SCIENCE & ENGINEERING INDICATORS

This section examines the importance of knowledge- and technology-intensive (KTI) industries in the global economy, and the positions of the United States and other major economies in global KTI industry production. In this report, KTI industries consist of high and medium-high R&D intensity industries as identified internationally in a report by the Organisation for Economic Co-operation and Development (OECD).^{​For more information on the OECD’s methodology in identifying R&D intensive industries, see the Technical Appendix and Galindo-Rueda F, Verger F. 2016. OECD Taxonomy of Economic Activities Based on R&D Intensity. OECD Science, Technology and Industry Working Papers, 2016/04, OECD Publishing, Paris. https://www.oecd-ilibrary.org/docserver/5jlv73sqqp8r-en.pdf?expires=1555622432&id=id&accname=guest&checksum=F080BDBDCDEC9AD8E8DDE43B567BD4B8. Accessed 18 April 2019.} Industries are classified into R&D intensity groups using the ratio of an industry’s business R&D expenditures to its value-added output.

Value added is a net measure of output; it is the difference between the total revenue generated from the sale of an industry’s output and the total cost of inputs that were used in production such as the cost of labor, raw materials, and services purchased from other businesses. For production activities that take place within a country’s geographic borders, value added from all industries at all stages of production equals GDP, thus value added is a measure of an industry’s contribution to overall GDP. Value added is used in the computation of R&D intensity instead of gross output because as a net measure, it avoids double counting of intermediate production.

Five industries are classified as high R&D intensive—aircraft; computer, electronic, and optical products; pharmaceuticals; scientific R&D services; and software publishing (Table 6-1). Eight industries are classified as medium-high R&D intensive—chemicals excluding pharmaceuticals; electrical equipment; IT services; machinery and equipment; medical instruments; motor vehicles; railroad and other transportation; and weapons (see sidebar New Definition of KTI Industries). These industries have lower, but still substantial levels of R&D intensity.

This report presents data on most of these industries. Data on software publishing are not available; instead data are presented on the publishing industry, which includes software publishing. The data presented on the publishing industry is an imperfect measure of the software publishing industry because the share of software publishing in the publishing industry varies across countries. Data on medical instruments and military vehicles are also not available. Military vehicles are part of the railroad and other transportation industry.

KTI industries contribute globally $9 trillion in value added, accounting for 11% of GDP (Table 6-1 and Table S6-2). The medium-high R&D intensive industries produce the largest share (64%) of global KTI output, accounting for 7% of global GDP. The output of the high R&D intensive industries is comparatively lower, accounting for 4% of global GDP (Table 6-1).

The United States and EU both have KTI output shares of their domestic GDP at the global average (11% of GDP). China and Japan have KTI shares that are considerably larger because of much higher output shares of medium-high R&D intensive industries (Figure 6-1). Over the past 15 years, the KTI output shares of domestic GDP in the United States, EU, China, and Japan have remained relatively constant (Figure 6-2). The next two sections discuss the specific trends for high and medium-high R&D intensive industries.

The United States has been the world’s largest producer of output in high R&D intensive industries for three decades. It is responsible for almost a third of global output of these industries (Figure 6-3 and Table S6-3). China and the EU are the second-largest producers with substantially lower global shares (about 20% each). Since 2002, global output of high R&D intensive industries has more than doubled, reflecting both price and quantity growth (Table S6-3). U.S. production in these industries has kept pace so the U.S. global share has remained stable. The EU’s output has grown slower than global output, resulting in a decline of EU’s global share. Japan’s output has contracted and Japan’s global share has declined sharply. China has emerged as a major producer in high R&D intensive industries over the last decade and its global share has increased rapidly.

Production in most high R&D intensive industries is globalized, involving complex value chains that span multiple countries. A global value chain consists of the full range of activities that take place across the world to bring a product or service from conception to its final form. Global value chains create opportunities for countries to participate in global production by specializing in segments of production in which they have a comparative advantage rather than the production of an entire product.

The global value chains of various KTI industries differ based on whether there is a need to integrate R&D, testing, and manufacturing activities. KTI’s global value chains also differ in terms of the location in the value chain where knowledge is created. In some industries innovation occurs largely in R&D activities; in other industries considerable knowledge is created in other parts of the production chain such as in manufacturing activities.

The global value chains and the globalization of production are prominent in the largest high R&D intensive industry—computer, electronic, and optical products—because components are modular and generally low weight, which keeps shipping costs low (OECD 2012:27). The foreign content share of global production of this industry, an indicator of globalization, was 35% in 2015 compared to the 24% average over all industries (Figure 6-4).

The pharmaceuticals industry, the next largest industry, has two main global value chains. For emerging and complex biologic vaccines and stem cell therapies, pharmaceutical companies generally locate closely with academic and medical R&D laboratories because these innovative products require close integration of R&D, testing, and manufacturing. For existing and mature technologies, such as small molecules and generics, companies do not need to locate near research laboratories because close integration of R&D and manufacturing is not as necessary (Donofrio and Whitefoot 2015). The foreign content share of the chemical and pharmaceuticals industries was 37% in 2015 (Figure 6-4).^{​Foreign content share of the pharmaceuticals industry is not available.}

Global value chains are also present in other industries. The global aircraft industry is characterized by lead firms, including Airbus and Boeing, that outsource production of major subsystems, such as engines and avionics, to other companies, which in turn rely on subcontractors to provide smaller components. Global production chains of this industry are mainly located in developed countries (Turkina et al. 2016:1217).

Although they account for a small share of U.S. industrial output (6%) and employment (2%), U.S. high R&D intensive industries fund a disproportionately large share—more than half—of R&D funded by U.S. businesses (Figure 6-5). In 2017, U.S. high R&D intensive industries employed 3.2 million people; the computer, electronic, and optical products industry is the largest employer with 1,156,000 employees followed by aircraft (752,000) and scientific R&D services (637,000) (Figure 6-6). Individuals with training in science, technology, engineering, and math who have an education level below a bachelor’s degree, comprise 16% of the total workforce in U.S. high R&D intensive industries (see sidebar The Skilled Technical Workforce in U.S. Knowledge- and Technology-Intensive Industries).

As the world’s largest producer, the United States holds strong global positions in high R&D intensive industries. It is particularly strong in two of these industries—manufacturing of aircraft and publishing (including software) (Figure 6-7, Table S6-5, and Table S6-9). The U.S. produces from more than half to almost two thirds of global production of these industries.

In the aircraft industry, the U.S. has consistently accounted for more than half of global production (Table S6-5). Much of the supply chain for the U.S. aircraft industry is globalized: for example, Boeing, a major producer, mostly specializes as a system integrator of major subsystems and components supplied by companies within and outside the United States (Turkina et al. 2016).

In the publishing (including software) industry, the United States has had a dominant position for the last decade and a half, producing more than half of global output (Table S6-9). A major driver has been the rise in U.S. business investment in software which more than doubled between 2002 and 2018 (from $152.5 billion to $380.0 billion) (BEA 2019).

In addition to industry-focused R&D, a growing industry is devoted to R&D services. The United States and the EU are the largest producers in the scientific R&D services industry in the world, each accounting for 23% of global activity (Figure 6-7 and Table S6-8). This industry engages in original research to advance the state of knowledge and applications of research findings to improve products and processes in the areas of physical, engineering, and life sciences including electronics, biology, medicine, and physics, and in the areas of social sciences and humanities including economics, sociology, psychology, language, and behavior.

The United States is also a major global producer in the pharmaceuticals and the computer, electronic, and optical products industries. In the pharmaceuticals industry, the U.S. shares the top spot with the EU, each accounting for more than a quarter of global production (Figure 6-7 and Table S6-6). In the computer, electronic, and optical products industry, the United States is the world’s second-largest producer (26% global share), behind China (31% global share) (Figure 6-7 and Table S6-7).

China and the EU are tied as the second-largest producers in high R&D intensive industries with China’s global share growing and that of the EU in decline (Figure 6-3 and Table S6-3). China’s global share has grown rapidly from 5.6% in 2002 to 20.6% in 2018 (Table S6-3), driven by growth in many high R&D intensive industries. China has made the largest gain in the computer, electronic, and optical products industry; China’s output in this industry has grown nearly nine-fold since 2002, becoming and remaining the world’s largest producer since 2014 (Table S6-7). In the computer industry, China has made impressive progress in its supercomputing ability over the last few years, an area that it had little presence in a decade ago (see sidebar China’s Progress in Supercomputers). Although Chinese semiconductor companies have gained global market share, China remains reliant on semiconductors supplied by foreign firms for most of its production of smartphones and other electronic products (PwC 2017).

China is an important part of “Factory Asia”—the electronics goods production network centered in East Asia (WTO and IDE-JETRO 2011). China plays a central role in this network as the major location of final assembly and as the largest importer and exporter of electronic components. China has a global manufacturing scale, a network of suppliers, a large labor force of skilled production workers, and the ability to quickly ramp up production that is required for many electronic products that have short development cycles (Donofrio and Whitefoot 2015:26).

Four Asian economies—Japan, Singapore, South Korea, and Taiwan—are major producers of components and finished electronic goods, and are closely integrated with China. These four Asian economies are major importers of components from China. According to the OECD's Trade in Value Added data, China comprised 30% or more of Japan, South Korea, and Taiwan's imports of computer, electronic, and optical products, and 17% of Singapore's imports in this industry. South Korea and Taiwan are major exporters of components to China (Frederick and Lee 2017:24). In 2015, these two economies each accounted for about 25% of China's imports of computer, electronic, and optical products according to the OECD's Trade in Value Added database.

China has also markedly increased its global share in the pharmaceutical and scientific R&D service industries, becoming the third-largest global producer in pharmaceuticals and in scientific R&D services (Figure 6-7, Table S6-6, and Table S6-8). According to Cao (2014) and Hsu (2015), the rapidly expanding middle class, reform of China’s health care system, and increasing demand for health care has fueled the rapid expansion of China’s pharmaceuticals industry. Many multinational biopharmaceutical companies have established R&D facilities in China to access the country’s domestic market and a growing number of Chinese companies have increased their investment in R&D (Chen and Zhao 2018). In the aircraft industry, China’s rapid growth continued, particularly over the last 5 years, albeit from a low base (Table S6-5).

The EU’s global share of high R&D intensive output declined from 26% in 2008 to 22% in 2011 and fluctuated between 19% and 21% since 2011 (Figure 6-3). The EU ties with the United States as the world’s largest producer in pharmaceuticals (26% global share) and scientific R&D services (23% global share) (Figure 6-7, Table S6-6, and Table S6-8). The EU is the second-largest producer in aircraft (24% global share) and publishing (including software) (24%) (Table S6-5 and Table S6-9). The EU’s production is much lower than the United States and China in computer, electronic, and optical products (Figure 6-7 and Table S6-7).

Japan’s global share of high R&D intensive industries fell from 9% in 2010 to 5% in 2018 (Figure 6-3 and Table S6-3). The computer, electronic, and optical products industry had the steepest decline, falling from 14% to 6% during this period (Table S6-7). Japan’s deep decline in this and other high R&D intensive industries coincides with slow labor force and economic growth as well as the transfer of production to China and other countries.^{​For a discussion of the various factors that have contributed to the stagnation of Japan’s economy, see Funabashi Y, Kushner B, editors. 2015. Examining Japan’s Lost Decades. NY: Routledge.}

The depreciation of the euro and yen between 2013 and 2018 may have understated to some degree the performance of the EU and Japan’s high R&D intensive industries (see Technical Appendix for more information).

The United States produces a smaller share of global output in medium-high R&D intensive industries compared to high R&D intensive industries. China is the world’s largest producer in these industries (26% of global output) followed by the EU and the United States (22%–23% global share) (Figure 6-8 and Table S6-4). Between 2002 and 2018, China’s output grew rapidly, expanding its global share from 7% to 26%.

Medium-high R&D industries have global and often complex value chains, a characteristic shared with high R&D intensive industries. However, production activities are generally located closer to the final market than consumer electronics and other information and communication technologies (ICT) industries that have lightweight products (Donofrio and Whitefoot 2015:25). Transportation costs are high in many of these industries because the final products and major components are often large and heavy, particularly automobiles, large appliances, and heavy equipment. For example, in the motor vehicles and parts industry, the manufacturing facilities of three major global automakers—General Motors, Toyota, and Volkswagen—are widely dispersed and clustered in the regions or countries of their final markets.

Although the medium-high R&D intensive industries account for a small share of U.S. industrial output and employment, they fund nearly one-quarter of R&D funded by U.S. businesses (Figure 6-5). These industries employ 6.5 million people, 4% of U.S. employment (Figure 6-9). IT services is the largest employer (3.0 million people), followed by motor vehicles (1.4 million). Individuals with training in science, technology, engineering, and math who have an education level below a bachelor’s degree, comprise nearly one-fifth of the total workforce (see sidebar The Skilled Technical Workforce in U.S. Knowledge- and Technology-Intensive Industries).

The United States is the world’s largest producer of IT services (Table 6-2 and Table S6-16). The United States is the second-largest producer in chemicals excluding pharmaceuticals (21% global share) and ties with the EU as the second-largest producer in railroad and other transport industry (15% global share) (Table S6-13 and Table S6-15).

China is the world's largest producer of chemicals excluding pharmaceuticals, electrical equipment, motor vehicles, other machinery and equipment, and railroad and other transport (Table 6-2, and Table S6-11 through Table S6-15). These industries grew very rapidly over the last decade. Output of electrical equipment grew by three-fold with China's global share doubling from 23% to 46%. China's global share also doubled in other machinery and equipment to reach 33% in 2018. China surpassed the EU in 2017 to become the world's larger producer in motor vehicles (27% global share).

China's growth in many of these industries coincides with a rapid expansion of its exports of medium-high R&D intensive goods. These more than doubled over the last decade (see “Trade in Medium-High R&D Intensive Goods”).

The EU, the second-largest producer of medium-high R&D intensive industries, saw its global share fall from 26% to 23% between 2010 and 2018 (Figure 6-8 and Table S6-4). The EU is the second-largest producer of motor vehicles (24% global share) closely behind China (Table 6-2 and Table S6-11). The EU is also the second-largest producer of IT services (27% global share) significantly below the United States (37% global share) (Table S6-16). Japan is the fourth largest producer in motor vehicles, closely behind the United States (13% versus 15%) (Table 6-2 and Table S6-11).

Science and technology are also used outside of KTI industries. Such industries may incorporate advanced technology in their services and delivery of their services, use advanced manufacturing techniques, or incorporate technologically advanced inputs in manufacturing. Agriculture, though not classified as a KTI, is an intensive user of advanced and science-based technologies.

The introduction of many technologies, including biotechnology, has fueled productivity growth in U.S. agriculture (Wang et al. 2015:38-45). Agriculture productivity, as measured by total factor productivity, grew at an annualized average rate of 1.5% between 1948 and 2015. Output more than doubled with only slight growth in use of inputs, including labor and capital, allowing the U.S. agricultural sector to feed far more people today while using less farmland than six decades ago (Wang et al. 2015:5).

U.S. agriculture has benefited from R&D funding provided by the U.S. Department of Agriculture, which was $2.4 billion in FY 2017 (NCSES 2019). U.S. universities received $824 million from the U.S. Department of Agriculture in FY 2017 to perform R&D. U.S. agriculture has also made technological progress with basic science that was not directed at agriculture, such as recombinant DNA technology (Wang et al. 2015:39).

U.S. agriculture has also benefited from R&D performed by companies classified outside of the agricultural sector. For example, the pharmaceutical and biotechnology industries performed a total of $81 billion in R&D in 2016 (NCSES 2016). Newer and emerging technologies, including big data, cloud computing, robotics, and drones, are being widely adopted in agriculture in the United States and other countries (Scott, Chen, and Cui 2018).

Although the U.S. agricultural sector is highly productive and an intensive user of technology, China is the world’s largest agriculture producer, accounting for more than one-third of the $2.8 trillion total global value-added output. The EU (10% global share) and the United States (6% global share) are the next largest producers (Figure 6-10). Between 2006 and 2018, the rapid growth of China’s agriculture industry resulted in its global share jumping from 22% to 36%—similar to its trend in the high and medium-high R&D intensive industries (Figure 6-10). The shares of the United States, the EU, and Japan all declined during this period.

Venture capital investment, an indicator of the commercialization of new technologies, has been increasing rapidly in start-up companies in agricultural technologies, including wireless sensors, remote controlled irrigation systems, and software to optimize planting (Figure 6-11). Global venture capital investment for agricultural technologies jumped from less than $200 million in 2008 to $2 billion in 2018, with the majority of the funds being invested in the United States.