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Chapter 6. Industry, Technology, and the Global Marketplace

Worldwide Distribution of Knowledge- and Technology-Intensive Industries

The second section of the chapter examines the changing shares of global activity in KTI industries attributed to the United States and other major economies (appendix table 6-1). (For an explanation of KTI industries, please see “Chapter Overview.”) As national and regional economies change, the worldwide centers of KTI industries shift in importance. Shifts take place for this entire group of industries and for individual service and manufacturing industries within the group. This section examines the positions of the United States and other major economies in KTI industries.

Health and Education Services

Although health and education services are not as fully competitive or globally integrated as other KTI industries, these sectors are major sources of knowledge and innovation that benefit the entire economy. Education trains students for future work in science, technology, and other knowledge fields, and research universities are an important source of knowledge and innovation for other economic sectors.

International comparison of the health and education sectors is complicated by variations in the size and distribution of each country's population, market structure, and the degree of government involvement and regulation. As a result, differences in market-generated value added may not accurately reflect differences in the relative value of these services.

The United States and the EU are the world's largest providers of education services, with world shares of 27%–30% (appendix tables 6-3 and 6-5). China is the third-largest provider, followed by Japan. Country and regional shares are similar in health care, except that Japan places ahead of China (appendix table 6-6).

The U.S. and EU global shares of education and health care fell modestly between 2003 and 2012 (appendix tables 6-3, 6-5, and 6-6). Japan's share fell more sharply. China's global share of education and health care services at least doubled during this period, in line with its rapid economic growth. Brazil, India, and Indonesia showed a similar expansion in their global shares. The growth of education in China and India coincided with increases in both of these countries in earned doctorates in the natural S&E fields (see chapter 2).

Commercial Knowledge-Intensive Service Industries

The global value added of commercial KI services—business, financial, and telecommunications—was $11.5 trillion in 2012 (figure 6-13; appendix table 6-4). Business services, which includes the technologically advanced industries of computer programming and R&D services, is the largest service industry ($5.6 trillion), closely followed by financial services ($4.3 trillion), with telecommunications far smaller ($1.6 trillion) (appendix tables 6-8, 6-11, and 6-12).

Patterns and Trends in Developing Countries

Developing countries comprise about one-fifth of global value added of commercial KI services industries (figure 6-13; appendix table 6-4). China (8% global share) is the largest provider among developing countries and essentially ties with Japan as the third-largest global provider. Other large developing countries have global shares of 2% or less.

From 1997 to 2003, the value added of commercial KI services grew at roughly the same rate in developed and developing countries (figure 6-13; appendix table 6-4). Starting in 2003, growth accelerated in developing countries, resulting in their share of global output doubling from 10% to 21% in 2012.

China grew the fastest among developing countries and accounted for 45% of the expansion of all developing countries between 2003 and 2012 (appendix table 6-4). China's world share more than doubled to reach 8% to tie with Japan as the third-largest provider (figure 6-13). Among the commercial KI services, China had the largest gain in financial services, which may reflect the substantial role of public-owned or public-supported financial institutions and development banks in that country.

Brazil and India also had sizeable gains in commercial KI services, with each reaching global shares of 2% (appendix table 6-4). Brazil's expansion was led by financial services and telecommunications (appendix tables 6-8 and 6-12). India gained the most in business services, particularly in computer programming, reflecting, in part, the success of firms providing information technology (IT), accounting, legal, and other services to developed countries (appendix tables 6-11 and 6-13). Indonesia, which has a smaller global share than these two countries, grew the second fastest among the larger developing countries (see sidebar, “Indonesia's Rapid Growth in Commercial Knowledge-Intensive Services”).

Patterns and Trends in Developed Countries

Commercial KI services industries in developed economies comprise four-fifths of global value added (figure 6-13; appendix table 6-4). The United States has the largest commercial KI services industries, with a 32% share of global value added. U.S. commercial KI services industries employ 18 million workers, 14% of the U.S. labor force, and pay higher-than-average wages (table 6-2; figure 6-14). In addition, these industries have a much higher concentration of skilled workers as measured by the proportion of those in S&E occupations. These industries fund roughly one-fourth of U.S. industry R&D.

The EU is the second-largest global provider of commercial KI services, with a 23% global share, followed by Japan (9%), which is essentially tied with China (figure 6-13).

After growing rapidly between 2003 and 2008, the valued added of commercial KI services of developed economies contracted in 2009 before rebounding in 2010–12 (figure 6-13; appendix table 6-4). However, growth in developed economies lagged developing economies, primarily due to China's rapid expansion. As a result, the global share of developed countries fell from 90% in 2003 to 79% in 2012.

After expanding rapidly prior to the global recession, value added of U.S. commercial KI services dipped in 2009 before rebounding to reach $3.7 trillion in 2012, 12% higher than its level prior to the global recession (figure 6-13; appendix table 6-4). Between 2003 and 2012, the U.S. global share slid from 40% to plateau at 32% beginning in 2011. Employment in U.S. commercial KI services has had a weaker recovery (figure 6-14). Commercial KI services lost 1.0 million jobs during the recession. Although jobs grew modestly in 2011–12, employment in 2012 remains 300,000 jobs below its pre-recession level.

The United States is the leading global provider of business services, which led the growth of U.S. commercial KI industries between 2003 and 2012 (figure 6-15; appendix table 6-11). Value added of business services grew slightly faster than all commercial KI industries (55% versus 45%), with value added of computer programming expanding 66% (appendix table 6-13). One source of growth of U.S. business services has been the infrastructure boom in developing countries that have employed U.S. firms in areas including architecture, engineering, and consulting.[9] U.S. employment in business services grew from 8.3 million in 2003 to reach 9.9 million in 2012, 400,000 jobs greater than the pre-recession level (figure 6-14).

The EU, which is the second-largest global provider, has fared worse than the United States since the recession. In the midst of the EU's financial and economic difficulties, the value added of its commercial KI services has remained stagnant in 2009–12 and below its pre-recession peak (figure 6-13; appendix table 6-4). As a result, the EU's global share dropped from 30% in 2008 to 23% 2012.

In the aftermath of the recession, Japan has performed better than the United States or the EU in this industry group. Value-added output continued to expand during and following the recession to reach a level nearly 25% higher than the pre-recession peak (figure 6-13; appendix table 6-4). Japan's share fell slightly, from 11% in 2003 to 9% in 2006, where it has remained steady. However, the substantial appreciation of the Japanese yen relative to the dollar during this period may have overstated the strength of Japan's commercial KI services industries (see sidebar, “Currency Exchange Rates of Major Economies”).

Australia had the fastest growth in commercial KI services among large developing economies during this period (appendix table 6-4). Its global share doubled from 1.7% in 2003 to 3.7% in 2012. Australia's rapid expansion is due in part to its growing economic integration with China (see sidebar, “Australia's Commercial Knowledge-Intensive Services Grow Strongly”).

High-Technology Manufacturing Industries

Global value added of HT manufacturing was $1.5 trillion in 2012, making up 14% of the manufacturing sector (figure 6-16; appendix tables 6-7 and 6-14). The three ICT manufacturing industries—communications, computers, and semiconductors—make up a collective $0.6 trillion in global value added (appendix tables 6-156-17). The three remaining industries are scientific instruments and pharmaceuticals, each with about $350 billion in value added, and aircraft and spacecraft, with $180 billion (appendix tables 6-186-20).

Patterns and Trends in Developing Countries

China is the second-largest global producer of HT products (24% global share) (figure 6-16; appendix table 6-7). These HT products are largely exported to the rest of the world. Most of China's production is performed in plants controlled by MNCs using imported inputs and components. Other large developing countries have global shares of 2% or less.

Growth of HT manufacturing in developing countries sharply accelerated starting in 2003 almost entirely due to China's rapid expansion (figure 6-16; appendix table 6-7). Between 2003 and 2012, China's value added rose more than fivefold, resulting in its global share climbing from 8% in 2003 to 24% in 2012. China's output fell slightly in 2009 during the 2008–09 recession, at a time when output declined more substantially in most other developing and developed countries. Among the HT industries, China made the most rapid gain in ICT manufacturing industries, with its global share reaching 36% in 2012 (figure 6-17; appendix tables 6-156-17). China also made huge gains in pharmaceuticals, reaching a global share of 25% in 2012 to tie with the EU as the world's largest producer (appendix table 6-18). Production of generic drugs by Chinese-based firms and the establishment of production facilities controlled by U.S. and EU multinationals were major factors in this industry's rapid expansion.

Despite some progress in producing globally competitive HT goods, notably in telecommunications equipment, Chinese HT manufacturing companies largely continue to be limited to lower-value activities, such as final assembly.[10] For example, within the semiconductor industry, Chinese firms have a limited share (20%) of China's rapidly growing market for integrated circuits, which foreign firms continue to dominate (PwC 2012). In addition, Chinese HT companies have not met many of the ambitious targets and goals of the Chinese government's indigenous innovation program.

Anecdotal reports suggest that some multinationals are relocating their facilities from China to other developing countries with lower labor costs or reshoring production in developed countries in response to increases in transportation costs and in China's manufacturing wages.[11] China's growth in ICT manufacturing industries appears to have slowed during the 2000s even prior to the global recession, although the slowdown may reflect the limitations of further expanding China's huge capacity (figure 6-18; appendix tables 6-156-17). However, China remains an attractive location for foreign MNCs because of its well-developed and globally capable manufacturing infrastructure. In addition, China's growing and potentially huge domestic market is prompting some foreign HT firms to expand their production facilities and establish R&D laboratories to develop products for China's rapidly growing consumer market.

Other large developing countries that grew rapidly included Brazil and India (see sidebar, “Brazil's and India's High-Technology Manufacturing Industries”).

Patterns and Trends in Developed Countries

Developed countries make up 66% of global value added of HT manufacturing industries (appendix table 6-7). The United States, which has a 27% global share, is the largest global producer (figure 6-16). U.S. HT manufacturing industries employ 1.8 million workers, 16% of the manufacturing labor force, and pay higher-than-average wages due, in part, to their high concentration of highly skilled S&E workers (table 6-2). Although a small part of the U.S economy, U.S. HT manufacturing industries fund about one-half of U.S. business R&D.

The EU and Japan are the third- and fourth-largest global producers with shares of 18% and 8%, respectively (figure 6-16; appendix table 6-7). Several Asian economies are both major domestic producers and suppliers of inputs and components to China. The largest—Singapore, South Korea, and Taiwan—have a collective share of 8%.

After expanding briskly prior to the recession, the value added by HT manufacturing industries of developed countries contracted by 5% in 2008, a far larger decline than in developed countries' commercial KI services (figure 6-16; appendix table 6-7). The recovery of HT manufacturing industries following the global recession was modest. Between 2003 and 2012, the global share of developed countries fell steadily from 86% in 2003 to 69% in 2012, due entirely to a collective 18 percentage point decline in the global shares of the United States, the EU, and Japan.

In the United States, value added dipped slightly in 2008 during the recession before rebounding strongly to reach 14% higher than its pre-recession level (figure 6-16; appendix table 6-7). After falling from 33% in the early 2000s to 27% in 2008, the U.S. global share has remained roughly steady in 2009–12.

U.S. employment has fared worse prior to and following the recession. HT manufacturing jobs fell from 2.5 million in 2000 to 2.0 million in 2008 before shedding 200,000 more jobs during the global recession (figure 6-19). Furthermore, HT manufacturing employment has remained stagnant following the recession. The steady loss of employment reflects the relocation of production to China and other countries and also the rapid productivity growth of U.S. HT manufacturing industries, which have eliminated some jobs, particularly those in routine tasks (see sidebar, “U.S. Manufacturing and Employment”). Researchers and policymakers have concluded that the location of HT manufacturing and R&D activities may lead to the migration of higher-value activities abroad (Fuchs and Kirchain 2010:2344).

Trends among individual U.S. industries were variable:

  • Testing, measuring, and control instruments led growth of U.S. HT manufacturing industries due to increased demand for these products for a variety of purposes, including meeting environmental standards (appendix table 6-19). However, employment declined from 490,000 jobs in 2000 to 400,000 jobs in 2012 (figure 6-19).
  • The United States is also the largest producer in aircraft and spacecraft, reflecting its historical dominance and the U.S. government's procurement of military aircraft and spacecraft (figure 6-17; appendix table 6-20). Employment remained flat in this industry at about 500,000 jobs (figure 6-19).
  • Value-added output in ICT industries contracted, reflecting the relocation of production abroad and labor saving from rapid productivity growth (figure 6-18; appendix tables 6-156-17). Employment dropped from 1.2 million in 2000 to 650,000 in 2012 (figure 6-19).
  • Pharmaceuticals showed little growth during this period (appendix table 6-18). The expiration of patents on highly profitable blockbuster drugs, the lack of new breakthrough drugs, increasing competition from generic drugs, and the relocation of production to other countries were among the factors accounting for tepid growth.

Other major Asian producers—Singapore, South Korea, and Taiwan—showed little change in their global shares during this period. After rapid expansion in HT manufacturing in the prior two decades, companies based in these economies have relocated some of their production facilities to China and other low-cost locations. For example, many Taiwanese ICT firms have shifted their production to mainland China.

[9] See Jensen (2012) for a discussion of U.S business services firms helping to build infrastructure in developing countries.
[10] See Williamson and Raman (2011) for a discussion of China's acquisition of foreign companies.
[11] See Economist (Coming home 2013) for a discussion of multinational firms choosing to have more of their manufacturing take place in developed countries.