Overview of the State of the U.S. S&E Enterprise in a Global Context

S&E education and R&D investments lead to a highly skilled workforce and new S&E knowledge in the form of peer-reviewed articles, patents, and intangibles. Over time, these investments also contribute to economic activity in the form of products, services, and processes. S&E knowledge is increasingly a key input to production in the marketplace. Industries that intensely embody new knowledge and technological advances in their production, as reflected by their R&D expenditures and utilization of S&T in the delivery of their services, account for nearly one-third (31%) of global economic output. They span both manufacturing (e.g., aircraft and spacecraft; computer equipment; communications and semiconductors; chemicals and pharmaceuticals; testing, measuring, and control instruments; motor vehicles and parts; railroad and other transportation equipment; machinery) and services sectors (e.g., education, health, business, R&D, financial, and information services) (see Glossary; see Chapter 6 for a discussion of knowledge- and technology-intensive [KTI] industry categories).

At 38%, the United States leads the major economies in the percentage of its GDP that comes from these KTI industries. Historically concentrated in the developed world, these industries typically make up a larger percentage of GDP in developed economies than in developing economies. However, developing economies, led by China, are emerging as prominent players as they ramp up their S&E capabilities. Additionally, recent global economic developments have had somewhat different impacts on the major global players, further transforming this segment of the S&E landscape. For example, following the global recession of the late-2000s, the United States has had strong growth in many KTI industries and trade of KTI goods and services, contrasting with tepid or negative growth in the EU and Japan. China has continued to grow quite robustly and has become the world’s largest producer in many technology-intensive manufacturing industries. Although its relative position is not as strong in the knowledge-intensive (KI) services sector, where the United States and the EU are the dominant global producers, China is growing far more rapidly than developed economies overall.

The technology-intensive manufacturing industries are the most globalized among the KI industries. International trade and an interconnected global supply chain tie these KI industries across the globe and reflect the interdependence and the extent of globalization in the production process. For example, high-technology manufacturing industries, such as communications, semiconductors, and computers, have complex global value chains with manufacturing often located far away from the final markets. Medium-high-technology manufacturing industries, such as motor vehicles and parts and electrical equipment and appliances, also have global value chains, although manufacturing generally occurs near or in the final markets.

In high-technology manufacturing industries (which totaled $1.6 trillion in value-added terms in 2016), the United States and China were the largest global providers (31% and 24% of the global share, respectively); China’s output rose sharply over time and now exceeds that of the EU (Figure O-16). Like the pattern of specialization seen in other S&E indicators, each region specializes in somewhat different types of activities. The United States has strength in aircraft and spacecraft and in measuring and control instruments. High-technology 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.^​ The EU is also relatively strong in these two areas of aircraft and spacecraft and measuring and control instruments. China is the largest producer of a large subsector of high-technology manufacturing, information and communications technology (ICT), with a 34% global share.

Notwithstanding China’s rapid advances, high-technology manufacturing in China continues to be heavily dependent on lower value-added activities, such as final assembly. In semiconductors, for example, although Chinese companies have gained global market share, China remains largely reliant on semiconductors supplied by foreign firms for most of its production of smartphones and other electronic products (PwC 2014). In the pharmaceutical sector (China is the third largest global producer of pharmaceuticals), output is largely made up of the production of generic drugs by Chinese-based firms and the establishment of production facilities controlled by U.S. and EU multinational corporations (MNCs) (Huang 2015). In contrast, the EU and the United States, the two largest global producers in pharmaceuticals, focus on biologics, vaccines, and stem cell therapies and closely integrate research, testing, and manufacturing of these pharmaceutical products (Donofrio and Whitefoot 2015:25). Many MNCs continue to conduct their higher value-added activities in developed countries because of the greater availability of skilled workers and stronger intellectual property protection.

China’s industry, however, is expected to move into emerging and complex technologies as companies continue to invest in R&D facilities and as research collaborations increase with academia (Donofrio and Whitefoot 2015:26). Recent developments indicate that China’s rapid investments in building its S&E capabilities likely have already unfolded a potential path toward producing advanced products. For example, China has made impressive progress in its supercomputing ability over the last few years, an area in which it had little presence a decade ago, but where it now features prominently among the top 10 machines (see Chapter 6 sidebar China's Progress in Supercomputers).^​ The first large Chinese-made jetliner, the Comac 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 (Watt and Wong 2017).

A country’s exports of KTI goods and services reflect its ability to compete in the world market. Globally, exports of high-technology products totaled $2.6 trillion in 2016 and are dominated by ICT products. China is the world’s largest exporter of high-technology goods (24% of the global share) and has a substantial surplus (as measured by gross market value of traded products). However, because many of China’s exports consist of inputs and components imported from other countries, China’s exports and trade surplus are likely much less in value-added terms. The EU (17% global share), the United States (12%), and Taiwan (11%) are the next largest global exporters of high-technology goods. Vietnam has experienced the fastest rate of high-technology export growth of any single country and has become a low-cost location for assembly of cellular phones and smartphones and other ICT products, with some firms shifting production out of China, where labor costs are higher.

In medium-high-technology manufacturing industries (consisting of chemicals excluding pharmaceuticals, as well as machinery and equipment, motor vehicles and parts, electrical machinery and appliances, and railroad and other transportation equipment), global output totaled $3.3 trillion in value-added terms in 2016. 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). Transportation costs are high in many of these industries due to large and heavy products and components. 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% of the global share) (Figure O-17) in medium-high-technology manufacturing industries. The EU and the United States are roughly tied for second (with a 19%–20% global share each), and Japan is the third largest producer (10% of the global share).

Globally, exports of medium-high-technology products totaled $3.4 trillion in 2016, with the EU being the largest exporter, followed by China, Japan, and the United States. The EU is the largest exporter in motor vehicles and parts, chemicals excluding pharmaceuticals, and machinery and equipment; China is the world’s largest exporter in electrical machinery and appliances.

In addition to technology-intensive manufacturing, KTI industries also include the public KI services of education and health and a range of commercial services that totaled $11.6 trillion in value-added terms in 2016.^​ Commercial KI services include finance (banking, insurance, securities, stock market, etc.); business (engineering, consulting, and R&D services); and information services (computer programming and IT services).

Unlike technology-intensive manufacturing industries, more than half of the global output of commercial KI services comes from the United States (31%) and the EU (21%). China (17%) and Japan (6%) are the next largest global producers (Figure O-18). Although China’s relative position is not as strong in services as in manufacturing, China is making increasingly rapid progress. In the rest of the developing world, India and Indonesia accounted for growing shares of global commercial KI services output. India’s growth was led by firms that provide business and computer services, such as IT and accounting, to developed countries. Indonesia had strong gains in financial services and business services.

Globalization in the commercial KI services industries, although increasing, remains lower than in the high-technology or medium-high-technology manufacturing industries. Globally, exports of commercial KI services totaled $1.6 trillion in 2016. The trade of commercial KI services around the world is facilitated in part by the outsourcing activities of multinational corporations, taking advantage of economies with well-educated and multilingual populations. In 2016, the EU (33%) and the United States (18%) together accounted for about half of the global exports in commercial KI services, followed by India (7%) and China (6%). India, however, represents a considerable share (16%) of global exports in telecommunications, computer, and information services, reflecting the success of Indian firms in providing IT and other business services to developed countries.