Think U.S. High Tech Isn’t Healthy? Look at the Data

According to Gary Pisano and Willy Shih, the U.S. has lost or is in the process of losing the ability to manufacture many cutting-edge products because of the outsourcing of development and manufacturing work abroad, which has caused a damaging deterioration in the collective capabilities that serve high-tech industries. This is a disturbing hypothesis backed up by anecdotal data about a variety of high-tech products that can no longer be manufactured in the U.S. As someone who has worried about the global competitiveness of U.S. high-tech industries for years, I find their analysis chilling — but not entirely convincing.

A look at some of the recent data on global market shares supports a more nuanced and optimistic assessment: The U.S. retains significant shares of global markets for high-tech products and services. And the reduction in costs and prices made possible by outsourcing upstream component production to low-cost foreign locations has helped U.S. companies maintain their competitiveness in high-value-added downstream products.

According to the O.E.C.D.’s latest Science and Technology Indicators, on a value-added revenue basis the U.S. continues to have the largest share of global markets in both knowledge-intensive services (business, communications, financial, education, and health services) and high-tech manufacturing industries (aerospace; computers and office machinery; communications equipment; pharmaceuticals; and scientific instruments).

Between 1995 and 2005, the U.S. maintained about a 40% global share in knowledge-intensive services and about a 35% global share in high-tech industries, keeping the lead in four of them. Indeed, despite the high value of the dollar and the rapid growth of emerging markets between 1995 and 2005, the U.S. increased its global share in all but the aerospace industry. The U.S. share in communications equipment increased by more than 20 percentage points as Japan’s share plummeted, and the U.S. doubled its share in computers and office equipment, although it was overtaken by China in 2003. These are the two sectors that encompass most of the products and companies that are the focus of the Pisano and Shih analysis.

The increase in China’s share in computers and office machinery — from 2% in 1995 to 46% in 2005 — was remarkable, but it is not a sign that China has gained on the U.S. in innovative capacity in this sector or others. China’s exports of high-tech products turn out to be not very high tech and not very Chinese: 80%-90% of China’s high-tech exports come from firms that are partially or wholly foreign-owned — in many cases by American or Japanese companies — and 95% are processing exports, the high-tech components of which are produced elsewhere and imported into China. China accounts for about 35% of the value added in its exports — and considerably less in many of its high-tech exports sold under the brand names of U.S. high-tech companies like Apple, Microsoft, and HP.

Pisano and Shih also argue that the national identity of high-tech companies is meaningless — that U.S. multinational companies are no more important to the innovative capacity of the U.S. than foreign MNCs. Again the data suggest otherwise.

According to a study by Matthew J. Slaughter of Dartmouth’s Tuck School of Business, in 2007 U.S.-based MNCs accounted for 19% of private-sector employment, 25% of private-sector output, 31% of private sector investment, 48% of exports, 37% of imports, and an amazing 74% of U.S. corporate R&D spending in the U.S.

U.S. MNCs are especially important in manufacturing, accounting for 61% of manufacturing value-added and 49% of manufacturing employment in the U.S. And within manufacturing they are particularly important in high tech, accounting for 85% of value-added in computers and electronics, 76% in transportation equipment, 73% in chemicals/pharmaceuticals, and 49% in electrical equipment, appliances and components And despite outsourcing, most of the activity of U.S. MNCs remains at home: they purchase 89% of their intermediate inputs from other companies in the U.S. and their U.S. operations account for 70% of their worldwide employment, 72% of their worldwide output, 75% of their worldwide investment, and 87% of their worldwide R&D.

Nor have these shares declined meaningfully in the last decade. Moreover, the evidence suggests that the offshoring of activity by U.S. MNCs — either to reduce the costs of their supply chain or to serve foreign customers — increases rather than decreases their U.S. activities. According to a recent study by Mihir A. Desai and C. Fritz Foley of Harvard Business School and James R. Hines Jr. of the University of Michigan at Ann Arbor Law School , both the domestic and foreign investment and the domestic and foreign employment of U.S. MNCs move together.

Overall, the data do not indicate that the U.S. has lost its innovative capacity or that the outsourcing of production to low-cost locations has undermined the global competitiveness of U.S. high-tech companies — at least not yet.

Laura D’Andrea Tyson
SK and Angela Chan Professor of Global Management
Haas School of Business
University of California, Berkeley