank as high income are developed countries, while those classified in the other income levels—upper middle income, lower middle income, and low income—are classified as developing. In this chapter, “country” and “economy” are used interchangeably in these discussions.

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Notes
[1] See the Organisation for Economic Co-operation and Development (OECD) (2001) for a discussion of classifying economic activities according to degree of “knowledge intensity.” Like all classification schemes, the OECD classification has shortcomings. For example, knowledge- and technology-intensive (KTI) industries produce some goods or services that are neither knowledge intensive nor technologically advanced. In addition, multiproduct companies that produce a mix of goods and services, only some of which are KTI, are assigned to their largest business segment. Nevertheless, data based on the OECD classification allows researchers and analysts to trace, in broad outline, the worldwide trends toward greater interdependence in science and technology and the development of KTI sectors in many of the world's economies.
[2] In designating these high-technology (HT) manufacturing industries, the Organisation for Economic Co-operation and Development (OECD) estimated the degree to which different industries utilized R&D expenditures made directly by firms in these industries and the 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 R&D intensities were calculated as the ratio of total R&D expenditure to output (production) in 22 industrial sectors. Each sector was weighted according to its share of the total output among the 13 countries, using purchasing power parities as exchange rates. Indirect intensities were calculated using the technical coefficients of industries on the basis of input-output matrices. OECD then assumed that, for a given type of input and for all groups of products, the proportions of R&D expenditure embodied in value added remained constant. The input-output coefficients were then multiplied by the direct R&D intensities. For further details concerning the methodology used, see OECD (2001). It should be noted that several nonmanufacturing industries have R&D intensities equal to or greater than those of industries designated by OECD as HT manufacturing. For additional perspectives on OECD's methodology, see Godin (2004).
[3] See Atkinson and McKay (2007:16–17) for a discussion of and references to the impact of information technology on economic growth and productivity.
[4] See Mudambi (2008) and Reynolds (2010) for a discussion on the shift to knowledge-based production and geographical dispersion of economic activity.
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