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Chapter 6. Industry, Technology, and the Global Marketplace

Knowledge- and Technology-Intensive Industries in the World Economy

Science and technology are widely regarded as important for the growth and competitiveness of individual industries and for overall national economic growth. Indeed, global economic growth increasingly depends on science, technology, and other knowledge-based assets. Policymakers in developed and developing countries are striving to attract, cultivate, and retain knowledge-based companies and workers to foster national prosperity and to increase national access to the global economy.[1]

The Organisation for Economic Co-operation and Development (OECD 2001, 2007) has identified 10 categories of industries that have a particularly strong link to science and technology.[2] Data on worldwide production in these industries can be used to examine their growing importance in the United States and other major economies.[3] These industries include both knowledge-intensive (KI) service industries and industries that produce high-technology (HT) manufactured goods. Collectively referred to as knowledge- and technology-intensive (KTI) industries, they include:

  • Five KI service industries that incorporate 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 that 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.[4] 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.[5]

This section examines the role of KTI industries in the global economy. (For a discussion of value added and other measures of economic activity, see sidebar, "Industry and Trade Data and Terminology"). For context, selected data are presented on wealth, productivity growth, and ICT infrastructure of selected economies, with a focus on the United States and other economies in which KTI industries play a particularly large or rapidly growing role.

Growth of Knowledge- and Technology-Intensive Industries in the World and Major Economies

KTI industries have become a major part of the global economy and represent a growing share of many countries' total economic activity. Global value added of these industries totaled $18.2 trillion in 2010 (figure 6-1 and appendix table 6-1). This represents 30% of estimated world gross domestic product (GDP), compared with a 27% share of a much smaller global economy 15 years earlier (figure 6-2 and appendix table 6-2). Almost all of the share increase occurred between 1995 and 2001. Most of the increase in the KTI share of the world economy stemmed from growth in KTI industries in the United States, the European Union (EU), Japan, and several developing economies.

The KTI shares of the total economic output of the United States, EU, and Japan rose by 4–7 percentage points from 1995 to 2010, reaching 40% in the United States, 32% in the EU, and 30% in Japan (figure 6-3). The higher U.S. share relative to the EU and Japan reflects a greater intensity of commercial KI services, notably finance and business services. The KTI share increases in the economies of South Korea and Taiwan were larger, rising by 7–10 percentage points to 29% and 32%, respectively, with increases occurring in both manufacturing and service industries. South Korea and Taiwan both became wealthy, developed economies during this period.

KTI shares also grew in most of the developing economies. China's KTI share grew by 3 percentage points to reach 20%, driven by a doubling of HT manufacturing share and increases in commercial KI services and education (figure 6-3). In India and Russia, the KTI shares each rose 2–4 percentage points to reach 19% and 20% of GDP, respectively, driven by the increases in commercial and public KI service shares.

Commercial Knowledge-Intensive Services

Value added of commercial KI services more than doubled from $4.4 trillion in 1995 to $10.9 trillion in 2010, representing 60% of the value added of all KTI industries ($18.2 trillion) (figure 6-1 and appendix table 6-3). In the 15 years leading up to 2010, commercial KI services increased their share of world economic activity from 15% to 18% (appendix table 6-2). Public KI services, especially education, also increased their share of the growing global GDP (figure 6-2 and appendix tables 6-4 and 6-5).

In the United States, value added of commercial KI services increased from 20% to 25% of GDP, the highest share of any large economy (figure 6-3 and appendix table 6-3). For the EU, the comparable figure rose by 4 percentage points to reach 18%, with France and Germany near the EU average and the UK above it. Japan's share rose from 15% to 17%.

The trend in large developing economies varied, with the shares of China and Brazil remaining roughly steady at 12%–14% (figure 6-3 and appendix tables 6-2 and 6-3). India's and Russia's shares each climbed by 3 percentage points to reach 13% and 14%, respectively. The differences among these economies reflect their stage of development and government policies, and may also reflect differences in the difficulty in measuring economic activity of service industries.

Commercial KI services as a percentage of non-government services (i.e., including health, education, and all commercial services) also increased (figure 6-4), and national differences in rates of increase were generally, but not always, similar to those for commercial KI services alone.

The three commercial KI service industries contributed uneven value-added amounts. The largest, business services, provided $5.7 trillion (52% of global total value added in 2010) (appendix table 6-6). Business services include the S&T intensive R&D services and computer programming industries (appendix tables 6-7 and 6-8). The second-largest, finance, provided $3.9 trillion (36% of global value added) (appendix table 6-9). Communications, crucial for information and data transactions in today's knowledge-based economies, provided $1.3 trillion (12% of global value added) (appendix table 6-10).[6]

Education and Health Services

The education and health sectors generated an estimated global value added of $2.6 and $3.3 trillion, respectively, in 2010 (table 6-1 and appendix tables 6-4 and 6-5).[7] International comparison of these two sectors is complicated by variations in market structure, the size and distribution of each country's population, 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.

Between 2000 and 2010, the value added generated by education services in developed countries nearly doubled, rising from $1.1 trillion to $2.0 trillion (appendix table 6-4). Output in the developing world tripled, increasing from $190 billion to $600 billion. China's output more than quadrupled, and Brazil's output nearly tripled. Russia's and India's outputs, starting from a low base, expanded more than fivefold and threefold, respectively (table 6-1). Increases by these large developing economies coincided with the rapid expansion of university enrollments and graduation of new degree holders. (See "Global Trends in Higher Education in S&E" in chapter 2 for a discussion of international trends in S&E higher education.)

As with education services, production of health care services in developed countries also doubled from 2000 to 2010, rising from $1.4 trillion to $2.9 trillion (appendix table 6-5). The United States and the EU have the largest health care sectors, as measured by share of global value added (34% each) (table 6-1). The growth trend in health care for these two developed economies was similar to that in education.

High Technology Manufacturing

The global value-added output of HT manufacturing industries increased from about $700 billion in 1995 to $1.4 trillion in 2010 (appendix table 6-11). However, the share of HT manufacturing industries in the global economy remained broadly steady during this period (figure 6-2 and appendix table 6-2) because of stronger overall growth in service industries than in manufacturing. In most nations, the HT manufacturing share of the economy remained flat or declined somewhat (figure 6-3). China was an exception. The HT manufacturing share of its economy doubled from 2% to 4%. This likely reflects a shift of final assembly of these goods from other Asian economies and developed economies to China.

Within the manufacturing sector, many economies experienced a modest shift toward HT industries. In both developed and developing economies, the HT share of the manufacturing sector has increased by 2 percentage points since 1995, reaching 16% and 10%, respectively (figure 6-5 and appendix tables 6-11 and 6-12). The HT share of the U.S. manufacturing sector, at 21% in 2010, is larger than in either the EU or in Japan. In China, the HT share increased from 7% to 13% of its total manufacturing base, similar to the proportion in the EU. However, other large developing countries underwent almost no change on this indicator.

Information and Communications Technology Industries

Many economists regard information and communications technology (ICT) as a general-purpose platform technology that fundamentally changes how and where economic activity is carried out in today's knowledge based economies, much as earlier general-purpose technologies (e.g., the steam engine, automatic machinery) propelled growth during the Industrial Revolution.[8] Thus ICT facilitates broad development of new markets (e.g., for mobile computing, data exchange, and communications). Because of the shift to knowledge-based production, ICT infrastructure can be as important as or more important than physical infrastructure to raising living standards and remaining economically competitive.

The OECD has identified four ICT industries: two are manufacturing industries—semiconductors and communications equipment and computers—and two are service industries—communications and computer programming and data processing.

Value added of ICT industries more than doubled from $1.2 trillion in 1995 to $2.8 trillion in 2010 (appendix table 6-13). In 2010, developed countries generated a collective $1.9 trillion in value added, with $1.7 trillion generated by the United States, the EU, and Japan. The ICT share of the global economy, and of most major economies, showed little change between 1995 and 2010 (increasing from a 4% to a 6% share of GDP) (appendix table 6-2). In contrast, the ICT share of the Chinese economy doubled from 3% to 6%, driven by its huge expansion in ICT goods produced for export and rapid growth of its communications services.

Productivity

Productivity growth is considered essential for maintaining or advancing living standards. The growth and rise in the concentration of KTI industries in the United States, the EU, Japan, and many developing economies coincided with elevated or rapidly rising productivity. The most accurate measure of productivity—output per hour—is unavailable for many emerging economies. GDP per employed person is the proxy measure used here, spanning 1990 to 2008.

Labor productivity growth of developed economies slowed from 1.9% in the 1990s to 1.6% from 2000 to 2005 and dropped to 0.9% from 2005 to 2008 (figure 6-6 and appendix table 6-14). Growth trends in the United States and the EU were very similar to the developed world average. After lagging behind the United States and the EU in the 1990s, Japan's growth accelerated to reach the rate of the United States and the EU in the 2000s. South Korea's productivity slowed but continued to grow twice as fast (3%) as most of the large developed economies.

The growth in labor productivity in developing economies accelerated from 1.4% in the 1990s to 4.4% from 2000 to 2005 and to 5.6% for 2005–08 (figure 6-6 and appendix table 6-14). China drove this increase; its labor productivity registered the fastest growth of any large economy, from 6% in the 1990s to more than 10% for both periods in the 2000s. Russia's labor productivity moved from negative growth in the 1990s to a 5.4% growth rate from 2000 to 2005 and further increased to a 6.2% growth rate from 2005 to 2008. India's growth in labor productivity advanced from 3.7% to 4.4% to 5.9% over these three periods. Brazil's labor productivity grew much more slowly for much of the 2000s than the other three large developing economies, but its growth accelerated from –0.1% from 2000 to 2005 to nearly 3% from 2005 to 2008.

Rapidly rising living standards, expressed as per capita GDP, accompanied the acceleration of productivity growth in developing economies and narrowed their gap with developed countries (figure 6-7 and appendix table 6-15). Despite sustained rapid productivity growth by China and several other emerging economies, however, their gap with the United States and other developed economies is substantial and is likely to remain so for some time even if their high growth is sustained. Per capita GDP in China and Brazil remains at less than a fifth of that in the United States and in Russia at less than half. India's and Indonesia's per capita GDP remains at less than 10% of that in the United States.

Information and Communications Technology Infrastructure

This section examines three broad ICT indicators: the percentage of households with broadband access; the ICT share of total fixed capital investment; and indexes of business, consumer, and government ICT infrastructure.[9] For developing economies, only the ICT infrastructure indexes are available.

The U.S. ICT infrastructure compares favorably in these three indicators to other large developed economies. South Korea is the leading country in fixed broadband penetration, with nearly 100% of its households having broadband access (figure 6-8). The United States is in the next group with household penetration of about 60% along with Australia, Canada, and Germany. The United States exceeds the EU average, France, and Japan in broadband penetration.

The United States has the highest ICT share of fixed capital investment (26%) of large OECD economies, with the United Kingdom a close second (figure 6-9). Five countries, Australia, Canada, Japan, France, and Germany, have shares of 13%–15%. In all of these countries, the ICT investment share has declined by large percentages since 2000; this most likely reflects rapidly falling prices of semiconductors, computers, and other ICT goods.

The United States is the leader in ICT business infrastructure among the larger developed economies (table 6-2), with an index score substantially higher than those of France, Germany, the United Kingdom, Japan, and South Korea. The United States scores near the top in ICT government infrastructure and about the same as France, Germany, the United Kingdom, Australia, and Canada in consumer infrastructure. South Korea and Japan have significantly higher scores in consumer infrastructure than the other developed economies, reflecting their lead in deployment of 3G connectivity and advanced mass-market broadband over other developed economies.

Employment data reinforce the close connection between ICT infrastructure and KTI industrial activity generally. In the United States, for example, commercial KI service industries employed about 16 million workers in 2009, or 1 of every 7 workers in the private sector, and they had a higher share of highly skilled workers than other service industries. Four commercial KI services—finance; scientific, technical, and professional services; telecommunications; and data processing hosting—have twice as high a share of workers with ICT skills compared to all service industries (figure 6-10).

Separate ICT infrastructure indexes for developing economies show wide variation among Brazil, China, India, and Russia (table 6-2). China scores third among these four economies in business infrastructure and second in consumer and government infrastructure. China's relatively weak score in ICT business infrastructure reflects very low penetration of secure Internet servers and limited international Internet bandwidth. India scores the lowest among the four in the three indexes, reflecting factors such as limited availability of public telephone lines, modest Internet usage and subscriber levels, and very low penetration of secure Internet servers.

Of the four large developing economies, Brazil ties with Russia as having the highest score in business infrastructure and with China for second in consumer infrastructure (table 6-2). Brazil's score in business infrastructure reflects higher penetration rates of secure Internet servers and personal computers. Brazil has the highest score in ICT government infrastructure.

Among the four large developing economies, Russia leads in consumer infrastructure, ties with Brazil in business infrastructure, and scores roughly the same as China in government infrastructure. Russia's relatively high score in consumer infrastructure reflects its levels of fixed and mobile telephone penetration and strong Internet and broadband subscription levels. Russia's business infrastructure score reflects a relatively high penetration of personal computers and telephones offset by low penetration of secure Internet servers and limited international Internet bandwidth.

Notes

[1] See Mudambi (2008) and Reynolds (2010) for a discussion on the shift to knowledge-based production and geographical dispersion of economic activity.
[2] See OECD (2001) for a discussion of classifying economic activities according to degree of "knowledge intensity." Part of the discussion on trade uses a different, product-based classification of the U.S. Census Bureau under the terminology advanced technology products.
[3] Like all classification schemes, the OECD classification has shortcomings. For example, 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 allow researchers and analysts to trace, in broad outline, the worldwide trends towards greater interdependence in science and technology and the development of KTI sectors in many of the world's economies.
[4] In designating these HT manufacturing industries, OECD took into account both the R&D expenditures made directly by firms and 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 the OECD as HT manufacturing. For additional perspectives on OECD's methodology, see Godin (2004).
[5] See Atkinson and McKay (2007: 16–17) for a discussion of and references to the impact of IT on economic growth and productivity.
[6] The sum of the value added attributable to individual commercial KI services does not add to the total because of rounding.
[7] Data on the health sector includes social services.
[8] See Bresnahan and Trajtenberg (1995) and DeLong and Summers (2001) for a discussion of ICT and general-purpose technologies.
[9] These ICT infrastructure indexes originate from the Connectivity Scorecard, which has developed a variety of ICT indexes for developed and developing countries. The ICT infrastructure indexes are benchmarked against the best-in-class country in developed and developing countries. The business ICT infrastructure index is composed of metrics on business hardware and software and penetration of business lines. The consumer infrastructure index is composed of indicators on penetration of telephone line and broadband. The government infrastructure index is composed of metrics related to e-government capacity and the share of schools connected to the Internet. More information on the methodology can be found at http://www.connectivityscorecard.org/methodology/
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