Innovation in science, technology and industry

OECD STI Outlook 1996



Deregulation, technological advances and the restructuring stemming from the recession of the early 1990s have made it clear that knowledge is the most important factor underpinning growth in OECD countries and elsewhere. The emergence of " knowledge-based economies " is evident across a wide range of statistical indicators and policy trends.

Science and technology are increasingly important to the bottom-line of business.
  1. The combined impact of slow economic growth, the end of the Cold War and pressures to reduce government budgets have led to a decline in R&D as a share of GDP, with the OECD average falling from 2.4 per cent in 1990 to 2.2 per cent in 1993 ( Figure 1 ) ; what growth did occur in the early 1990s came from business funding of R&D, although the pace of growth of business expenditures, especially in Japan, was much slower in the early 1990s than that set in the 1980s ( Figure 2 ) ; by 1993, nearly 60 per cent of R&D was funded, and 67 per cent of R&D was performed by the business sector.
  2. The importance of high-technology industries continues to grow. This group was responsible for nearly two-thirds of all OECD business R&D in 1993, the greatest gains in exports ( Figure 3 ) and almost all the positive job gains in manufacturing since the early 1970s. This part of manufacturing also enjoys above-average wages and has experienced the fastest productivity growth.
  3. While high-technology manufacturing industries represent the bulk of business R&D spending, non-manufacturing industry (service) R&D spending has outpaced that of manufacturing since the mid-1980s in those countries in which it is measured; research in the service sector typically account for one-quarter or more of total business R&D ( Table 1 ) .
Information and communication technologies are central to the growing speed and evolution of the knowledge-based economy.
  • Non-electrical machinery (which includes computers) and electrical machinery (which includes communications equipment) are the manufacturing sectors experiencing the fastest growth coming out of the recession with growth rates exceeding 10 per cent in the United States, Canada, Finland, Ireland, Sweden and the United Kingdom.
  • Capital spending associated with the fabrication of semiconductors, arguably the fundamental building block of information and communication technologies, has grown at a rate of 20 per cent or higher in 1992-93 for North America and Europe and at 34 per cent or more in 1993-94 and 1994-95 in North America, Europe and Japan.
  • A huge portion of the investment in information and communication equipment is made by service industries such as finance, telecommunications and retail trade (upwards of 75 per cent in the United States and the United Kingdom). These investments, accompanied by regulatory reforms, have led to productivity gains in the service sector, where the United States enjoys a substantial lead over Europe and Japan.
In the knowledge-based economy, the service sector is taking on a new role.
  • A huge portion (95 per cent) of the 65 million net jobs added to the OECD labour force during the 1980s originated in the market service sectors. However, this steady growth seems to be changing with the most recent recession ( Figure 4 ) . In contrast to earlier recessions where manufacturing tended to be the driving force, in the 1990s it was the combination of services and manufacturing that led the decline.
  • In the UK, the share of manufacturing in the downturn of GDP in the early 1980s was ten times that of services, while in the early 1990s, manufacturing was only about one-and-a-half times as important; likewise, the most recent recession in Italy and Japan marks the first time that their service sectors have registered negative output growth over the last decade-and-a half; while in the United States and France, the growth rate of services output has always remained positive, but the decline in service sector output in the early 1990s was nearly two-and-a-half and three times respectively as great as the previous two-year low in the early 1980s.
  • Technological developments are undermining the notion of "natural" monopolies and are a key factor driving regulatory reform in many Member countries. In the telecommunications sector, the price of total residential charges increased by 8.7 per cent between 1990 and 1994 in non-competitive countries, while in countries with a competitive market they fell by 3.1 per cent. The diffusion rate for one of the new communication technologies -- mobile (cellular) phones -- is directly related to the regulatory scheme under which it operates ( Figure 5 ) .
  • Services are an increasingly important part of international trade, rising from a quarter of world trade in 1975 to more than a third in 1993; and they consistently outpace manufacturing in terms of the value of foreign direct investment both in and from OECD Member countries ( Figure 6 ) .
As all sectors of the economy become knowledge-based, enhancing the skills of the labour force becomes a prerequisite to performance.
  • Across a wide cross-section of OECD countries, the level of skills in both the manufacturing and service sector has increased over time.
  • This up-skilling trend is largely due to changes in staffing patterns within industries, rather than being due to changes in the industrial structure as activity shifts from manufacturing to services.
  • In fact, most of the new jobs added to manufacturing during the 1980s were high-skill, white-collar positions.
  • This is confirmed by trends in the hiring of scientific researchers whose number per 10 000 employed has increased steadily in industry, especially in high-technology manufacturing in the Asia-Pacific region ( Table 2 ) .

The "Outlook" and associated policy implications.

The key question is whether this transformation into a knowledge-based economy will produce sufficient high-quality employment in OECD Countries. Many technologies have large realised and unrealised productivity and job impacts that are only now beginning to be felt.
In all likelihood, the jobs of the future will not be in the industries of today. Rather, they will be in new industries, some of which will be a hybrid of old industries such as the embryonic on-line and multimedia industries which are fusing a number of manufacturing and service industries, notably computing hardware and software, communications (telephony, television and radio), content producers and broadcasters (audio-visual and textual) into a new industry.

  • This underscores the need for basic economic infrastructure improvements in the transportation, communication and education systems that connect the different sectors.
  • New policies that are not centred on an individual part of the economy but rather seek to improve system-wide efficiency should be considered. Examples include enlarging the pool of projects to which governments provide direct or indirect R&D assistance, undertaking government-led demonstration projects in the development of new service-based industries and deregulating services so that greater experimentation and boundary-crossing can occur.

While there is good reason, because of both history and the impact of new innovations, to be cautiously optimistic about the availability of employment; the nature of these new jobs in terms of skill requirements and their impact on incomes is more uncertain. There are indications that existing industries are "up-skilling" their labour forces and this trend is likely to be reinforced by the continued diffusion of information and communication technologies.
These technologies and the associated re-organisation of firms and continued globalisation of OECD economies, also mean that historic links between technology, productivity and incomes have changed as higher incomes accruing from productivity can be used to buy foreign products or invest in other countries, opening up what were previously more closed national and regional systems, and reducing the chance that productivity gains and new jobs will occur in the same geographic location. This, combined with the fact that these new technologies have a tendency to reduce market imperfections, leads to a more heterogeneous mix of incomes.

  • These trends place those that do not possess skills which are in demand in a perilous position. Balancing the need to de-regulate, innovate and stimulate growth, while accounting for those parts of society that are not equipped for these changes, will be the primary challenge for the rest of the decade.

In addition to undertaking new policies that reflect the merger of manufacturing and services, it is also important to account for the unique characteristics of services in existing policy frameworks, many of which have been formed in the image of manufacturing. Examples include:

  • labour policy , which may have to contend with a greater number of unemployed service workers as price competition grows due to regulatory reform and greater exposure to foreign competition increases the insecurity of these jobs;
  • competition policy , which may confront new types of anti-competitive practices as the ease of forming networks of businesses increases and traditional market boundaries blur; and
  • trade policy , which may require new multilateral approaches as the nature of services emphasises differences in market vs. non-market services (health care, education), regulatory frameworks (telecommunications), cultural attitudes (entertainment) and standards (pornography, privacy).

Finally, as a greater part of the OECD economies become dependent on high-technology industries, the science system is becoming more closely related to the marketing, production and finance departments of firms. Coupled with this is a stringent budgetary environment in many national capitals. This situation has several implications including an increasing expectation of economic performance from the science system and a growing unwillingness to investment in science purely for "the sake of science."

  • In terms of policy, this will put greater pressure on the science system for more applied projects and closer collaboration with industry through technology transfer mechanisms and joint projects;
  • It will also call into question whether sufficient amounts of fundamental or basic research are being conducted, and the role governments should play in determining that the right balance of R&D is being performed.

Latest update 07 November 2000


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