Chapter 6: Industry, Technology, and the Global Marketplace

Most countries acknowledge a symbiotic relationship between investment in S&T and success in the marketplace: S&T supports competitiveness in international trade, and commercial success in the global marketplace provides the resources needed to support new S&T. Consequently, the nation's economic health is a performance measure for the national investment in R&D and S&E.

OECD currently identifies five industries as high technology (science-based industries that manufacture products while performing above-average levels of R&D): aerospace, pharmaceuticals, computers and office machinery, communication equipment, and scientific (medical, precision, and optical) instruments.[2] These five industries, identified as the most R&D intensive by OECD, are also the most R&D intensive for the United States (table 6-1

This section reviews the U.S. position in the global marketplace from several vantage points: its position in the high-technology product market, the competiveness of individual industries, and trends in U.S. exports and imports of technological know-how.

Importance of High-Technology Industries

High-technology industries are important to nations for several reasons. High-technology firms innovate, and firms that innovate tend to gain market share, create new product markets, and use resources more productively (NRC, Hamburg Institute for Economic Research, and Kiel Institute for World Economics 1996; and Tassey 2000). High-technology firms develop high value-added products and are successful in foreign markets, which results in greater compensation for their employees. Industrial R&D performed by high-technology industries benefits other commercial sectors by generating new products and processes that increase productivity, expand business, and create high-wage jobs.

According to the Global Insight World Industry Service database, which provides production data for 70 countries that account for more than 97 percent of global economic activity, the global market for high-technology goods is growing at a faster rate than that for other manufactured goods, and high-technology industries are driving economic growth around the world. During the 22-year period examined (1980–2001), high-technology production grew at an inflation-adjusted average annual rate of nearly 6.5 percent compared with 2.4 percent for other manufactured goods. Global economic activity was especially strong at the end of the period (1996–2001), when high-technology industry output grew at 8.9 percent per year, more than double the rate of growth for all other manufacturing industries (figure 6-1

and appendix table 6-1

). Output by the five high-technology industries represented 7.7 percent of global production of all manufactured goods in 1980; by 2001, it doubled to 15.8 percent.

During the 1980s, the United States and other high-wage countries committed to increasing the resources used in the manufacture of higher value-added, technology-intensive goods, often referred to as high-technology manufactures. (See sidebar, "U.S. High-Technology Industries Add More Value During Production Than Other U.S. Manufacturing Industries.") During this period, the United States led the major industrialized countries in concentration on high-technology manufactures. In 1980, high-technology manufactures accounted for about 10 percent of total U.S. production. By 1984, it had increased to 13 percent and in 1989 was nearly 14 percent. By contrast, high-technology manufactures represented about 12 percent of total Japanese production in 1989, up from 7.3 percent in 1980. European nations also saw high-technology manufactures account for a growing share of their total production, although to a lesser degree. The one exception was the United Kingdom, where high-technology manufactures rose from 9 percent of total manufacturing output in 1980 to 12.5 percent in 1989.

The major industrialized countries continued to emphasize high-technology manufactures throughout the 1990s (figure 6-2

and appendix table 6-1

). In 1999, high-technology manufactures were estimated to be 20.9 percent of manufacturing output in the United States, 17.0 percent in the United Kingdom, 16.2 percent in France, 15.8 percent in Japan, and 9.3 percent in Germany. The latest data through 2001 show output in high-technology industries continued to grow faster than output in other manufacturing industries in the United States, Germany, and France, while slowing somewhat in Japan and the United Kingdom.

Taiwan and South Korea typify how important R&D-intensive industries are to newly industrialized economies. In 1980, high-technology manufactures accounted for 8.2 percent of Taiwan's total manufacturing output; this proportion jumped to 12.4 percent in 1989 and reached 29.2 percent in 2001. The transformation of South Korea's manufacturing base is even more striking. High-technology manufacturing in South Korea accounted for 6.1 percent of total output in 1980, 10.0 percent in 1989, and 31.0 percent in 2001.

Share of World Markets

From 1980 through 2001, the United States has consistently been the world's leading producer of high-technology products. U.S. high-technology industries' shares of world output fluctuated between 29 and 33 percent, rising slightly in the late 1990s before falling in 2000 and 2001. In 2001, U.S. high-technology industries accounted for about 32 percent of world output.

The EU lost high-technology market share gradually during the 1980s and 1990s. High-technology industries in the EU's 15 nations accounted for 22.8 percent of world output in 2001, which was a small increase from 2000 but generally reflects a persistent decline in the European share since the early 1980s. Among the four large EU countries, the United Kingdom, Germany, and Italy each recorded smaller shares, although Germany reversed its decline somewhat from 1999 to 2001. Only France gained market share over the 22-year period examined, and in 2001, it led EU countries with a 5.5 percent share. Germany accounted for 5.0 percent and the United Kingdom for 4.1 percent. Italy's shares were the lowest among the four large European economies, ranging from a high of about 3.5 percent during the mid-1980s to a low of about 1.8 percent in 2000 and 2001.

Asia's market share grew over the past 2 decades, led first by Japan in the 1980s and then by South Korea and China in the 1990s. In 1989, Japan accounted for 21.3 percent of the world's production of high-technology products, moving up 4 percentage points from its 1980 share. Japan continued to gain market share through 1991. Since then, however, its market position has deteriorated, with the steepest declines evident after 1997. In 2001, Japan's share fell to 12.9 percent, its lowest level in the 1980–2001 period examined (figure 6-5

As Japan's dominance waned, developing Asian nations made dramatic gains. South Korea's market share more than doubled during the 1980s, moving from 0.9 percent in 1980 to 2.1 percent in 1989, and then increased each year throughout the 1990s. By 2000, it had jumped to 6.5 percent, and by 2001 it measured 7.1 percent, its highest level in the 22 years examined. The growth in China's high-technology output surpassed that of South Korea. In 1980, China's high-technology industry produced just 0.9 percent of the world's output. That figure rose to 2.2 percent in 1989, 5.5 percent in 1999, and 8.7 percent in 2001.

Global Competitiveness of Individual Industries

In each of the five industries that make up the high-technology group, the United States maintained strong, if not leading, market positions between 1980 and 2001. The United States is a large and mostly open market, characteristics that benefit U.S. high-technology producers in two important ways. First, supplying a market with many consumers results in scale effects for U.S. producers because there are potentially large rewards for new ideas and innovations (Romer 1996). Second, the openness of the U.S. market to competing, foreign-made technologies pressures U.S. producers to be more innovative to maintain domestic market share.

Two U.S. high-technology industries, computers and office machinery and communication equipment, reversed downward trends resulting from competitive pressures from a growing cadre of high-technology-producing nations during the 1980s. These industries gained market share in the mid- to late 1990s in part due to increased capital investment by U.S. businesses. (See sidebar, "U.S. Industry Continues to Invest in IT.")

Since 1997, the United States has been the leading supplier of office and computer machinery in the global market, overtaking longtime leader Japan. The EU, led by Germany, was the dominant producer for most of the 1980s before relinquishing the lead to Japan in 1988. Among developing countries, China and South Korea showed rapid and consistent growth in global market share, especially in the late 1990s.

From 1980 through 1997, Japan was the world's leading supplier of communication equipment, exceeding output in the United States and the EU. In 1998, U.S. manufacturers once again became the leading producer of communication equipment in the world and have since retained that position. In 2001, the latest year for which data are available, the United States accounted for approximately 24 percent of world production of communication equipment, down from 29 percent in 2000 (figure 6-7

and appendix table 6-1

Aerospace, the U.S. high-technology industry with the largest world market share, was the only industry to lose market share during the 1990s. During the early 1980s, the U.S. aerospace industry consistently gained market share, peaking at 57 percent in 1984. Since then, the U.S. share of this market has generally declined, falling to 51 percent in 1989 and to about 44 percent in 1995. The industry recovered somewhat during the following 3 years, then leveled off at about a 50 percent share in 2001. European aerospace industries made some gains during this time, particularly in France. After fluctuating between 7 and 10 percent during the 1980s, the French aerospace industry slowly gained market share for much of the 1990s. In 2000, France supplied 12.8 percent of world aircraft shipments; in 2001, that figure reached 13.5 percent. The EU as a whole accounted for 30.2 percent of world aircraft shipments in 2001. China's aerospace industry also grew relatively sharply. In 1980, China's aerospace industry output accounted for less than 1 percent of world output; by 1989, its market share rose to 1.5 percent. A succession of year-to-year gains from 1992 through 1997 then lifted its market share to 5.8 percent, and in 2000 and 2001 it stood at 6.5 percent. Brazil exhibited a very different trend. Brazil accounted for 14.9 percent of world aerospace production in 1980, 10.2 percent in 1989, and 2.8 percent in 2001.

The EU was the leading producer of drugs and medicines in the world market for the entire 22-year period examined and accounted for 30–34 percent of global shipments. France is the leading producer among the four largest EU member nations. The U.S. market share grew irregularly, from 20 percent in 1980 to 24 percent in 1990, and to 25 percent in 2001. Different national laws governing the distribution of foreign pharmaceuticals make this industry unique compared with other high-technology industries. For this industry, domestic population dynamics may play a more important role than global market forces and affect the demand for a country's pharmaceutical products.

The 2001 addition of the scientific instruments industry (medical, precision, and optical instruments) to the group of high-technology industries reflects the industry's high level of R&D in advanced nations (table 6-1

). From 1980 through 2001, the United States was the leading producer of scientific instruments. In 2001, the United States accounted for 49.3 percent of global industry shipments, up from 46.0 percent in 1990 and 45.1 percent in 1980. The EU, led by Germany and France, ranked second, accounting for 28–31 percent of global shipments.

Exports by High-Technology Industries

Although U.S. producers benefit from having the world's largest home market as measured by gross domestic product (GDP), mounting trade deficits highlight the need to serve foreign markets as well. Traditionally, U.S. high-technology industries have been more successful exporting their products than other U.S. industries, and therefore can play a key role in returning the United States to a more balanced trade position (figure 6-8

Foreign Markets

Despite its domestic focus, the United States was an important supplier of manufactured products to foreign markets throughout the 1980–2001 period. Throughout the 1990s and continuing through 2001, U.S. industry supplied 13–14 percent of the world's general manufacturing exports. It ranked second only to the EU in its share of world exports. If intra-EU shipments were excluded, the United States would likely rank above the EU.

Exports by U.S. high-technology industries grew rapidly during the mid-1990s and contributed to the nation's strong export performance (figure 6-9

). During the 1990s, U.S. high-technology industries accounted for between 19 and 23 percent of world high-technology exports, which at times were nearly twice the level achieved by all U.S. manufacturing industries. In 2001, the latest year for which data are available, exports by U.S. high-technology industries accounted for about 17 percent of world high-technology exports; Japan accounted for about 10 percent, and Germany nearly 8 percent.

The gradual drop in the U.S. share during 1990–2001 was in part due to competition from emerging high-technology industries in newly industrialized economies, especially in Asia. High-technology industries in South Korea and Taiwan each accounted for about 2.5 percent of world high-technology exports in 1990, and data for 2001 show that each country's share nearly doubled. Singapore's share, which was 3.5 percent in 1990 and 5.7 percent in 2001, was also significant.

Industry Comparisons

Over the past 2 decades, U.S. high-technology industries were leading exporters in each of the five industries that comprise the high-technology group. The United States was the export leader in all five industries in 2001, although its shares in several categories declined.

U.S. aerospace technology, computers and office machinery, and communication equipment industries all recorded successively smaller shares of world exports in 2001 than in earlier years. U.S. exports of aerospace technologies accounted for 54 percent of world aerospace exports in 1980, 46 percent in 1990, and 38 percent in 2001. U.S. exports of computers and office machinery represented 31 percent of world exports in 1980, 22 percent in 1990, and 16 percent in 2001. The U.S. manufacturers of communication equipment's share has fluctuated in a much narrower range, 13–17 percent, reaching highs in the early 1980s and the mid-1990s before falling to lows in 2000 and 2001. U.S. exports of scientific instruments declined throughout most of the 1980s, remained stable through the mid-1990s, and have slowly climbed since then. In 2001, U.S. exports of scientific instruments accounted for approximately 22 percent of world exports (figure 6-10

and appendix table 6-1

). The only U.S. industry with a higher share of world exports in 2001 than in 1980 was the pharmaceutical industry, which rose from 12 to 15 percent.

Global Business in Knowledge-Intensive Service Industries

For several decades, revenues generated by U.S. service-sector industries grew faster than those generated by the nation's manufacturing industries. Data collected by the U.S. Department of Commerce show that the service sector's share of U.S. GDP grew from 49 percent in 1959 to 64 percent in 1997 (NSB 2000, appendix table 9-4). This growth has been fueled largely by knowledge-intensive industries-those that incorporate science, engineering, and technology in either their services or the delivery of their services.[3] Five of these knowledge-intensive industries are the communication, financial, business (including computer software development), educational, and health services. In the United States, these industries grew faster than the high-technology manufacturing sector discussed earlier. This section presents data tracking the overall revenues earned by these industries in 70 countries[4] (figure 6-11

and appendix table 6-2

Combined global sales in these service-sector industries exceeded $12.3 trillion in 2001, up from $5.4 trillion in 1980 and $8.0 trillion in 1990. The United States was the leading provider of high-technology services, responsible for about one-third of total world service revenues during the 22-year period examined.

Business services, which include computer and data processing and research and engineering services, was the largest of the five service industries and accounted for 34 percent of global revenues in 2001. It was most prominent in the EU, which claimed 37 percent of business services world revenue in 2001. The United States ranked second at nearly 34 percent, followed by Japan at 15 percent. Data on individual business services by country are not available.

Financial services was the second largest service sector and accounted for nearly 27 percent of global revenues in 2001. Forty percent of industry revenues in 2001 went to the U.S. financial services industry, the world's largest. The EU was second with approximately 26 percent, followed by Japan at nearly 10 percent.

Communication services, which include telecommunication and broadcast services, was the fourth-largest service industry examined, accounting for almost 15 percent of world service industry revenues in 2001. In what many consider the most technology-driven of the service industries, the United States held the dominant position. In 2001, U.S. firms generated revenues equal to 38 percent of world revenues. The EU accounted for 24 percent, and Japan accounted for nearly 11 percent.

Because many nations' governments serve as the primary provider of the remaining two knowledge-intensive service industries, health services and educational services, and because the size of each country's population affects the delivery of these services, global comparisons based on market-generated revenues are less meaningful than they are for other service industries. The United States, with arguably the least government involvement, has the largest health services industry in the world. The EU is second, followed by Japan. If most of these services are delivered primarily to domestic customers, then, on a per capita basis, Japanese residents clearly consumed the most health services of any advanced nation. Educational services, the smallest of the five knowledge-intensive service industries in terms of revenue generated, includes governmental and private education institutions of all types that offer primary, secondary, and university education, as well as technical, vocational, and commercial schools. By comparison, fees (tuition) and income from other education service-related operations accounted for about one-fourth of the revenues generated by the business services industry worldwide. Europe generated the most revenues in this service industry, with Japan second and the United States third. Again, on a per capita basis, Japanese residents consumed more educational services than residents in any other advanced nation.

U.S. Royalties and Fees Generated From Intellectual Property

The United States has traditionally maintained a large trade surplus in intellectual property. Firms trade intellectual property when they license or franchise proprietary technologies, trademarks, and entertainment products to entities in other countries. These transactions generate revenues in the form of royalties and licensing fees.

U.S. Royalties and Fees From All Transactions

In 2001, U.S. receipts from trade in intellectual property declined for the first time since 1987. After an increase throughout the late 1980s and 1990s, total receipts peaked in 2000 at nearly $40 billion, then dropped somewhat in 2001. U.S. receipts for transactions involving intellectual property generally were four to five times larger than U.S. payments to foreign firms. This gap narrowed in the late 1990s as U.S. payments increased faster than U.S. receipts. This trend continued for 3 years and, by 2000, the ratio of receipts to payments dropped to about 2.5:1.

In 2001, U.S. trade in intellectual property produced a surplus of $22.3 billion, down 5 percent from the $23.5 billion surplus recorded a year earlier and extending a downward trend that began in 1999 (figure 6-12

and appendix table 6-3

). About 75 percent of transactions involved exchanges of intellectual property between U.S. firms and their foreign affiliates.[5] Exchanges of intellectual property among affiliates grew at about the same pace as those among unaffiliated firms. These trends suggest both a growing internationalization of U.S. business and a growing reliance on intellectual property developed overseas.

U.S. Royalties and Fees From Trade in Technical Knowledge

Data on royalties and fees generated by trade in intellectual property can be further disaggregated to reveal U.S. trade in technical know-how. By tracking transactions between unaffiliated firms in which prices are set through market-based negotiation, these data may better reflect the value of technical know-how at a given time than data on exchanges among affiliated firms. When receipts (sales of technical know-how) consistently exceed payments (purchases), these data may indicate a comparative advantage in the creation of industrial technology. Tracking the record of receipts and payments also provides an indicator of trends in the production and diffusion of technical knowledge.

The United States is a net exporter of technology sold as intellectual property. The gap between imports and exports narrowed during the late 1990s, but the most recent data show a surge in receipts in 2000 that outpaced the growth in payments. During the early 1990s, royalties and fees received from foreign firms were an average of three times greater than the amount U.S. firms paid foreigners for access to their technology. U.S. receipts grew to $3.9 billion in 1999, and in 2001 totaled $4.9 billion, an increase of approximately 24 percent (figure 6-13

and appendix table 6-4

). The slower growth in the most recent year may be due in part to past transfers of intellectual property to foreign affiliates of U.S. firms who in turn take the place of the U.S. parent company when dealing directly with foreign customers. Such transfers are advantageous for U.S. firms when the affiliates are located in countries with lower tax rates or when the transfers facilitate local product adaptation (Borga and Mann 2002). In transactions between unaffiliated firms, U.S. receipts for technology sold as intellectual property exceeded payments by more than $3 billion in 2000 and 2001.

The U.S. trade surplus in intellectual property is driven largely by trade with Asia. In 1995, U.S. receipts (exports) from technology licensing transactions were nearly seven times the amount of U.S. payments (imports) to Asia. That ratio closed to slightly more than 4:1 by 1997, but has since widened. The most recent data show U.S. receipts from technology licensing transactions at more than six times the amount of U.S. payments to Asia. Japan and South Korea were the biggest customers for U.S. technology sold as intellectual property; together, these countries accounted for 54 percent of total receipts in 2001.

Japan was the single largest consumer, although its purchases declined significantly during the 1990s. At its peak in 1993, Japan's share of U.S. receipts was approximately 51 percent. Japan's purchases began to increase again in 2000 and 2001, raising its share to 35 and 39 percent, respectively. Another Asian country, South Korea, was the second largest consumer, accounting for nearly 15 percent of U.S. receipts in 2001. South Korea has been a major consumer of U.S. technological know-how since 1988, when it accounted for 5.5 percent of U.S. receipts. South Korea's share rose to nearly 11 percent in 1990 and reached its highest level, 19 percent, in 2000.

Unlike its trade with Asia, U.S. trade in intellectual property with Europe fluctuated between surplus and deficit until 1994, when a sharp decline in U.S. purchases of European technical know-how led to a considerably larger surplus for the United States than in previous years. Another large surplus in 1995 resulted from an increase in receipts from the larger European countries. Receipts from EU countries have risen steadily since 1997, reaching $1.4 billion in 2001, or about 28 percent of all U.S. receipts for technology sold as intellectual property. Some of this increase can be attributed to increased licensing activity by firms in Germany, the third-largest consumer of U.S. technological know-how. In 2001, German firms spent $368 million, approximately double their expenditures in 1997. The latest data also show that U.S. receipts from exchanges with France and Switzerland rose sharply during the late 1990s and again in 2000 and 2001, leading to considerably larger U.S. surpluses from trade with Europe.

Foreign sources for U.S. firms' purchases of technical know-how varied over the years. The EU has been the biggest supplier for U.S. firms, accounting for 40–55 percent of foreign-supplied purchases of technological know-how sold as intellectual property. Germany, the United Kingdom, and Switzerland are the principal European suppliers.[6]

Asia has also been an important supplier of technological know-how, although its share of U.S. purchases has dropped considerably since 1999. In 2001, Asian countries accounted for 26 percent of U.S. purchases, down from 39 percent in 1999. Japan is the source for nearly all of the U.S. purchases from Asia, with small amounts coming from South Korea and Taiwan. Since 1992, Japan has been the single largest foreign supplier of technical know-how to U.S. firms: about one-fourth of 2001 U.S. payments were made to Japanese firms.

Footnotes

[2] In designating these high-technology industries, OECD took into account both direct and indirect R&D intensities for 13 countries: the United States, Japan, Germany, France, the United Kingdom, Canada, Italy, Spain, Sweden, Denmark, Finland, Norway, and Ireland. Direct intensities were calculated as the ratio of 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 (PPPs) as exchange rates. Indirect intensities were calculated by 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).

[3] See OECD (2001) for discussion of classifying economic activities according to degree of "knowledge-intensity."

[4] Unlike the manufacturing industries, national data that track activity in many rapidly growing service sectors are limited in the level of industry disaggregation and the types of data collected.

[5] An affiliate refers to a business enterprise located in one country that is directly or indirectly owned or controlled by an entity in another country. The controlling interest for an incorporated business is 10 percent or more of its voting stock; for an unincorporated business, it is an interest equal to 10 percent of voting stock.

[6] France has also been an important source of technological know-how over the years. In 1996, France was the leading European supplier to U.S. firms. Since then, data for France have been intermittently suppressed to avoid disclosing individual company operations. Data were last published for France in 2000 and showed a sharp drop in U.S. purchases of French technological know-how compared with 1996 data.