Chapter 6 | Industry, Technology, and the Global Marketplace

Patterns and Trends of Knowledge- and Technology-Intensive Industries

Related Content

• Related Content-
• Global Trends in Commercial Knowledge-Intensive Services Industries
• Global Trends in Public Knowledge-Intensive Services Industries
• Knowledge- and Technology-Intensive Industries in the Global Economy

KTI industries have a value-added output of $24 trillion, making up nearly one-third of world GDP (Figure 6-1; Appendix Table 6-1, Appendix Table 6-2, and Appendix Table 6-3). This 2018 edition of Science and Engineering Indicators includes an expanded definition of KTI industries to add several industries with a value-added output of $3.3 trillion (see sidebar New Definition of KTI Industries).

Among the KTI industries, the commercial knowledge-intensive services—business, financial, and information—have the highest share (15% of GDP) (Figure 6-1; Table 6-1; Appendix Table 6-3 and Appendix Table 6-4). The public knowledge-intensive services—education and health care—have the second largest (9% of GDP) (Figure 6-1; Appendix Table 6-3, Appendix Table 6-5, and Appendix Table 6-6).^​ The newly added KTI industries for the 2018 edition of Science and Technology Indicators are medium-high-technology manufacturing industries that consist of motor vehicles and parts, electrical machinery, machinery and equipment, chemicals excluding pharmaceuticals, and railroad and other transportation equipment (see sidebar New Definition of KTI Industries). These industries have the third largest share (4% of GDP) (Figure 6-1; Appendix Table 6-3 and Appendix Table 6-7). The high-technology manufacturing industries—aircraft and spacecraft; communications; computers; pharmaceuticals; semiconductors; and testing, measuring, and control instruments—are smaller, with a 2% share, but use and embody cutting-edge technologies (Figure 6-1; Appendix Table 6-3 and Appendix Table 6-8).

The KTI share of developed economies is higher than that of developing economies, largely because of their much higher share of knowledge-intensive services (Figure 6-2 and Figure 6-3; Appendix Table 6-2 through Appendix Table 6-6). But KTI shares vary widely, even among developed economies:

• The United States has the highest KTI share of any major developed economy (38%) largely because its share of commercial knowledge-intensive services is higher than the average for developed economies.
• The UK and Japan have the second highest share (36%). The United Kingdom (UK), like the United States, has a higher-than-average share of commercial KI services. In contrast, Japan has a much higher share in medium high-technology manufacturing industries compared to the United States and the UK. Germany also has a relatively high KTI share (35%) with a similar profile to Japan.

The KTI shares of large developing countries vary widely, in part reflecting differences in their stage of development, level of per capita income, and the size of their high-technology and medium-high-technology industries (Figure 6-3; Appendix Table 6-2 and Appendix Table 6-3).

• China has the largest share of any large developing economy (35%) due to its relatively large shares in medium-high-technology manufacturing industries and commercial KI services industries.
• Mexico, India, Russia, and Indonesia have KTI shares (19%–22%) that are considerably lower than the average for developing economies.

Investment in ICT plays an important role in the competitiveness and innovation capability of KTI and other industries. In addition, the ICT industries (a subset of KTI industries), consisting of communications, semiconductors, and computers and information services, produce ICT products and services that are used by the entire economy. Many economists regard ICT as a general-purpose platform technology that fundamentally changes how and where economic activity is carried out in today’s knowledge-based countries, much as earlier general-purpose technologies (e.g., the steam engine, automatic machinery) propelled growth during the Industrial Revolution.^​ Many KTI and other industries invest heavily in ICT to be successful and compete in global markets. Investment in ICT, particularly by businesses, is also important because it has a substantial impact on a country’s living standards, employment, and productivity. The Internet of Things—ICT technologies that sense, measure, and connect devices through the Internet—is rapidly growing and holds the potential to raise consumer and business productivity and raise living standards (see sidebar The Internet of Things).^​

The United States has the highest rate of ICT investment in all of its industries (measured as an industry’s ICT spending share of value-added output) compared to the other three largest economies—EU, Japan, and China (Figure 6-4). Among the KTI industries, the United States has a considerably higher rate of ICT investment in medium-high-technology manufacturing industries and commercial knowledge-intensive services. The high rate of ICT investment by U.S. commercial knowledge-intensive services coincides with the global dominance of this U.S. industry, particularly business services, a category that contains many advanced industries, such as R&D, architectural, and engineering services (Table 6-1). The rate of ICT investment for the other three economies is far below that of the United States in this industry. In high-technology manufacturing industries, China, the EU, and the United States have the same rate of ICT investment. Japan’s share is considerably lower.

Public knowledge-intensive services—health care and education—account for $7 trillion in global value added (Figure 6-1 and Figure 6-5; Appendix Table 6-5 and Appendix Table 6-6). These sectors are major sources of knowledge and innovation of great benefit to national economies. Although they are far less market driven than other KTI industries in the global marketplace, competition in education and health appears to be increasing.^​ Education trains students for future work in science, technology, and other fields, and research universities are an important source of knowledge and innovation for other economic sectors. Many renowned universities are seeking to establish themselves as global brands. The health sector helps keep the population healthy and productive, trains and employs highly skilled workers, conducts research, and generates innovation. Leading medical centers in many countries are collaborating across borders, and “medical tourism,” while modest, is growing.

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

The United States and the EU are the world’s largest providers of public and private education services, with global shares of 31% and 24%, respectively (Figure 6-5; Appendix Table 6-5). China is the third largest provider (13%), followed by Japan (6%). The United States and the EU are also the largest providers in health care (Appendix Table 6-6). Japan is the third largest provider followed by China.

The U.S. global shares of education and health care remained roughly flat over the last decade despite rising in absolute value (Figure 6-5; Appendix Table 6-5 and Appendix Table 6-6). The shares of education and health care for the EU and Japan declined. China’s global share of education and health care more than doubled during this period, in line with its rapid economic growth, emphasis on education, and focused efforts to improve the health care system. India and Indonesia also showed expansion. The growth of education in China and India coincided with increases in higher-education degree awards in both countries and, particularly, in doctorates in the natural science and engineering fields (see Chapter 2).

The global value added of commercial knowledge-intensive services—business, financial, and information—was $11.6 trillion in 2016 (Figure 6-1 and Figure 6-6; Appendix Table 6-4). Financial services is the largest industry within commercial KI services ($4.6 trillion) (Appendix Table 6-9). The large size of financial services reflects the wide and diverse activities of these industries, including banking, insurance, pension funding, leasing, commodities, securities, and stock markets. Business services, which include the technologically advanced industries of engineering, consulting, and R&D services, is the second largest industry ($4.0 trillion) (Appendix Table 6-10). Many businesses and other organizations purchase various services rather than provide them in-house, particularly in developing countries (Table 6-1). The third largest industry is information services that includes the technologically advanced industries of computer programming and information technology (IT) services ($3.1 trillion) (Appendix Table 6-11 and Appendix Table 6-12).

The United States accounted for 31% of global commercial knowledge-intensive services in 2016 (Figure 6-6; Appendix Table 6-4). U.S. commercial knowledge-intensive services industries employ 20.6 million workers, 17% of U.S. private sector employment (Figure 6-7). These industries perform 29% of U.S. industrial R&D, higher than their share of U.S. industrial output (Figure 6-8).

The EU is the second largest global provider (21% share) of commercial knowledge-intensive services (Figure 6-6; Appendix Table 6-4). China is third (17%), and Japan is fourth (6%).

During the post-global recession period of 2011 through 2016, the steady growth of U.S. commercial knowledge-intensive services between 2011 and 2016 contrasts with declines in the EU and Japan, which have had comparatively weaker economic recoveries (Figure 6-6 and Figure 6-9). U.S. value-added output of commercial knowledge-intensive services grew 26% higher during this period, driven by business and financial services (Appendix Table 6-9 and Appendix Table 6-10). However, China grew far faster than the United States with its output nearly doubling.

Since 2006, the U.S. global share of commercial knowledge-intensive services has slightly declined from 35% to 31% (Figure 6-6; Appendix Table 6-4). These changes have been largely due to much faster growth in China. However, the United States continues to be the dominant global provider of commercial knowledge-intensive services. The United States has a strong position in business services (33% global share), a category that includes advanced-technology industries such as engineering, architectural, and R&D services (Figure 6-10; Table 6-1). Business services led the growth of U.S. commercial knowledge-intensive industries over the last decade (Appendix Table 6-10). One source of growth of this U.S. industry has been the infrastructure boom in developing countries, which has employed U.S. firms in areas including architecture, engineering, and consulting.^​

Employment in U.S. commercial knowledge-intensive services has grown more slowly than value added output in the post-global recession period reaching 20.6 million in 2016, a gain of 2.0 million jobs over 2011 (Figure 6-7).^​ Business and financial services added about 1.5 million and 400,000 jobs, respectively. Employment in information services was stagnant. The high growth in output of U.S. commercial knowledge-intensive services relative to weak job growth is consistent with historical trends and is largely explained by faster labor productivity growth in these industries relative to non-KTI industries (NSF/NCSES 2014:7).

Output of commercial knowledge-intensive services in the EU fell 8% between 2011 and 2016 (Figure 6-6; Appendix Table 6-4). The slow pace of growth of commercial knowledge-intensive services coincides with the EU’s weak and halting economic recovery (Figure 6-9). Over the last decade, the EU’s global share has declined from 29% to 21% due to faster growth in the United States and China and other developing countries (Figure 6-6; Appendix Table 6-4). The EU’s global share in business services slid from 34% to 26% during this period (Appendix Table 6-10). However, the EU continues to be the second largest global provider in this industry.

The substantial depreciation of the euro relative to the dollar in 2011–16 likely overstated the weakness of the EU’s commercial knowledge-intensive services and other KTI industries (see sidebar Currency Exchange Rates of Major Economies).

China’s commercial KI services grew rapidly during the post-global recession period, with output nearly doubling between 2011 and 2016 (Figure 6-6; Appendix Table 6-4). However, toward the end of this period, growth of commercial KI services slowed in 2016, coinciding with the moderation in China’s economic growth (Figure 6-9).

Over the last decade, commercial KI services in China has grown at an average annual rate of nearly 20%, resulting in its global share more than quadrupling to reach 17% (Appendix Table 6-4). China surpassed Japan in 2012 to become the world’s third largest provider, with its global share in 2016 more than double the size of Japan’s. Business services and financial services led the growth of China’s commercial KI services (Appendix Table 6-9 and Appendix Table 6-10). China’s industry that provides outsourced business services to firms based in other countries has grown rapidly over the last decade.^​

Output of Japan’s commercial knowledge-intensive services shrank 24% in the post-global recession period (Figure 6-6; Appendix Table 6-4), and this trend has coincided with Japan’s halting recovery from the global recession (Figure 6-9). In addition, Japan’s global position in commercial knowledge-intensive services has weakened over the last decade coinciding with the lengthy stagnation of the Japanese economy (Figure 6-6; Appendix Table 6-3 and Appendix Table 6-4).

The substantial depreciation of the yen relative to the dollar in 2011–16 likely overstated the weakness of Japan’s commercial knowledge-intensive services industries and other KTI industries (see sidebar Currency Exchange Rates of Major Economies).

Trends were mixed in other large developing economies. India and Indonesia had sizeable gains in commercial knowledge-intensive services over the last decade, with their global shares reaching 3% and 1%, respectively (Appendix Table 6-3 and Appendix Table 6-4). In Brazil and Russia, output of commercial knowledge-intensive services industries was down sharply over the last decade due to their economies entering recession in 2014–16. India had strong gains in business and information services, reflecting, in part, the success of Indian firms providing IT, accounting, legal, and other services to developed countries (Appendix Table 6-10 and Appendix Table 6-11). Indonesia had strong gains in financial services and business services (Appendix Table 6-9 and Appendix Table 6-10).

Global value added of high-technology manufacturing was $1.6 trillion in 2016, making up 14% of total manufacturing output (Figure 6-1 and Figure 6-11; Appendix Table 6-8 and Appendix Table 6-13). The three ICT manufacturing industries—semiconductors, computers, and communications—are highly globalized and involve complex value chains in the production process. These ICT industries made up a collective $0.6 trillion in global value added (Appendix Table 6-14, Appendix Table 6-15, and Appendix Table 6-16). Many ICT products such as consumer electronics have short development cycles that require production of large quantities in a short period. The rapid and massive scale-up of production requires a location that can quickly ramp up large-scale production with skilled labor, including engineers and production workers (Donofrio and Whitefoot 2015: 26).

The three remaining high-technology industries are pharmaceuticals ($540 billion); testing, measuring, and control instruments ($280 billion); and aircraft and spacecraft ($190 billion) (Appendix Table 6-17, Appendix Table 6-18, and Appendix Table 6-19). In the aerospace industry, Airbus and Boeing have globalized their production networks in response to rapidly growing markets outside their domestic regions and pressure to reduce labor and other costs, and to comply with requirements by some countries to locally produce components and supplies (Treuner et al. 2014:7). The global networks benefit from more immediate access to raw materials and engineering capacities and low labor cost. The pharmaceuticals 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 necessary (Donofrio and Whitefoot 2015:25–26).

The United States is the largest global producer (31% global share) of high-technology manufacturing industries (Figure 6-11 and Appendix Table 6-8). U.S. high-technology manufacturing industries account for a small share of the U.S. industrial output and industry employment (Figure 6-8). However, they fund a disproportionately large share of U.S. business R&D. China is the second largest global producer, with a global share of 24%. The EU is the third largest producer (16%). Japan and Taiwan are roughly tied as the fourth largest producers (6% and 5%, respectively) (Figure 6-11; Appendix Table 6-8).

U.S. high-technology manufacturing has grown steadily in the post-global recession period coinciding with its moderate recovery from the global recession (Figure 6-9 and Figure 6-11; Appendix Table 6-8). Between 2011 and 2016, U.S. high-technology manufacturing output grew far faster (16%) compared to the EU and Japan. However, China’s output grew far faster (68%) than the United States, resulting in China substantially narrowing its gap with the United States.

Two high-technology manufacturing industries have contributed the most to post-global recession growth: testing, measuring, and control instruments; and pharmaceuticals (Appendix Table 6-17 and Appendix Table 6-18). The United States is the world’s largest producer in testing, measuring, and control instruments (44%) and is the second largest global producer in pharmaceuticals closely behind the EU. In the pharmaceuticals industry, production of biologics, vaccines, and stem cell therapies is concentrated in these two economies, where close integration of research, testing, and manufacturing is necessary (Donofrio and Whitefoot 2015:25). The United States is also the dominant global producer in aircraft and spacecraft (53%).

Despite a recovery in output following the global recession, overall U.S. employment in high-technology manufacturing industries has not increased (Figure 6-12). Employment has remained stagnant in the post-global recession period and remains slightly below its level prior to the global recession. The lack of employment growth reflects the relocation of production to China and other countries with lower costs, greater manufacturing scale, or both, as well as the use of robotics and machines in U.S. high-technology manufacturing industries, which have eliminated some jobs, particularly those in routine tasks. Some researchers and policymakers have concluded that the location of high-technology manufacturing and R&D activities may lead to the migration of higher-value activities abroad (Fuchs and Kirchain 2010:2,344).

U.S. companies invest a considerable amount of their R&D in three high-technology manufacturing industries—testing, measuring, and control instruments; pharmaceuticals; and aircraft and spacecraft.^​ In addition, manufacturing of aircraft and spacecraft involves a supply chain of other high-technology inputs—navigational instruments, computing machinery, and communications equipment—many of which continue to be provided by U.S. suppliers. Boeing sources about 70% of the parts from U.S.-based companies and 30% from companies outside the United States to produce its advanced 787 airliner and other similar models (Kavilanz 2013). In pharmaceuticals and medical devices (medical devices is part of testing, measuring, and control instruments), production, testing, and treatment are often located close to U.S. academic and medical-center laboratories so that companies can conduct close and continuous research collaboration (Donofrio and Whitefoot 2015:25).

Over the last decade, the U.S. global share of high-technology manufacturing output has remained similar despite a gradual increase in the level of output (Figure 6-11; Appendix Table 6-8). Overall, U.S. high-technology manufacturing output grew by more than 30% over the last decade. Three industries have led growth—testing, measuring, and control instruments; pharmaceuticals; and aerospace (Appendix Table 6-17, Appendix Table 6-18, and Appendix Table 6-19). In contrast, output of the U.S. communication and computer industries has declined coinciding with the rapid rise of China in these industries (Appendix Table 6-15 and Appendix Table 6-16). However, the United States retains a stronger position in the communication and computer industries than the EU or Japan (Figure 6-13), which have had much deeper declines over the last decade.

China’s high-technology manufacturing industries have grown substantially in the post-global recession period, with value-added output growing by 70% between 2011 and 2016, far faster than the United States, EU, or Japan (Figure 6-11; Appendix Table 6-8). However, the growth rate of high-technology industries on a 3-year moving average basis slowed in 2015–16, coinciding with the moderation of China’s economic growth (Figure 6-9 and Figure 6-14). The deceleration in growth was most pronounced in the export-oriented ICT manufacturing industries. The pharmaceuticals industry had the slightest decline in growth among the high-technology industries, with its growth rate overtaking the ICT manufacturing industries in 2015 (Figure 6-13; Appendix Table 6-14 through Appendix Table 6-17). Some observers and researchers believe that the slowdown of China’s high-technology manufacturing and other export-oriented industries also reflects the economy beginning to shift away from export-led to domestic consumption-led growth (Dizioli, Hunt, and Maliszewski 2016:5; Nie and Palmer 2016:26). China’s government adopted the goal of moving the economy from growth based primarily on exports and investment to domestic consumption playing a larger role in supporting its economy in its 12th Five Year Plan for 2011–2016 (Prasad 2015: 4). There is some indication that this policy may be starting to have an impact on the economy. For example, data from the World Bank shows that the private consumption share of GDP increased slightly from 49% to 51% and the share of exports of goods and service fell from 26% to 22% between 2010 and 2015.^​

Over the last decade, China’s global share in high-technology manufacturing more than doubled (10%–24%), and it surpassed Japan in 2008 and the EU in 2012 to become the world’s second largest producer (Figure 6-11; Appendix Table 6-8). China had the most rapid growth in its ICT manufacturing industries resulting in its global share more than doubling from 14% to 34% (Figure 6-15; Appendix Table 6-14, Appendix Table 6-15, and Appendix Table 6-16). China overtook the United States in 2013 to become the world’s largest global producer in ICT manufacturing industries.

China functions as the final assembly location for ICT goods assembled in “Factory Asia”—the electronics goods production network centered in East Asia (WTO and IDE-JETRO 2011:14–15). China has global manufacturing scale, a network of suppliers, a large labor force of skilled and production workers, and the ability to quickly ramp up production that is required for many ICT products that have short development cycles (Donofrio and Whitefoot 2015:26). South Korea and Taiwan are major global producers in semiconductors and communications that supply advanced components and inputs to China. Asian countries that supply components and inputs to China, perform final assembly of ICT goods, or both include Indonesia, Malaysia, Philippines, Thailand, and Vietnam.

China has also become a major global producer of pharmaceuticals with its global share tripling over the last decade to reach 22% in 2016 to become the world’s third largest producer (Figure 6-13; Appendix Table 6-17). China’s rapid growth has originated from production of generic drugs by China-based firms and the establishment of production facilities controlled by U.S. and EU multinationals, often in partnership with Chinese companies. 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.^​ China’s pharmaceuticals industry largely produces mature and existing technologies, such as generics, that do not require close integration of production with R&D. However, China’s industry is expected to move into emerging and complex technologies as companies invest in R&D facilities and research collaborations increase with academia (Donofrio and Whitefoot 2015:26). Output of China’s testing, measuring, and control instruments industry has grown rapidly, although from a low base (Appendix Table 6-18).

China has been moving up the value chain in manufacture of high-technology goods, albeit progress has been uneven.^​ For example, 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).^​ The first large Chinese-made jetliner, the C919, successfully completed its maiden test flight in 2017, a key step in China’s plan to move up the value chain and become a global competitor in advanced technologies. Although more than 200 Chinese companies and 36 universities have been involved in the research and development of the C919, the plane relies on foreign-made technology for critical systems, including its engines.^​ Although Chinese semiconductor companies have gained global market share, China remains very reliant on semiconductors supplied by foreign firms for most of its production of smartphones and other electronic products (PwC 2014). Chinese-owned high-technology companies have not met many of the ambitious targets and goals of the Chinese government’s indigenous innovation program. China’s rapidly growing domestic market is prompting some foreign high-technology firms to establish R&D laboratories to develop products for China’s rapidly growing consumer market. However, many multinational companies (MNCs) continue to conduct some of their higher value-added activities in developed countries because of the greater availability of skilled workers, stronger intellectual property protection, or both. In addition, researchers surveyed by the Industrial Research Association perceived the quality of China’s R&D to be far lower than the United States.^​

Anecdotal reports suggest that final assembly has migrated from China to other developed Asian economies or has returned to developed countries in response to increases in transportation costs and China’s manufacturing wages.^​ However, China remains an attractive location for foreign MNCs because of its well-developed and global manufacturing scale that has an extensive network of domestic suppliers. In addition, the cost of wages in capital-intensive manufacturing industries, such as ICT, is not a major factor in choosing the location of production facilities because wages are a very small share of production costs. Factors including the cost of land and energy and manufacturing scale typically are more important factors in determining the location of production facilities.^​

Growth of high-technology manufacturing industries in the EU has trailed that in the United States in the post-global recession period (Figure 6-11; Appendix Table 6-8), similar to trends seen in the commercial knowledge-intensive services sector. The EU’s output remained relatively flat between 2011 and 2016, coinciding with its lackluster economic growth (Figure 6-9). The EU’s global share slipped from 18% to 16% during this period. Although aircraft and spacecraft and pharmaceuticals each grew 14%, output in the ICT manufacturing industries contracted 27% (Appendix Table 6-14 through Appendix Table 6-17, and Appendix Table 6-19). The EU is the largest global producer in pharmaceuticals (26% global share in 2016) (Figure 6-13). The EU is the second largest global producer in aircraft and spacecraft (22% global share) and testing, measuring, and control equipment (19% global share) (Appendix Table 6-18).

Output of Japan’s high-technology manufacturing industries was stagnant between 2011 and 2016, coinciding with its weak and halting recovery from the global recession (Figure 6-9 and Figure 6-11; Appendix Table 6-8). Over the last decade, value-added output contracted by 27%, resulting in Japan’s global share dropping from 13% to 6%. Output of ICT industries alone fell by 54%. Japan’s deep decline coincides with the decade-long stagnation of its economy, the loss of competitiveness of Japanese electronics firms, and the transfer of production to China and other countries (Appendix Table 6-14, Appendix Table 6-15, and Appendix Table 6-16).

Taiwan’s output rose by 19% between 2011 and 2016, almost entirely due to gains in its ICT industries, which dominate its high-technology manufacturing industries. Taiwan is the third largest global producer of ICT manufacturing industries (11%) after China and the United States (Figure 6-15; Appendix Table 6-14, Appendix Table 6-15, and Appendix Table 6-16).

Other major Asian producers—Malaysia, Singapore, and South Korea—showed little change in their global shares between 2011 and 2016 (Appendix Table 6-8). Over the last decade, companies based in these economies have moved up the value chain to become producers of semiconductors and other sophisticated components that are supplied to China and other countries. Output in Vietnam more than doubled between 2011 and 2016 (Appendix Table 6-8), largely due to growth in ICT manufacturing industries. Vietnam has become a low-cost location for assembly of cell phones and other ICT products, with some firms shifting production out of China, where labor costs are higher.^​

India’s high-technology manufacturing output fell 14% during this period. India is a major producer in the pharmaceuticals industry (2% global share), with Indian firms manufacturing generic drugs and performing clinical trials for multinational pharmaceutical companies based in the United States and the EU (Appendix Table 6-8 and Appendix Table 6-17).^​

Global value added of medium-high-technology manufacturing was $3.3 trillion in 2016, about twice as large as high tech manufacturing, making up 29% of the manufacturing sector (Figure 6-1 and Figure 6-16; Appendix Table 6-7 and Appendix Table 6-13). The three largest industries are chemicals excluding pharmaceuticals, machinery and equipment, and motor vehicles and parts ($0.8–$0.9 trillion in output) (Appendix Table 6-20, Appendix Table 6-21, and Appendix Table 6-22). The fourth largest industry is electrical machinery and appliances ($0.5 trillion) (Appendix Table 6-23). Railroad and other transportation equipment is a far smaller industry ($0.1 trillion) (Appendix Table 6-24).

Although these industries have global and often complex value chains, production activities are generally located closer to the final market compared to consumer electronics and other ICT industries with lightweight products (Donofrio and Whitefoot 2015:25). Because many inputs and components are manufactured near or at the final market, the value added may be credited to the company’s subsidiary or contractor. 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 (Figure 6-17). Transportation costs are high in many of these industries because the final products and major components in many of these industries are large and heavy, particularly automobiles, large appliances, and heavy equipment. Furthermore, co-location of R&D and design near the customers is advantageous for understanding customer needs and local market demand (Donofrio and Whitefoot 2015:25).

China is the largest global producer (32% global share) (Figure 6-16; Appendix Table 6-7) in medium-high-technology manufacturing industries. The EU is second (20%) closely followed by the United States (19%). Japan is the fourth largest producer (10%).

China’s medium-high-technology manufacturing industries grew 38% between 2011 and 2016 (Figure 6-16; Appendix Table 6-7). Growth in output of these industries slowed significantly in 2015–16, similar to the moderation in growth of China’s high-technology manufacturing industries.

China surpassed the United States in 2009 to become the world’s second largest producer in medium-high-technology industries and surpassed the EU in 2012 to become the world’s largest producer. The motor vehicle and parts industry led growth in China, with output rising almost sixfold over the last decade (Figure 6-18; Appendix Table 6-20). China’s automobile industry is composed of joint ventures with multinational companies and indigenous manufacturers. Although most cars and trucks manufactured in China are sold for the rapidly growing domestic market, China’s industry is exporting an increasing number of cars, trucks, and parts (see "China's Trade in Medium-High-Technology Goods" in section Global Trade in Commercial Knowledge- and Technology-Intensive Goods and Services).^​

China surpassed the United States to become the world’s largest producer of chemicals (excluding pharmaceuticals) in 2013 (28% global share in 2016) (Appendix Table 6-21). China accounts for nearly half of global production in electrical machinery and appliances (44%) and is the largest global producer in machinery and equipment (32%) (Appendix Table 6-22 and Appendix Table 6-23).

U.S. medium-high-technology manufacturing industries grew at the same pace as Japan in the 2011–16 post-global recession period (16%–17%). Output of the EU’s industries contracted by 12% during this period. However, China grew far faster (38%) than the United States (Figure 6-16; Appendix Table 6-7). Just like in China, the motor vehicle and parts industry drove overall growth of these industries in the United States, with output rising nearly 60% during this period (Figure 6-18; Appendix Table 6-20). The global share of the U.S. motor vehicle industry climbed from 14% to 19% between 2011 and 2016, returning to its pre-global recession level. The United States has the world’s third largest motor vehicle industry, behind the EU (21%) and the largest global producer, China (25%) (Figure 6-19).

The rapid recovery of the U.S. automobile industry following the global recession has been driven in part by the federal government’s bailout and financial restructuring of General Motors and Chrysler in 2009, which restored those firms to profitability and helped preserve the extensive domestic network of suppliers and parts to these and other automotive firms (Klier and Rubenstein 2013:146–55). Sales of motor vehicles and parts soared following the recession due to pent-up demand from the collapse of sales during the recession and greater availability of credit. Many automobiles sold in the United States by U.S. and foreign-based companies are manufactured in plants and use suppliers and parts located in the United States or nearby in Canada or Mexico.^​ In addition, many of these companies have R&D facilities in the United States to understand customer needs and quickly modify or innovate in design, capabilities, or the manufacturing process.^​

In other industries, output in electrical machinery and appliances increased by 17% between 2011 and 2016 (Appendix Table 6-23). The U.S. global share in this industry remained flat during this period (11% in 2016). Growth was sluggish in chemicals excluding pharmaceuticals (5%) and in machinery and equipment (7%) (Appendix Table 6-21 and Appendix Table 6-22). The United States is the second largest global producer of chemicals excluding pharmaceuticals (25%) closely behind China. The United States is the third largest global producer of machinery and equipment (17% global share).

Over the last decade, the U.S. global share of medium-high-technology manufacturing has slipped from 22% to 19%, largely due to much faster growth in China (Figure 6-16; Appendix Table 6-7). Despite the slight decline in the U.S. global share, U.S. medium-high-technology manufacturing output grew by 27% over the last decade. Chemicals excluding pharmaceuticals and motor vehicles and parts drove growth of these industries, with output rising by 39% and 31%, respectively (Appendix Table 6-20, Appendix Table 6-21).

U.S. employment in medium-high-technology manufacturing has grown substantially in the post-global recession period, adding 280,000 jobs to reach 3.0 million in 2016 (Figure 6-20). The motor vehicle industry drove the gain in employment with the addition of 220,000 jobs. Despite this robust growth, employment in medium-high-technology manufacturing industries remains slightly below its level prior to the global recession.

The EU's medium-high technology manufacturing industries grew slower than those of the United States. The EU’s output declined by 12% between 2011 and 2016, coinciding with its lackluster economic recovery from the global recession (Figure 6-9). The EU’s global share declined from 24% to 20% during this period.

The extent of decline in EU output varied across individual industries. Output in chemicals excluding pharmaceuticals and electrical machinery and appliances fell by 19% between 2011 and 2016 (Appendix Table 6-21 and Appendix Table 6-23). Output of motor vehicles and parts remained flat (Figure 6-18; Appendix Table 6-20). The German auto industry is the dominant producer in the EU, and companies including BMW, Mercedes, and Volkswagen have been successful in the EU and the global market. In addition, Germany had comparatively stronger growth than other EU countries in the post-global recession period.

Over the last decade, the EU’s global share in medium-high-technology manufacturing has fallen substantially (from 30% to 20%) with declines in each of the four industries.

Japan’s medium-high-technology manufacturing industries grew by 16% between 2011 and 2016, far faster than its high-technology manufacturing industries (Figure 6-11 and Figure 6-16; Appendix Table 6-7 and Appendix Table 6-8). Despite the rise in output, Japan’s global share in medium-high technology manufacturing remained flat (10%) during this period.

The motor vehicles and parts industry grew the fastest (23%) followed by a 17% increase each in electrical equipment and appliances and machinery and equipment (Figure 6-18; Appendix Table 6-20, Appendix Table 6-22, and Appendix Table 6-23). Japanese automakers, including Toyota and Honda, are leading global automakers and are very successful in many developed and developing countries. Over the last decade, Japan’s global share in medium-high-technology manufacturing has fallen from 15% to 10%, coinciding with the long-term stagnation of Japan’s economy and the migration of manufacturing and routine activities to China and other countries. For example, Toyota has more than three-quarters of its manufacturing plants located outside of Japan (Figure 6-17).

In other developing countries, Brazil, India, Indonesia, and Mexico have global shares of 1%–2% (Appendix Table 6-7). Output in Brazil has fallen steeply in the last several years across all industries due to Brazil’s economic recession. Brazil’s global share slid from 4% to 2% between 2011 and 2016. India’s output was stagnant during this period. Indonesia’s output grew 27%, led by strong gains in chemicals excluding pharmaceuticals, electrical equipment and appliances, and machinery and equipment. Mexico’s output rose by 7% between 2011 and 2016, led by motor vehicles and parts (29%). Mexico assembles many cars for sale in the United States and has benefitted from the rapid recovery of the U.S. auto industry.

S&T are used in many industries besides KTI industries. Service industries not classified as knowledge-intensive services—which include wholesale and retail trade, restaurant and hotel, transportation and storage, and real estate—may incorporate advanced technology in their services or in the delivery of their services. Manufacturing industries not classified as high technology or medium-high technology may use advanced manufacturing techniques, incorporate technologically advanced inputs in manufacturing, or perform or rely on R&D. Industries not classified as either manufacturing or services—agriculture, construction, mining, and utility—also may incorporate recent S&T in their products and processes. For example, agriculture relies on breakthroughs in biotechnology, construction uses knowledge from materials science, mining depends on earth sciences, and utilities rely on advances in energy science.

In the non-knowledge-intensive service industries—wholesale and retail trade, restaurant and hotel, transportation and storage, and real estate—the United States, the EU, China, and Japan were the four largest producers in 2016 (Table 6-2). Over the last decade, in all four industry categories, the global shares of the EU and Japan declined; China’s global share grew rapidly and by 2016 it surpassed Japan’s share. The U.S. global share remained steady in real estate and transport and storage and declined slightly in retail and wholesale trade and restaurants and hotels.

The non-knowledge-intensive manufacturing industries (non-high-technology and non-medium-high-technology manufacturing industries) are divided into two categories, as formerly classified by the OECD: medium-low technology and low technology. In both of these categories, patterns and trends diverged somewhat from those in high-technology manufacturing and were broadly consistent with medium-high-technology manufacturing (Table 6-2). China’s global share of value added grew rapidly between 2006 and 2016 (Table 6-2), and it became the world’s largest producer by 2016 in both categories. The global shares of the EU and Japan declined in both categories. The U.S. global share fell slightly in medium-low technology industries and had a deeper decline in low-technology manufacturing industries.

In the nonmanufacturing and non-services industries—agriculture, forestry, and fishing; construction; mining; and utilities—China’s global share grew substantially between 2006 and 2016 (Table 6-3). China became the world’s largest producer in agriculture, and reached parity with the United States and the EU as the largest global producer in construction. China became the second largest global producer in utilities. The global share of the United States fell in these industries. The EU and Japan had generally steeper declines in these industries.

Identifying industries that are KTI by their industry classification has many limitations. These limitations include (1) firms are classified in one industry although many have activities in multiple industries and (2) the difficulty of capturing the value added contributed by countries and industries for KTI products and services produced in global value chains. “Platform-based” companies, which include Amazon, Facebook, and Uber, are an example of firms that produce KTI goods and services and use innovative technologies that are likely not categorized in KTI industries. The United States is a global leader in these types of companies. (For a discussion of these companies, see sidebar Platform-Based Companies.)