Science and Engineering Indicators 2014

Chapter 6. Industry, Technology, and the Global Marketplace

The third section of this chapter examines several trade and globalization measures associated with KTI industries in the United States and other economies. (For an explanation of KTI industries, please see “Chapter Overview.”) In the modern world economy, production is more often globalized (i.e., value is added to a product or service in more than one nation) and less often vertically integrated (i.e., conducted under the auspices of a single company and its subsidiaries) than in the past. These trends have affected all industries, but their impact has been pronounced in many commercial KTI industries. The broader context is the rapid expansion of these industrial and service capabilities in many developing countries, both for export and internal consumption, accompanied by an increasing supply of skilled, internationally mobile workers. (See chapter 3 for a discussion on the migration of highly skilled labor.)

This section focuses on cross-border trade of international KI services and HT trade and on U.S. trade of ATP. (See “U.S. Trade in Advanced Technology Products” later in this chapter for a discussion of how the U.S. Census Bureau's classification of ATP differs from the classification of HT products based on the OECD industry classification.) It will also examine trade and other globalization measures of U.S. multinationals in KTI industries. Trade data are a useful although imperfect indicator of globalization (for a discussion, see sidebar, “Measurement and Limitations of Trade Data”).

This discussion of trade trends in KI services and HT manufactured products focuses on (1) the trading zones of the North American Free Trade Agreement (NAFTA), with a particular focus on the United States, and the EU; (2) China, which is rapidly taking on an increasingly important role in KTI trade; (3) Japan and other Asian countries; and (4) large developing countries, including Brazil, India, and Indonesia.

The EU, East Asia, and NAFTA have substantial volumes of intraregional trade. This section treats trade within these three regions in different ways. Intra-EU and NAFTA exports are not counted because they are integrated trading zones with common external trade tariffs and few restrictions on intraregional trade. This kind of trade is treated as essentially equivalent to trade between China and Hong Kong, which is excluded because it is essentially intraeconomy trade. (Data on trade in commercial KI services between China and Hong Kong are not available.) Intra-Asian trade is counted for other Asian countries because they have a far smaller degree of trade integration.

Global Trade in Commercial Knowledge- and Technology-Intensive Goods and Services

Exporting goods and services to other countries is one measure of a country's economic success in the global market—the goods and services it produces compete in a world market. In addition, exports have an important advantage over domestic purchases in that they bring in income from external sources and do not consume the income of a nation's own residents.

Global trade in commercial KTI goods and services consists of four services—business, communications, computer and information, and finance—and six HT products—aerospace, communications, computers, pharmaceuticals, semiconductors, and scientific instruments.^[12] Global cross-border exports of commercial KTI goods and services were an estimated $3.7 trillion, consisting of $2.3 trillion of exports of HT products and $1.4 trillion of commercial KI services (figure 6-20; appendix table 6-21).

Commercial Knowledge-Intensive Services

Global exports of commercial KI made up one-third of all commercial services. Among the commercial KI services, business services was the largest ($800 billion), followed by finance (which includes insurance) ($300 billion), computer and information services ($170 billion), and communications ($80 million).^[13]

The United States, the EU, Japan, and other developed countries export $1.0 trillion in commercial KI services, comprising 77% of global exports (figure 6-20). China and other developing countries export far less than developed countries ($0.3 trillion).

Patterns and Trends in Developing Countries

Exports of developing countries make up a small share (22%) of global exports of commercial KI services. China and India have the largest global export shares of any developing economy (6%–7% each), and they are tied as the third largest in the world, behind the United States and the EU (table 6-3; figure 6-20).^[14]

India is notable for being the largest exporter of computer and information services, attesting to the strong market position of Indian firms providing IT and related services to the rest of the world (table 6-3). China and India both have substantial surpluses in trade of commercial KI services. Other developed countries have global export shares of less than 2%.

Between 2004 and 2011, cross-border commercial KI exports of developing countries nearly tripled to reach $296 billion, expanding much faster than in developed countries but from a much lower base (figure 6-20). The global share of developing countries rose from 16% to 22% during this period.

China's exports tripled during this period, resulting in its global export share climbing from 4% to 7% (table 6-3; figure 6-20). China's trade balance in commercial KI services widened from a surplus of $3 billion to $11 billion in 2010.^[15]

India's exports also expanded rapidly, with its global share rising from 4% to 7%. India's surplus expanded from $11 billion to $50 billion during this period.^[16]

Patterns and Trends in Developed Countries

The EU is the largest exporter of commercial KI services, with a global share of 32% (figure 6-20). The United States is the second-largest exporter, with a global share of 17%. The EU and United States both have surpluses in trade of commercial KI services in contrast to their deficits in HT product trade (table 6-4). Japan, which has a small deficit in commercial KI services trade, is the fifth-largest exporter, behind India and China.^[17]

Between 2004 and 2011, growth of commercial KI exports of developed economies trailed developing economies, resulting in their global share falling from 83% to 77% (figure 6-20).

U.S. exports of commercial KI services more than doubled to reach $235 billion; the U.S trade surplus climbed from $33 billion to $52 billion (table 6-4; figure 6-20). Exports of business services, the largest component, slighted lagged overall export growth. The trade surplus in other business services increased from $29 billion to $39 billion. U.S. exports of R&D services, a component of business services, rose from $13 billion in 2006 to $22 billion in 2010. The trade surplus edged down from $4 billion to $2 billion (see sidebar, “U.S. Trade in R&D Services”).

In the EU, commercial KI services grew at a similar pace, reaching more than $400 billion in 2011, with the EU's surplus more than doubling to reach $127 billion (table 6-4; figure 6-20). Among the commercial KI services, computer information services grew the fastest, nearly tripling to reach $57 billion. Exports of business services, the largest component, slightly lagged overall growth. The EU's trade surpluses of these two commercial KI exports both grew substantially. EU's exports of financial services (which include insurance) also grew rapidly with the surplus widening from $25 billion to $51 billion.

High-Technology Goods

Global HT product exports—aircraft and spacecraft; computers; communications; semiconductors; pharmaceuticals; and testing, measuring, and control instruments—were $2.3 trillion in 2012, making up 16% of the $14.7 trillion in exports of all manufactured goods (figure 6-21; appendix tables 6-21 and 6-24). Among the HT products, ICT products—communications, computers, and semiconductors—are the largest, with a collective value of $1.4 trillion (appendix tables 6-25–6-28). The remaining three industries—testing, measuring, and control instruments; pharmaceuticals; and aircraft and spacecraft—range from $200 billion to $400 billion each (appendix tables 6-29–6-31).

The bulk of global exports ($1.4 trillion) originate from developed countries—primarily from the EU, the United States, Japan, and several Asian economies, including Singapore, South Korea, and Taiwan (figure 6-21; appendix tables 6-21 and 6-32). A large share of HT exports of developed countries is made up of components and inputs that are imported by China, Mexico, and other developing countries for final assembly. Exports of developing countries, which make up $0.9 trillion, are largely finished goods imported by developed countries (figure 6-21).

Between 2003 and 2012, global HT exports doubled to reach $2.3 trillion (appendix table 6-21). The HT share of manufactured exports declined from 22% to 16% during this period (appendix table 6-24).

Patterns and Trends in Developing Countries

China is the largest exporter of HT products among developing countries and is also the world's largest exporter, with a 28% share of global HT exports (table 6-5; figure 6-21; appendix table 6-21). Other developing countries have global shares of 3% or less.

Between 2003 and 2012, HT exports of developing countries grew twice as fast as those of developed countries. As a result, the developing countries increased their share of global HT exports from 29% to 40% (figure 6-21; appendix table 6-21). China grew the fastest among the developing countries, with its exports reaching $632 billion, becoming the world's largest exporter. China's trade surplus climbed from $30 billion to $280 billion during this period. However, because many of China's exports consist of inputs and components imported from other countries, China's trade surplus is likely much less in value-added terms (see sidebar, “International Initiative to Measure Trade in Value-Added Terms”).

China's ICT exports, which dominate China's HT product exports, more than tripled to reach almost $560 billion during this period (table 6-5; appendix tables 6-25–6-28). China's ICT trade surplus expanded from almost $40 billion to over $280 billion. Its exports of testing, measuring, and control instruments grew at the same pace to reach almost $60 billion (appendix table 6-31).

Trends varied widely among other developing countries (appendix table 6-21):

• Vietnam grew the fastest of any developing country, with its HT exports growing from less than $1 billion to $17 billion. Vietnam has become a low-cost location for assembly of cell phones and other ICT products, with some firms shifting production out of China and other developing countries, where labor costs are higher.
• India's exports rose sevenfold to reach $26 billion due to expansion in pharmaceuticals and ICT products.

Patterns and Trends in Developed Countries

The bulk of global exports of HT goods ($1.4 trillion) originate from developed countries—primarily the EU, the United States, Japan, and several Asian economies (figure 6-21; appendix tables 6-21 and 6-32). The EU and the United States are the largest and second-largest global exporters among developed economies. Japan, South Korea, and Taiwan are the next-largest exporters, each with a global share of between 6% and 8%.

Between 2003 and 2012, exports of developed economies nearly doubled to reach $1.4 trillion in 2012 (figure 6-21; appendix table 6-21). Because exports of developing economies grew much faster than developed economies, the global share of developed economies fell from 71% to 60%.

In the United States, HT product exports grew slightly faster than the average for all developed economies' exports (appendix table 6-21). The U.S. global share slipped from 14% to 13%. The U.S. HT product trade position, which had been in balance in the late 1990s, experienced a widening deficit during this period, going from $88 billion to $130 billion.^[18]

U.S. growth of HT product exports was led by pharmaceuticals and by aircraft and spacecraft (appendix tables 6-29 and 6-30). Pharmaceutical exports more than doubled in value to reach $39 billion, with the trade deficit widening from $13 billion to $24 billion. Exports of aircraft and spacecraft climbed to $96 billion, with the U.S. trade surplus at nearly $80 billion in 2012, up from $21 billion in 2003.

Exports of ICT products, the largest component, grew slower than the average for all HT products to reach $94 billion (appendix tables 6-25–6-28). The U.S. trade deficit in ICT products widened from $95 billion to $192 billion.

The EU exhibited a similar trend, with growth in its HT product exports led by aircraft and spacecraft, pharmaceuticals, and testing, measuring, and control instruments (appendix tables 6-29–6-31). The trade surpluses in these three products widened substantially. The EU's trade deficit in ICT products deepened from $65 billion to $112 billion (appendix tables 6-25–6-28).

Other major Asian exporters—Japan, South Korea, and Taiwan—showed divergent trends (appendix table 6-21). Japan's exports trailed the average for all developed countries, with its global share falling from 12% to 6%. Japan's decline from an export powerhouse in electronics reflects its lengthy economic stagnation, the financial difficulties of Japanese electronics firms, and Japanese companies offshoring their production to Taiwan, China, and other lower-cost locations.

Taiwan's HT exports doubled during this period, and it surpassed Japan in 2010 to become the largest developed Asian exporter of HT products. South Korea's HT exports also doubled, and it reached Japan's level in 2012. Both of these economies' rapid gains in HT exports were due to growth of ICT product exports, which make up most of their HT exports (appendix tables 6-25–6-28).

U.S. Trade in Advanced Technology Products

The Census Bureau has developed a classification system for internationally traded products based on the degree to which they embody new or leading-edge technologies. This classification system has significant advantages for determining whether products are HT and may be a more precise and comprehensive measure than the product classification based on the OECD classification for HT industry production. It categorizes ATP trade into 10 major technology areas, including aerospace, biotechnology, electronics, ICT, life sciences, and optoelectronics.^[19]

U.S. trade in ATP products is an important component of overall U.S. trade, accounting for about one-fifth of combined nonpetroleum exports and imports. Five technology areas—ICT, aerospace, electronics, life sciences, and optoelectronics—account for more than 90% of the total value of U.S. ATP exports and imports (table 6-6; appendix tables 6-33–6-38). ICT is the largest, with a share of 44%, followed by aerospace, with a 21% share. Life sciences and electronics each have a share of 11%. Optoelectronics has a share of 5%. The largest U.S. ATP trading partners are China; other Asian countries, including Japan, South Korea, and Malaysia; the EU; and NAFTA partners Canada and Mexico.

In 2012, the United States exported $305 billion in ATP goods and imported $396 billion, resulting in a deficit of $92 billion (figures 6-22 and 6-23; appendix table 6-33). Trends varied widely by technology area (table 6-6):

• Trade in ICT products produced a deficit of $128 billion, the largest of any technology area. The largest trading partner is China, which dominates this area.
• In the life sciences area, the United States ran a small deficit of $12 billion, largely with the EU.
• The United States has a surplus of $66 billion in aerospace, the largest of any technology area. The largest trading partner in this area is the EU.
• The United States had a small surplus ($7 billion) in electronics. Leading trading partners are Malaysia and South Korea.

Trends in U.S. Advanced Technology Products Trade

Between 2003 and 2012, U.S. ATP imports grew faster than exports, resulting in the trade deficit widening from $27 billion to $92 billion (figure 6-23; appendix table 6-33). Among the four largest technology areas, exports of life sciences grew the fastest (143%), with imports increasing at the same rate, resulting in the trade deficit remaining roughly stable (appendix table 6-37).

Aerospace exports grew the next fastest, and outpaced growth of imports, resulting in the trade surplus widening from $27 billion to $66 billion (appendix table 6-35). Trends in exports and imports in these two technology areas have largely been driven by trade with the EU, the largest partner in these two areas.

Exports of ICT products grew the slowest among these four technology areas, with much faster growth of imports (appendix table 6-34). The trade deficit in ICT products more than doubled to reach nearly $130 billion, with the trade deficit with China reaching nearly $100 billion. As in U.S. HT international trade, the rising deficit in U.S. ATP trade has largely occurred in ICT products and with China.

In electronics, the United States had a surplus of between $16 billion and $25 billion for much of the 2000s. Between 2011 and 2012, the trade surplus fell to $7 billion because of a decline in exports combined with an increase in imports (appendix table 6-36).

U.S. Multinational Companies in Knowledge- and Technology-Intensive Industries

The Bureau of Economic Analysis (BEA) conducts an annual survey of U.S. multinationals that includes firms in KTI industries. The BEA data are not directly comparable with the world industry data used in the previous sections. However, the BEA data provide additional information on the globalization of activity and employment in U.S. multinationals in these industries.

Commercial Knowledge-Intensive Service Industries

U.S. multinationals in commercial KI services industries generated $1.1 trillion in value added in 2010 (preliminary), of which $873 billion (76%) occurred in the United States (appendix table 6-39). Financial services ranks first by value added ($471 billion), followed by information services ($384 billion) and business services ($297 billion). Production in business services was the most globalized, as measured by the distribution between U.S. and foreign value added, with 31% of value added originating from foreign economies in 2010 (figure 6-24). Financial services were the next highest (28%), followed by information services (15%).

U.S. multinationals in commercial KI services industries employed 7.4 million workers worldwide, of whom 5.4 million (72%) were employed in the United States (appendix table 6-39). Employment was highest in financial services, at 2.5 million, followed by 1.6 million employed in information services and 1.2 million employed in business services. Employment was most globalized in business services (foreign share of 44%), followed by financial services (24%) and information services (19%) (figure 6-24).

High-Technology Manufacturing Industries

U.S. multinationals in the HT manufacturing industries (excluding aircraft and spacecraft) generated more than $400 billion worldwide in value added in 2010 (preliminary), of which about two-thirds originated in the United States (figure 6-25; appendix table 6-39). Production in the computer industry was the most globalized, as measured by the distribution between U.S. and foreign value added, with 45% of value added originating from foreign locations in 2010 (figure 6-25). Pharmaceuticals was the second highest (40%), followed by semiconductors (35%) and then by testing, measuring, and control instruments (28%). Communications is the least-globalized industry, with 17% of value added produced outside of the United States.

U.S. multinationals in HT manufacturing employed 2.4 million workers worldwide, with 1.2 million workers (about 50%) employed in the United States in 2010 (preliminary) (appendix table 6-39). More than 60% of the semiconductor workforce of 600,000 workers is employed abroad, the highest share among these industries (figure 6-25). Multinational companies in two industries—computers and pharmaceuticals—employ around 50% of their workforce abroad. The communications and testing, measuring, and control instruments industries have less than 40% of their workforces employed abroad.

U.S. and Foreign Direct Investment in Knowledge- and Technology-Intensive Industries

Foreign direct investment (FDI) has the potential to generate employment, raise productivity, transfer skills and technology, enhance exports, and contribute to long-term economic development (Kumar 2007). Receipt of FDI may indicate a developing country's emerging capability and integration with countries that have more established industries. FDI in specific industries may suggest the potential for these industries' evolution and the creation of new technologies.

This section uses data from BEA on U.S. direct investment abroad and foreign investment in the United States in KTI industries. The rising volume of trade by U.S.-based KTI firms has been accompanied by increases in U.S. direct investment abroad and FDI in the United States. Estimates of U.S. direct investment abroad and FDI in the United States are lower-bound estimates because a substantial share of outward and inward investment is allocated to holding companies that own companies in other industries.

U.S. Direct Investment Abroad

The stock of U.S. direct investment abroad in computer and electronic products, which includes the HT industries of communications, semiconductors, and testing, measuring, and control instruments, was $102 billion in 2012 (figure 6-26). The Asia and Pacific region receives 43% of U.S. direct investment abroad.^[20] The EU is the next-largest recipient, with a share of 39%.

The stock of U.S. direct investment abroad in commercial KI services industries was $1.0 trillion in 2012 (figure 6-26). Financial services accounted for most U.S. direct investment abroad, with far smaller shares for information and professional, scientific, and technical services. The EU is the largest recipient in these three industries, with shares ranging from 44% to 54%. The Asia and Pacific region, including Japan, is the next largest, with shares of 18%–28% in these industries.

Foreign Direct Investment in the United States

The stock of inward FDI in U.S. computer electronics manufacturing industries was $61 billion in 2012, less than the amount the United States invested abroad in these industries (figure 6-27). Limited data on the geographical region show that the Asia and Pacific region is the largest investor, with a share of 39%. The EU is the second largest, with a share of 33%.

Similarly, the stock of inward FDI in U.S. commercial KI services, at $596 billion in 2011, was less than the amount the United States invested abroad in these industries (figure 6-27). The EU is the largest investor in these industries, with shares of 65%–83% in these industries.