The changes affecting manufacturing value chains underscore the importance of creating an environment in the United States that continuously attracts and creates businesses and jobs. If the nation is to replace jobs that have been disrupted along the value chain, it will need to be in a strong position for its businesses to compete globally. Looking at the current state of activities in US-based value chains in the context of the global economy and the country’s ability to attract and create businesses and jobs, three challenges are apparent. First, there is growing competition from countries around the world. Second, there are concerns that the United States is falling behind in some of the critical inputs for value creation, such as capital investments and student learning in science, technology, engineering, and math. Last, the birth rate of new businesses across the value chain—in production, retail, and services—has been declining in the United States.
While the development of economies around the world has intensified competition, it also presents enormous opportunities to expand demand for US goods and services. Emerging markets offer tremendous potential for US companies in the coming decades, but only if companies and policymakers recognize the potential and develop and maintain the capabilities to take advantage of it.
US POSITION IN GLOBAL INNOVATION AND VALUE CREATION
Although it is difficult to get a good, direct measure of the level of innovation and value creation in a country, there are a number of indirect measures and indicators, which suggest that while the United States remains among the world’s leaders in activities along the value chain, other countries are advancing rapidly. The following sections review evidence from several perspectives: US performance in the production of manufactured goods and high-tech services, invention, and the country’s attractiveness to innovative companies.
How Is the United States Doing in Manufacturing and High-Tech Services?
A useful way to start examining the ability of a country to create value is to look at “value added.” This measure captures the amount that a country, company, or other entity contributes to the value of a good or service through the contribution of labor and/or capital inputs. Basically, it represents the price of the good or service produced discounting all (domestic or imported) purchased materials or other external inputs needed to produce it.
Every two years the US National Science Board publishes a report on Science and Engineering Indicators that includes value added across industries. The most recent report indicates that the United States’ global share of value added in several important industry categories has significantly declined since the early 2000s (NSB 2014). Specifically, the US share of high-tech manufacturing—aircraft, spacecraft, communication products, computers, pharmaceuticals, semiconductors, and technical instruments—dropped from 34 percent in 2002 to 27 percent in 2012. The United States increased the absolute value it contributes in high-tech manufacturing during this period, but not nearly as quickly as China, which increased the value it contributes by more than seven times. It outpaced the United States in computer and office machinery in 2005 and has continued to accelerate in these areas while the corresponding US contributions have stagnated.
Other countries are also starting to surpass the United States in high-tech manufacturing. In 2010 the United States ranked behind Japan in communications equipment and behind the European Union (EU) in technical instruments, and tied with the EU in pharmaceuticals. It remains the world leader in aerospace manufacturing, but there are serious concerns that multiple Asian and Middle East countries will emerge as significant competitors in the near future.
Although US performance in high-tech services has fared better than in high-tech manufacturing, the nation’s share of global contributions has declined in this area as well. The United States remains the global leader in business, financial, and communication services, but its share of global value added in these areas fell almost 12 points, from approximately 44 percent to 32 percent in 2001–2012. The value contributed by developing countries, and even developed countries outside of the European Union or Japan (e.g., South Korea, Taiwan, Canada, and Australia), has significantly increased over the past decade, albeit from a lower baseline—from approximately 20 percent in 2001 to 34 percent in 2012 (NSB 2014).
How Is the United States Doing in Invention?
One rough measure of a country’s level of value creation is its rate of invention, which can be determined by the number of patents that it applies for or is granted. Again, this is far from an ideal measure—for a number of reasons,
including the fact that patents reflect only one aspect of creating value—but it does offer some insights into trends in invention, which is an important part of value creation. US inventors have consistently accounted for roughly half of the patents granted by the US Patent and Trademark Office (USPTO), but since 2003 have gone from just over 50 percent to under 50 percent, with non-US inventors making up the difference (Figure A-1).
A similar picture emerges from a look at “triadic” patents—inventions patented in the United States, the European Union, and Japan. Because it is expensive to apply for patents, inventions patented in all three of these markets are likely to be the most important innovations, economically speaking. From 1999 through 2008 inventors from the each of the three markets accounted for about 30 percent of the total number of triadic patent applications, although their percentages dropped slightly (e.g., from about 32 percent to about 30 percent for the United States) as the percentage of triadic patent applications from the “Asia 8”—India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand—rose from about 2 percent to about 4 percent of the total (NSB 2012).
China’s contributions are relatively small in these measures because Chinese inventors have made relatively few patent applications in the United States, Europe, or Japan. This does not tell the whole story, however. The number of patents filed by Chinese inventors has risen dramatically over the past decade, but so far primarily in China. In 2012 residents of China accounted for the largest number of patents filed throughout the world and the Chinese Intellectual Property Office accounted for the largest number of applications received by any single IP office (WIPO 2013).
The rapidly growing number of patents filed by Chinese inventors and China’s rise in R&D suggest that Chinese patent filings may grow much faster than US patent filings in the coming years and that they may be increasingly for higher-value inventions that rival those from the developed world.
Are the Most Innovative Companies Based in the United States?
Various organizations have attempted to identify the world’s most innovative companies using a variety of criteria that yield a broad range of answers. Notwithstanding the diversity of results, it is instructive to examine them to look for trends in the global distribution of these businesses. It is interesting to note that, although the rankings considered all types of companies, those that ranked at the top of each are in manufacturing or high-tech service value chains.
Several rankings simply count the number of patents awarded in a given year to different companies. By that standard, IBM was the world’s most innovative company in 2013—for the 21st year in a row (Barinka 2014): it was granted 6,809 US patents, almost 50 percent more than the second-place company, Samsung. Two other US-based companies—Microsoft and Qualcomm—
FIGURE A-1 US Patent and Trademark Office patents granted, by location of inventor, 2003–2012. Source: NSB (2014).
Notes: EU = European Union. Technologies are classified by the Patent Board. Patent grants are fractionally allocated among countries on the basis of the proportion of the residences of all named inventors.
were in the top ten, which were dominated by Asian companies. The same was true in 2012, when IBM, Microsoft, and GE were the only US companies in the top ten. The number of US-based companies in the top ten has slowly but steadily declined from four in 2010 and five in 1985.1
Innovativeness rankings published by Forbes magazine took a completely different tack: they are based on investors’ judgments about companies’ abilities to create value. This approach draws on work by Hal Gregerson of the international graduate business school INSEAD and Jeff Dyer at Brigham Young University (Gregerson and Dyer 2013). The two researchers calculated what they call an innovation premium, a measure of how much investors push up the stock price of a company in anticipation of the company’s creating additional value—that is, beyond its current value and what might be projected if the company were not going to innovate further.
The method shows that investors are willing to pay more for companies they expect to be above average in creating value. Based on this criterion Forbes ranks the US companies Salesforce.com and Alexion Pharmaceuticals as the two most innovative companies in the world, with four other US companies—Regeneron Pharmaceuticals (5), Amazon.com (6), BioMarin Pharmaceutical (7), and VMware (9)—in the top ten (Forbes 2014).
The Boston Consulting Group develops a yearly list of the world’s 50 most innovative companies by surveying more than 1,500 senior executives from companies around the world and then combining the executives’ ratings with data on revenue growth, three-year shareholder growth, and margin growth. According to the BCG rankings, Apple is the most innovative company in the world, followed by Samsung, Google, Microsoft, Toyota, IBM, Amazon, Ford, BMW, and General Electric, meaning six of the top ten are American companies. A total of 24 US companies made the list of the top 50 (Nisen 2013). This is down from 33 in 2008 (Andrew et al. 2008).
None of these ways of identifying the most innovative companies is ideal. Counting patents tends to tilt the list toward companies in industries that are most patent-heavy, particularly companies in information and communication technology. The method of looking at a company’s “innovation premium” relies on investors’ perceptions of companies and ends up tilting the list toward smaller, newer companies because it is easier for innovation to make a large difference in their bottom line. The survey method picks out larger companies because those are the ones that more business executives are familiar with. Still, a look at these different lists does suggest a general conclusion: While US companies remain among the most innovative in the world, companies in other countries are catching up.
KEY INNOVATION INPUTS IN THE UNITED STATES
The ability of a country to attract and retain businesses along the value chain is influenced by the condition of various inputs that are necessary for innovation. Countries invest in three main categories of these inputs: research and development, education, and infrastructure.
How Is the United States Doing in Research and Development Investments?
In 1999 the United States accounted for 38 percent of all R&D spending around the world. The European Union accounted for 27 percent, and Asia—China, India, Japan, South Korea, Malaysia, Singapore, and Thailand—represented 24 percent. Thus the United States, European Union, and Asia were doing almost 90 percent of the world’s research and development (NSB 2012).
Since then the US share of world R&D investment has steadily declined, mainly because China has been ramping up its R&D spending so quickly. According to statistics from the National Science Foundation, by 2009 the US share of the $1.28 trillion in global R&D spending had fallen to 31 percent—a drop of 7 percent in a decade—while the Asian share had risen to 32 percent. The European Union share had also declined, to 23 percent. Much of the growth in the Asian R&D spending came from China, which increased its spending by about 20 percent each year, several times the US rate of growth, albeit from a much lower base. By 2009 China’s R&D spending was 12 percent of the world total, and it had surpassed Japan to become the world’s second largest investor in research and development (NSB 2012).
The trend has continued. It is estimated that in 2014, $1.62 trillion will be spent on research and development worldwide, of which the United States will account for 31.1 percent, China an estimated 17.5 percent, and all of Asia 39.1 percent. Japan has fallen further behind China, and in 2014 its R&D spending will be 10.2 percent of the world total. Europe will account for 21.7 percent of worldwide R&D spending; Germany, at 5.7 percent, will be the largest European investor in research and development (Figure A-2).
These changes are occurring quickly. In just five years the US share of global R&D dropped from 34 to 31 percent, and the European share from 26 to 22 percent, while the Asian share increased from 33 to nearly 40 percent, and China alone jumped from 10 percent to nearly 18 percent (Grueber and Studt 2013).
These trends are expected to continue through at least 2020. While US R&D spending is expected to increase modestly, Chinese R&D spending is projected to continue its double-digit growth. Assuming the current rates of growth and investment continue, China’s total R&D funding is projected to exceed US funding by about 2022 (Grueber and Studt 2013). This is in line
FIGURE A-2 Share of total global research and development spending (actual and estimated), 2012–2014. Source: Based on data in Grueber and Studt (2013).
Note: America, Europe, Asia, and Rest of World include 21, 20, 34, and 36 countries, respectively.
with the country’s announced goal of transitioning from an imitation-driven economy to an innovation-driven economy by 2020.
Given the different sizes of countries’ economies, perhaps a better way to compare R&D spending is to examine it as a percentage of gross domestic product (GDP). This measure offers a sense of R&D spending intensity—how much a country focuses its spending on research and development.
For several decades the United States has consistently spent 2.4–2.8 percent of its GDP on research and development. Over the past decade it generally stayed above 2.6 percent, and in the past few years it remained close to 2.8 percent.
Generally speaking, developed countries spend a much greater percentage of their GDP on research and development than developing countries, but even among developed countries there is large variation. For example, in 2011 South Korea’s R&D spending represented 4.0 percent of its total economic output, and Japan’s was 3.4 percent. Although the economies of both countries are much smaller than the US economy, they rank high in terms of total R&D expenditures; South Korea’s is the fourth largest with $45 billion and Japan’s the second largest, after the United States, with $149 billion (OECD 2010).
In 2011 China spent a significantly smaller percentage (about 1.7 percent) of its GDP on research and development (Figure A-3), but that number is growing steadily. The country’s R&D spending was only 0.8 percent in 1999 (NSB 2014), it is projected to be 2.0 in 2014, and it seems poised to meet the current five-year plan goal of 2.2 percent by 2015 (Grueber and Studt 2013). As China continues its push to transition to an innovation-driven economy, this number can be expected to increase further, with the result that shortly after 2020 China will devote a greater percentage of its economy to research and development than the United States.
How Is the United States Doing in Science, Technology, Engineering, and Math Education?
An effective system of education in science, technology, engineering, and mathematics (STEM) is crucial for maintaining a country’s ability to innovate and create value (see, e.g., NRC 2007). As Atkinson and Mayo (2010, p. 22) wrote in Refueling the US Innovation Economy,
Science- and technology-based innovation is impossible without a workforce educated in science, technology, engineering, and math. As a result, it behooves the United States to support strong science, technology, engineering, and mathematics (STEM) education, especially as our competitors recognize the links between STEM education, greater research, and increased innovation.
By many accounts, the US system of higher education remains the best in
FIGURE A-3 Gross expenditures on research and development as a share of gross domestic product (GDP) for selected countries, 1981–2011. Source: NSB (2014).
Notes: EU = European Union. Data are not available for all countries in all years. Figure shows the top seven R&D-performing countries. Data for the United States reflect international standards for calculating gross expenditures on R&D, which differ slightly from the National Science Foundation’s protocol for tallying US total R&D expenditures. Data for Japan since 1996 may not be consistent with earlier data because of changes in methodology.
the world. Universities in the United States typically dominate global rankings of prestigious higher education institutions: in 2011–2012, 18 of the highest-ranking 25 universities and 30 of the top 50 were in the United States (OECD 2011).
Unfortunately, a number of concerns persist about US STEM education among business leaders and negatively affect the perception of the country as an attractive place to locate activities along the value chain. In particular, the quantity of STEM graduates and the quality of K–12 education are cited as leading concerns. These issues are discussed below.
Quantity of Science and Engineering Graduates
The 2012 Science and Engineering Indicators show a dramatic increase in the number of students in China earning university degrees in engineering and the natural sciences that are broadly comparable to US baccalaureate degrees. The number of these graduates rose from about 280,000 in 2000 to 1 million in 2008 (Figure A-4). These numbers dwarf the quantity of US graduates in such fields, especially in engineering: In 2008 the number of US natural science degrees awarded was 175,000 and the number of engineering degrees 60,000.
What’s more, in the United States, unlike China, a significant percentage of these degrees, especially advanced degrees, are awarded to foreign nationals who may leave the country (Figure A-5). Since 2000, foreign students with temporary visas have earned 39 percent to 48 percent of US doctoral degrees in the natural sciences and engineering. More than half of these students are from China, India, and South Korea (NSB 2012).
Alongside the total number of science and engineering graduates, it is useful to look at their percentage of a country’s total population of university graduates. Because China has a much larger population than the United States, it is no surprise that it graduates more students in these fields. However, the United States trails behind not only China but also Japan, South Korea, Germany, and the United Kingdom. The fraction of US university degrees in science or engineering—at 32 percent—pales in comparison to Japan’s nearly 60 percent and China’s 50 percent.
Ranking of US K–12 Education
Another significant factor affecting the ability of the United States to attract businesses is its K–12 education system. Perceptions of a poor-quality K–12 system are cited as one of America’s greatest competitive weaknesses when businesses are considering location decisions (Porter and Rivkin 2012). For example, the OECD Program for International Student Assessment (PISA) ranks the United States 36th out of 65 countries in students’ performance in math, 28th in science, and 24th in reading (OECD 2012). Another assessment,
FIGURE A-4 First university degrees in natural sciences and engineering, by selected country, 1998–2008. Source: NSB (2012).
Note: Natural sciences include physical, biological, environmental, agricultural, and computer sciences, and mathematics.
FIGURE A-5 Internationally mobile students enrolled in tertiary education, by selected country, 2010. Source: NSB (2014).
Note: “Mobile students” are defined as those who moved to another country in 2010 with the objective of studying. Data for Canada and the Russian Federation correspond to 2009. Data for Germany exclude advanced research (e.g., doctoral) programs.
the Trends in International Mathematics and Science Study (TIMSS), shows US fourth-graders ranked behind seven other countries, most of them in Asia: Singapore, South Korea, Hong Kong, Taiwan, Japan, Northern Ireland, and Belgium. In science, US fourth-graders lagged behind their counterparts in six other countries: South Korea, Singapore, Finland, Japan, the Russian Federation, and Taiwan (Provasnik et al. 2012).
In 1992 the National Center for Education Statistics released International
Mathematics and Science Assessment: What Have We Learned? (Medrich and Griffith 1992), which reported international assessments of students’ performance in science and mathematics since the 1960s. The tests painted a uniformly grim picture of the achievement of US students (Medrich and Griffith 1992, p. viii): “The evidence suggests, in general, that students from the United States have fared quite poorly on these assessments, with their scores lagging behind those of students from other developed countries…. Generally the ‘best students’ in the United States do less well on the international surveys when compared with the ‘best students’ from other countries.”
International STEM Assessments in Context
It is clear that the United States is not doing as well as many other countries, particularly those in Asia, in teaching science and mathematics to students in primary and secondary schools, at least not in terms of producing students who score well on these standardized tests. Many observers have suggested that this comparatively poor performance poses a threat to US competitiveness and prosperity. Indeed, this argument has been made at least since the publication of A Nation at Risk (National Commission on Excellence in Education 1983) more than 30 years ago.
A look at the evidence, however, suggests that there is no straightforward connection between performance on these tests and economic competitiveness. The use of international education statistics such as those of PISA does not necessarily represent a fair comparison across countries. It has been noted, for example, that Shanghai has an “economically and culturally elite population with systems in place to make sure that students who may perform poorly are not allowed into public schools” (Loveless 2013, p. x). This skews Shanghai’s PISA scores because they do not represent average performance across the population. In contrast, because the United States emphasizes universal primary and secondary education, the US scores may present a somewhat more representative average across the population.2
What Is the Condition of US Infrastructure Needed for Value Creation?
In 2014 the World Economic Forum (WEF), in its report on global competitiveness, scored countries around the world on the quality of their transportation, electrification, and telephony (Schwab and Sala-i-Martín 2014). The United States was ranked 19th out of 148 economies. Switzerland, Hong Kong, and Finland were judged to have the best overall infrastructure; the United Arab Emirates was 4th, and Singapore 5th.
2 US scores exclude a not insignificant number of students who drop out of high school before the 9th grade.
Final Observations about US Innovation Inputs
If there is any common trend in these innovation inputs, it is that the United States has serious competition in all of these areas. Several other countries spend more per capita on research and development, for example, and China may soon outspend the United States in terms of total R&D funding. Many other countries score better on multiple measures of science and mathematics education in primary and secondary schools, although comparison of a country as diverse and populous as the United States with homogeneous and small countries is somewhat problematic. And many other countries have higher-quality infrastructure—for telecommunications, Internet, electricity, roads, railroads, and air transportation—than the United States.
All of these factors play a critical role in how well a country can create value, so the United States can no longer take for granted that it will remain the best in the world in this area.
JOBS AND PRODUCTIVITY
As the US Department of Commerce reported in The Competitiveness and Innovative Capacity of the United States (DOC 2012, p. 1-4):
The United States’ ability to create jobs has deteriorated during the past decade. Employment increased at an annual rate of just 0.6 percent between the February 2001 and January 2008 employment peaks…. This rate is one-third as fast as the 1.8 annual rate of employment growth between the June 1990 and February 2001 employment peaks. A recent study by McKinsey Global Institute found that the United States has been experiencing increasingly lengthy jobless recoveries [Manyika et al. 2011, p. 1]: “it took roughly 6 months for employment to recover to its prerecession level after each postwar recession through the 1980s, but it took 15 months after the 1990–91 recession and 39 months after the 2001 recession.”
Whether or not the decay of employment growth over the past two decades is a direct result of a relative weakening of the United States’ ability to create value, the fact remains that the only way to create economic growth is to innovate—either by developing a novel product, service, or process that adds value or by putting innovations into widespread practice to improve productivity (Schumpeter 1934). The only way for businesses to stay competitive and provide employment is to continue to create valuable products. Simply put, the economic prosperity of any nation is directly tied to its ability to make value.
Although economic prosperity is often spoken of in the cold language of statistics—employment growth, wage rates, international competitiveness rankings, and so on—it is really about whether people’s lives will be better and more comfortable than their parents’ lives, as Americans have come to expect.
It is about the sort of society Americans will live in, what sorts of jobs we will have, or whether we will have jobs at all. It is about what sort of future we will create for ourselves and our children.
Fundamental changes in the US economy appear to be looming that underscore the importance for the United States to create new opportunities for innovation, for novel products and services that will generate employment growth.
US ECONOMIC GROWTH AND EMPLOYMENT
GDP growth per employed person in the United States has slowed. This ratio is an important indicator of productivity growth, which is generally considered essential for maintaining or enhancing living standards. Although the recession was certainly a factor, the rate of US productivity growth had been slowing since the early 2000s (Figure A-6); from 1990 to 2000, average growth was 2.0 percent; in 2005–2008 it slowed to 0.9 percent (NSB 2012). Meanwhile, economic growth per employed person in developing economies has exploded, particularly in China and India, which had respective growth rates of 10 percent and 6 percent in 2005–2008 and have continued at these rates through 2012 (NSB 2014).
Until recently employment in the United States was tightly coupled with rising productivity: as workplaces became more efficient and output per worker went up, more jobs were created and wages generally increased. This was the case from at least the 1940s until the 1980s (Brynjolfsson and McAfee 2011). Since then, both wages and the employment-to-population ratio have stagnated despite continued growth in productivity and GDP.
Beginning in the 1980s, median wages stopped growing—job creation kept up with productivity growth but, for the average worker, these jobs did not offer a chance to climb the economic ladder. Then in the early 2000s job creation also stopped growing and it has not turned around since. The United States is creating jobs but not enough to keep up with population growth, and the average American household’s income has not improved since 1997. What’s more, there’s no indication that this picture is likely to change (Brynjolfsson and McAfee 2011).
Thus economic progress and profit growth no longer translate into arguably the most essential achievement that most people strive for: a well-paying job that will allow them to have a higher standard of living.
FIGURE A-6 GDP growth per employed person for selected countries/regions, 1990–2008. Source: NSB (2012).
Note: GDP is in 2010 purchasing power parity dollars. The European Union (EU) includes current member countries. China includes Hong Kong. Brazil’s growth in 2000–2005 was −0.1 percent.
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