Mainstay Study IV

E M E R G E N C Y C O M M I T T E E F O R A M E R I C A N T R A D E

Matthew J. Slaughter

TM

TECHNOLOGY, TRADE

AND INVESTMENT:THE PUBLIC OPINION DISCONNECT

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In October 1967, a number of United States busi-ness leaders joined together because of a sharedconcern that a new worldwide trade war was in themaking. Proposals to severely restrict imports intothe United States were moving through theCongress. Threats of retaliation by foreign nationswere being openly voiced.

These business representatives felt that a combina-tion of restrictions and retaliations could destroytwo decades of progress in the expansion of tradeand investment and would damage other areas ofinternational cooperation. To help prevent this,they formed the Emergency Committee forAmerican Trade.

The bills then in Congress did not succeed but thethreat to trade and investment continued, and thefounders of what came to be known as ECAT werejoined by others until the Committee reached itspresent size.

ECAT’s members account for major segments ofthe manufacturing, financial, processing, merchan-dising, and publishing sectors of the Americaneconomy. Their combined exports run into the tens

of billions of dollars. The jobs they provide forAmerican men and women – including the jobsaccounted for by suppliers, dealers, and subcontrac-tors — are located in every state and cover skills ofall levels. Their annual worldwide sales exceed $1.5 trillion, and they employ approximately fourmillion persons.

The members of ECAT are practical business people.They are not free trade theorists. They believe inand support measures designed to promote economic growth through the expansion of interna-tional trade and investment.

ECAT members are active supporters of legislativeand other measures that facilitate U.S. trade andinvestment. They additionally are opposed tochanges in U.S. trade and tax law that unfairlypenalize their competitiveness in world markets.Members of ECAT, supported by experts fromwithin their companies and from the small ECATstaff, have made their views known through testimonybefore Congressional committees, through contactswith members of Congress and Administration officials,through liaison with other organizations, and throughpublic information programs.

EMERGENCY COMMITTEE FOR AMERICAN TRADE

MATTHEW J. SLAUGHTER

Matthew J. Slaughter is currently an AssociateProfessor of Business Administration at the TuckSchool of Business, Dartmouth College. He is alsoa faculty research fellow at the National Bureau ofEconomic Research, a visiting fellow at the Institutefor International Economics, and a term member atthe Council on Foreign Relations. In recent years,he has also been a visiting scholar at the FederalReserve, the International Monetary Fund, and theWorld Bank.

He received his Ph.D. from the MassachusettsInstitute of Technology in the field of internationaleconomics. Dr. Slaughter has published many articleson the subjects of international trade and invest-ment, and he also has a recently published book onthe politics of globalization.

Copyright © 2002 by the Emergency Committee for American Trade. All rights reserved.

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TM

TECHNOLOGY, TRADE

AND INVESTMENT:THE PUBLIC OPINION DISCONNECT

Mainstay IV

Matthew J. Slaughter

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Preface ......................................................................................................................i

Executive Summary.............................................................................................1

Chapter I ................................................................................................................7Setting the Stage: The Productivity Resurgence in the United States

Chapter II ............................................................................................................17The Central Role of Trade and American Companies with Global Operations in the Production of ICT Goods and Services

Chapter III ..........................................................................................................39The Central Role of Trade and American Companies with Global Operations in the Use of ICT Goods and Services

Chapter IV ..........................................................................................................57The Split in Public Opinions about ICT Products and Globalization

Chapter V ............................................................................................................63Conclusions and Policy Recommendations

Data Appendix ...................................................................................................67

References ............................................................................................................69

Endnotes ..............................................................................................................73

CONTENTS

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P R E F A C E

O ver 30 years ago, the EmergencyCommittee for American Trade (ECAT)recognized the need to encourage

greater awareness of the importance of U.S. for-eign direct investment to the U.S. economy. Atthe time, American companies with global oper-ations were under attack. Critics charged thatU.S. foreign direct investment exportedAmerican jobs and promoted increased importsfrom foreign affiliates. Some political leadersadvocated changing U.S. trade and tax laws tokeep capital and production in the United States.

In 1972, ECAT commissioned its first major studyon the role of U.S. foreign direct investment in thedomestic economy, entitled: The MultinationalCorporation: American Mainstay in the WorldEconomy. The report demonstrated that overseasinvestments by American companies contributed toincreased U.S. exports and increased investments athome. Based on data collected from 74 U.S. manu-facturers operating in world markets, the study wasused in the effort to prevent enactment of draconianrestrictions on American activities in foreign markets.

In subsequent years, the business community andgovernment agencies have helped to educate opinion leaders and the public about the benefits of U.S. overseas investment to the domestic and worldeconomies. For example, a 1991 study by theUnited Nations Conference on Trade andDevelopment concluded that “foreign direct invest-ment is increasingly becoming an engine of growthin the world economy.” To boost growth world-wide, the study urged governments to facilitate agreater flow of foreign investment to developingcountries. In its 2001 report on “FDI and the LeastDeveloped Countries,” UNCTAD again empha-sized the importance of fostering greater foreigninvestment to promote economic growth anddevelopment in the world’s poorest countries. A1997 study by the International Labor Organization

also stated that slow economic growth, not trade andforeign direct investment, is the primary cause of slowjob growth and stagnant wages.

ECAT continued its contribution to this educationeffort in 1993 with the publication of Mainstay II:A New Account of the Critical Role of U.S.Multinational Companies in the U.S. Economy. Byusing more extensive data covering the entire U.S.manufacturing sector during the decade of the1980s, Mainstay II again explored the effect ofAmerican companies operating overseas on the U.S.economy. The report concluded that to remaincompetitive and to participate successfully in globaltrade and investment, American companies musthave a “global reach.”

In 1998, ECAT continued this effort with the pub-lication of Mainstay III: Global Investments,American Returns, which examined U.S. foreigndirect investment in the agricultural, manufactur-ing, and services sectors. This study was updated in1999. Both the original study and the 1999 Updatedocumented that foreign investment by U.S. com-panies complements their activities in the UnitedStates, and that U.S. companies with global opera-tions make greater investments in physical capitaland research and development, pay their U.S.workers more, and export more than purely domes-tic firms. In short, American companies with globaloperations represent an essential component supporting greater productivity, a high standard ofliving and economic growth in the United States.

With the publication of its latest study, MainstayIV, Technology, Trade and Investment: The PublicOpinion Disconnect, ECAT seeks to continue itscontribution to this important public policy debate.This latest study in the Mainstay series is motivatedby two broad developments in the United Stateseconomy in recent years.

PREFACE

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The first development is the acceleration in thegrowth of U.S. labor productivity. In the generationbefore 1995, U.S. labor productivity in the non-farm business sector rose at about 1.35 percent peryear. From 1995 to 2000, this growth rate acceleratedto 2.54 percent per year. As was emphasized inMainstay III, labor productivity is the single bestmeasure of a country’s standard of living.Accordingly, this uptick in U.S. productivitygrowth holds enormous implications for the well-being of all Americans. Many have cited as animportant driver of this productivity uptick infor-mation and communication technologies such aspersonal computers and the Internet. As will bedocumented in this report, the production and useof these technologies account for about two-thirdsof the acceleration in U.S. productivity growth.

The second development is the rising backlash inthe United States and elsewhere against further liberalization of trade and foreign direct investment.A large number of political events in recent yearssuggest a marked turn away from liberalization: thelapse of “fast-track” trade negotiating authority forthe U.S. president; close Congressional votes overtrade bills such as the North American Free TradeAgreement; the collapse of the OECD negotiationsfor a Multilateral Agreement on Investment; and,perhaps most visibly, disruptive protests in Seattle,Washington, D.C., Genoa, and elsewhere againstintergovernmental organizations, including theInternational Monetary Fund and the World TradeOrganization. In light of these events, many promi-nent observers have raised alarms about a rising“globalization backlash.”

The key message of Mainstay IV is that the growthin both the production and the use of informationand communication technologies — and thus theacceleration in U.S. productivity growth — is intricately linked with trade and foreign directinvestment. The incentives for companies to produceand use these new technologies depend crucially on

the ability of these companies to integrate thesetechnologies into their trade and investment activi-ties worldwide. Indeed, on many measures the keytechnology-producing industries are among themost globally engaged industries in the U.S. economy.

Mainstay IV builds on its predecessors in two majorways. One is a continuing focus on the impact oftrade and foreign direct investment on the U.S.standard of living. This emphasis reflects the wide-spread agreement among economists that thestandard of living is the most important measure ofa country’s economic well-being. And it is particu-larly timely in light of the productivity accelerationthe United States has enjoyed in recent years.Understanding what forces have driven this acceler-ation is essential for formulating policy aimed atextending this gain and thereby avoiding the productivity stagnation of the previous generation.

An important aspect of this focus on living standardsis a re-emphasis of a main message of Mainstay III:that because U.S. and foreign activities of Americancompanies tend to complement each other, the abil-ity of these companies to help raise U.S. livingstandards depends crucially on their global engage-ment through trade and foreign direct investment.This complementarity between U.S. living stan-dards and globalization is starkly demonstrated bythe industries producing information and commu-nication technology products. In an imaginaryworld where in recent years U.S. policy had shutdown the trade and investment linkages in theseindustries, almost surely U.S. productivity growthwould have suffered dramatically.

The second way in which Mainstay IV builds on itspredecessors is a continuing focus on all major sectors of the economy. The report opens with afocus on industries that produce information andcommunication technology products. As will bedocumented, this is due to production in these fewindustries accounting for about a third of recent

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P R E F A C E

U.S. productivity gains. The focus then widens toinclude all sectors and their use of information andcommunication technologies, because investmentin these products throughout the economyaccounts for about another third of recent U.S.productivity gains. So understanding the majorityof the recent U.S. productivity performance requiresan economy-wide focus on both the productionand the use of information and communicationtechnologies.

With this central message of the intimate linkbetween information and communication tech-nologies on the one hand and trade and foreigndirect investment on the other, Mainstay IV aims toprovide important new insights into U.S. policydiscussions. Those interested in the continuedgrowth in the production and use of these technologies need to be interested in the continuedliberalization of trade and investment policies. Putdifferently, freer trade and investment make sub-stantial contributions to the U.S. economy becausethey facilitate the production of and investment inthese new technologies — and thereby facilitate ris-ing U.S. living standards. The benefits of thesetechnologies cannot be fully realized without liber-al policies on trade and investment.

As this report will document, this link betweentechnology and liberalization is largely absent fromboth policy discussions and the public opinionsthat help shape those discussions. At the same timethat the average American opposes freer trade andinvestment policies because of a belief that theyhurt the U.S. economy, that same individualstrongly believes that information and communica-tion technologies are one of the main forces thatbenefit the U.S. economy.

Overall, with its new findings Mainstay IV providesfresh insights and policy recommendations. In sodoing, ECAT hopes that this latest contributionwill help inform public debate over U.S. trade andinvestment policies based upon hard data and aninformed understanding about the links betweentechnology and globalization.

The analysis in Mainstay IV relies on a wide rangeof data, from the level of the overall U.S. economyto case studies of individual investment decisions ofindividual companies. The Data Appendix discussesthe sources and measurement of these data, includinga glossary that summarizes definitions of key termsused throughout the report.

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E X E C U T I V E S U M M A R Y

I n public and private sector debates over U.S.economic policies, the role of trade andAmerican companies with global operations

has often been misunderstood.1 Although there isno doubt that the United States plays an importantrole in the world economy, there is considerableskepticism about the contributions that trade andforeign direct investment make to the U.S. econ-omy. Notwithstanding public rhetoric, thisMainstay IV study finds – through an analysis ofeconomic data and company case studies – thattrade and investment are critical componentssupporting the growth in productivity and theincrease in U.S. living standards that the UnitedStates has enjoyed over the last decade. In short,trade and investment matter to the U.S. economy.

This study examines in particular the relationshipbetween trade and investment and the growth inthe production and use of information and com-munication technology (ICT) products. Theseproducts have accounted for the majority of theacceleration in U.S. labor productivity over the lasthalf-decade. This acceleration has been much celebrated, as labor productivity is the single bestmeasure of a country’s overall standard of living.

The research of this study finds that the incentivesfor companies to produce and/or use these newtechnologies depend crucially on the ability of thesecompanies to integrate these technologies into theirtrade and investment activities worldwide. The keyconclusion of Mainstay IV is that trade and invest-ment play a critical role in fostering the growth ofand the demand for ICT in ways that supportincreased productivity and economic growth.

The conclusion that the production and use ofthese technologies and the related gains in produc-tivity cannot be maximized without liberalizedtrade and investment policies carries important policyimplications. Most immediately, it means the

United States should continue to be at the forefrontin the push for greater liberalization globally,regionally, and bilaterally – and that requires theenactment this year of Trade Promotion Authoritylegislation to create a Presidential-Congressionalpartnership to push for liberalized trade and invest-ment. In addition, the Administration andCongress should continue to pursue policies andnegotiations that promote strong investment protections in order to help spur the growth in theICT producer and user industries. As well, effortsshould accelerate to expand the coverage of suchtrade liberalization agreements as the InformationTechnology Agreement. The Administration shouldcontinue to press for the dismantling of non-tariffbarriers to trade in ICT goods, commitments thatno new barriers will be erected, and full implemen-tation of the WTO Agreement on Trade-RelatedAspects of Intellectual Property Rights. Furthermore,additional work is needed to develop public under-standing of the relationship between trade andinvestment on the one hand and the growth in theproduction and use of ICT products on the other.Work is also needed on appropriate public-policyintervention, such as the reform of trade-adjustmentassistance programs.

Like previous ECAT Mainstay studies, MainstayIV emphasizes the positive impact of trade andinvestment on the U.S. standard of living. It alsocontinues ECAT’s broad perspective of all majorsectors of the economy: not just ICT producers, butjust as importantly the ICT users throughout theentire economy.

Mainstay IV is based upon analysis of data on U.S.productivity, trade flows, and activities by Americancompanies with global operations from 1982through 2000. These data come from various statisticalagencies of the federal government. In addition,company case studies offer tangible examples ofpatterns revealed in the broader data.

EXECUTIVE SUMMARY

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M A I N S T A Y I V

The following sections summarize the major findingsand conclusions of the study.

I. Setting the Stage: The ProductivityResurgence in the United States

Since 1995, labor productivity in the UnitedStates has accelerated markedly. Higher produc-tivity growth rates directly translate into higherU.S. living standards, and the magnitudesinvolved are dramatic.

� From 1973 to 1995, output per worker hour in thenonfarm business sector grew at 1.35 percent peryear. From 1995 through 2000, growth in laborproductivity accelerated to 2.54 percent per year.

� This acceleration in growth of U.S. labor produc-tivity means dramatically faster increases in U.S.living standards. The previous generation’s pro-ductivity growth rate implied that living standardsdoubled every 53 years. The faster growth rate ofrecent years has implied that living standards nowdouble in only 28 years — a generation faster.

Approximately two-thirds of the productivityacceleration is accounted for by information andcommunication technology products — both theirproduction and their use. Accelerated declines inthe quality-adjusted price of many ICT productshave been the key link between ICT producers and users.

� About one-third of the productivity accelerationis accounted for by faster technological progressand innovation in the production of ICT goodsand services — e.g., cellular phones, computers,and software.

� Quality-adjusted prices for many ICT productshave been falling for decades, but since 1995there has been acceleration in many of these pricedeclines. It appears that this acceleration is

partly accounted for by the technologicalprogress in ICT production.

� About one-third of the productivity acceleration isaccounted for by the use of ICT goods and servic-es in industries throughout the economy. Partly inresponse to price declines and quality increases,firms throughout the economy have invested moreheavily in ICT products in recent years.

� The remaining one-third of the productivityacceleration is accounted for by faster technologicalprogress in production in non-ICT industries.There is mixed evidence as to whether thisprogress is related to ICT investments.

II. The Central Role of Trade and AmericanCompanies with Global Operations in theProduction of ICT Goods and Services

In the central ICT industries of machinery andelectronic goods, on many measures the structureof production is very global — relative to thebroader economy and/or over time as well. Muchof the output in these industries entails multipleproduction stages across multiple countries, alllinked via trade and investment.

� Trade: Imports and exports as a share of outputhave been high and rising in these ICT industriesfor decades. Imports and exports currently equalover 50 percent of value-added of these products,far higher than in the broader economy.

� Investment: In the United States, parents ofAmerican companies with global operationsaccount for about two-thirds of total U.S. sales inthe central ICT industries. Outside the UnitedStates, foreign affiliates of these U.S. companies inthe central ICT industries now account forbetween 25 and 40 percent of worldwide firmvalue-added and employment, and around 10 per-cent of worldwide firm research and development.

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These shares have been rising, and are generallyhigher than shares for the broader economy.

� International Distribution of Production:Within ICT industries, in American companieswith global operations nearly 90 percent of par-ent exports to their foreign affiliates areintermediate goods for further processing.Foreign affiliates of U.S. companies in ICTindustries export nearly 60 percent of their output,rather than selling into host-country markets.And in both parents and affiliates, importedintermediate inputs account for a small but risingshare of total sales. All these figures have been rising over time and are higher than for thebroader economy, and they are consistent withICT goods having many production stages locatedin many countries.

The acceleration since 1995 in quality improve-ments and price declines in many ICT productscoincides with three major WTO agreements ofdirect relevance to ICT producers: the 1995 TRIPSAgreement, the 1997 Information TechnologyAgreement, and the 1997 Basic Telecommuni-cations Agreement. The correlation between theseliberalizations and ICT performance is striking,and strongly suggests a prominent role for policyliberalization in explaining the recent performanceof ICT industries.

� The TRIPS Agreement: The WTO Agreement onTrade-Related Aspects of Intellectual PropertyRights (TRIPS) committed WTO member coun-tries to enact and enforce laws protectingcopyrights, patents, and trademarks. Aimed at fos-tering the creation and proliferation of new ideasin all industries, this agreement is of paramountimportance to ICT producers due to their strongfocus on innovation. Since the mid-1990s, U.S.research and development spending and patentgrants by ICT firms have accelerated, both relativeto the past and relative to the broader economy.

� The ITA: Enacted in 1997 by dozens of countriesaccounting for nearly 95 percent of world ICTtrade, the Information Technology Agreement(ITA) has virtually eliminated all world tariffs fora wide set of hundreds of ICT products. Thismajor trade liberalization helped reduce ICTprices worldwide through greater competitionand lower trade barriers. It also likely stimulatedICT research and development thanks to greaterproduct-market competition and opportunities.

� The BTA: The 1997 Basic TelecommunicationsAgreement (BTA) now covers over 100 WTOcountries that account for about 95 percent ofworld telecom trade. Under the agreement,countries have committed to guarantee marketaccess for telecom providers, national treatmentof foreign firms, and the adoption of pro-competitive regulations. These provisions helpedstimulate worldwide price competition and productinnovation in this central ICT service industry.

III. The Central Role of Trade and AmericanCompanies with Global Operations in theUse of ICT Goods and Services

At the national level, the heavy use of ICT productsin recent years coincides with a deepening of tradeand investment linkages. At the industry level, theindustries investing most heavily in ICT productsalso appear to be the industries engaging most heavily on a global basis via trade and investment.

� Trade: For decades, manufacturing industrieswith a higher share of their capital stock accountedfor by ICT products have tended to have higherexports, imports, and total trade as a share oftotal sales. This is consistent with ICT use complementing the trade engagement of firms.

� Investment: American companies with globaloperations have expanded more rapidly — both


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in the United States and outside the country — during the recent period of accelerated ICTinvestment than during earlier periods. ProminentICT-intensive industries account for a rising shareof the total U.S. and foreign activity of Americancompanies with global operations. The share ofworldwide research and development performedby foreign affiliates has risen from 6.4 percent in1982 to 11.6 percent in 1998.

� International Distribution of Production: Byseveral measures, global production networkshave deepened and widened in many industriesthat use ICT goods and services. For example,the share of U.S. manufacturing intermediateinputs that are sourced from outside the countryhas risen from 4.1 percent in 1975 to 8.2 percentin 1995. Within manufacturing American companies with global operations, for both U.S.parents and foreign affiliates, the export share oftotal sales has been rising over time.

Two of the most intensive ICT-using industries inrecent years — telecommunications and financialservices — have also benefited from trade andinvestment liberalization as a result of major WTOagreements. As with the TRIPS Agreement and theITA, this correlation supports the conclusion thattrade and investment liberalization has helpedstimulate demand for ICT goods and services.

� The BTA: The 1997 Basic TelecommunicationsAgreement now covers over 100 WTO countriesthat account for about 95 percent of world telecomtrade. Under the agreement, countries have committed to guarantee market access for telecomproviders, national treatment of foreign firms,and the adoption of pro-competitive regulations.These provisions have helped stimulate world-wide expansion in telecommunications and,thereby, worldwide telecommunications demandfor ICT goods such as cellular phones, computers,and networking gear.

� Financial Services: The WTO’s 1997 Agreementon Financial Services has encouraged competi-tion in a wide range of financial services in over100 signatory countries worldwide. As with theBTA, this agreement has stimulated worldwideexpansion of financial-services firms and, thereby,their demand for ICT goods and services.

IV. The Split in Public Opinions About ICTProducts and Globalization

Despite the preponderance of evidence that theproduction and use of ICT products are intricatelylinked with trade and investment, there is a widegulf separating American public opinions aboutICT products on the one hand and trade andinvestment on the other.

� Large majorities of Americans think that ICTproducts have been a main driver of overall economic growth in recent years. Moreover, pluralities to majorities also credit ICT productswith labor-market improvements including risingwages, rising employment, and falling poverty.

� At the same time, the majority of Americansthink trade and FDI hurt the U.S. economy, onbalance, with large majorities also worrying thattrade and investment generate labor-market costsin terms of job destruction and lower wages.

� The majority of Americans support ongoingtechnological progress even if that progressentails job losses in some traditional industries,but at the same time the majority of Americansalso favor protecting jobs over liberalizing trade.

This split in attitudes is unwarranted. Thoseinterested in the continued production and use ofICT products need to be interested in the continuedliberalization of trade and investment policies.More open trade and investment facilitate the production and the use of these new technologies,and thereby facilitate rising U.S. living standards.


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V. Policy Recommendations

Based on the research findings of this report, U.S.trade and investment policies should take intoaccount the following policy recommendations.

� At a general level, policy makers and businessleaders should articulate the essential role thattrade and investment play in the creation and useof ICT goods and services — and thereby play inthe improvement of U.S. living standards.

� Congress and the Executive should continue topromote expansionary U.S. trade and investmentpolicies that make important contributions toAmerica’s high living standards. This includes the following.

� The enactment and renewal of TradePromotion Authority legislation is critical toenhance the President’s ability to negotiatetrade- and investment-liberalizing agreements.

� The Administration should negotiate andCongress should implement trade- and invest-ment-liberalizing agreements globally in theWTO, regionally in the Americas, and else-where and bilaterally.

� The Administration and Congress should continue to pursue policies that promote invest-ment abroad, including through the negotiationof investment treaties and agreements thatinclude the traditional protections necessary tosafeguard such investments and through tradeand tax policies that recognize the importance ofinvestment to the U.S. economy.

� The positive role that liberalization has played inthe development and growth of ICT productsshould be maintained in at least five specific ways.

� Additional countries should be activelyencouraged to sign onto the ITA, the BasicTelecommunications Agreement and theFinancial Services Agreement.

� The extension of the original ITA to an “ITAII” should be strongly pursued, to cover widerand ever-evolving groups of ICT products aswell as non-tariff barriers.

� The Administration and Congress should con-tinue to seek to dismantle non-tariff barriersthat limit the growth of ICT-producing andconsuming industries.

� Efforts should continue to ensure that no newbarriers are erected to ICT trade and investment.

� The Administration should continue to pressfor the adoption and full implementation ofintellectual property rights protection.

� Finally, policy makers and business leadersshould actively support on a bipartisan basis acomprehensive reform and modernization ofadjustment assistance programs to address morefully any labor-market impacts of liberalization.


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T H E P R O D U C T I V I T Y R E S U R G E N C E

A. The Strong Economic Performance of the United States in Recent Years

Over the 1990s and, in particular, the second half ofthe 1990s, the U.S. economy enjoyed strong eco-nomic performance on a number of dimensions. Thisstrength contrasted sharply with the relatively pooreconomic performance of the previous two decades.

Figures 1 through 3 present a long-term view of thisrecent strength in terms of aggregate output, infla-tion, and unemployment. In each figure, the U.S.

performance is shown annually from 1950 through2000, with output and inflation measuring year-to-year percentage growth and unemploymentmeasuring each year’s average rate.2

Figure 1, page 8, shows the swings in output com-mensurate with business cycles. What is notableabout the 1990s is that after the short recession in1990-1991, output growth has been both high andsteady relative to historical standards. This is partic-ularly true post-1995. At the time of writing thisreport in late 2001, the U.S. economy has beenexpanding for over 10 years without a recession, thelongest such expansion in U.S. history.

Figure 2, page 9, shows price inflation. The high-inflation 1970s stands out quite clearly. Since 1990inflation has been falling, with rates since 1995approaching 50-year lows.

Figure 3, page 10, shows unemployment rates.Here, rising unemployment rates generally followthe output slow-downs of Figure 1. U.S. unem-ployment rates fell steadily after 1993, againapproaching 50-year lows by 2000, a time at whichthe U.S. economy was widely thought to be operat-ing very near, if not actually at, full employment.3

To highlight further the strength of the U.S. economysince 1995, Chart A, page 11, translates the annualdata in Figures 1 through 3 into decade averages,where the 1990s is broken into its first and second halves.

The key message of Chart A is the very strong per-formance of the U.S. economy in the second half ofthe 1990s in terms of all measures shown — output

Chapter Overview

T his chapter reviews the strong economic performance of theUnited States in recent years.

Most importantly, since 1995, labor pro-ductivity in the United States hasaccelerated markedly. Higher productivitygrowth rates directly translate into higherU.S. living standards, and the magnitudesinvolved are dramatic. After documentingthis productivity acceleration, the chapterthen explains the forces behind it.Approximately two-thirds of the productivityacceleration has been driven by informationand communication technology products —both their production and their use.Producers of these products have enjoyedfaster technological progress and innova-tion. In response, firms economy-wide haveinvested more heavily in these products.

CHAPTER I

Setting the Stage: The Productivity Resurgence in the United States


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growth, price inflation, and unemployment rates.This was an extraordinary period of high outputgrowth, low price inflation, and very low unem-ployment, both relative to earlier decades and alsorelative to the first half of the 1990s.

B. The Most Important Performance Gain of All: The Acceleration in U.S. Productivity Growth

The previous sub-section highlighted strong economic performance in terms of total output,price inflation, and unemployment rates. But togauge the standard of living of a country’s citizens,the single most important indicator of well-being isproductivity: the average value of output a countryproduces per worker.4 Why care about productivity?Because a country’s productivity is the primarydeterminant of its material standard of living. Thefollowing quotation from noted economist andNew York Times columnist Paul Krugman makesthis point concisely.

Productivity isn’t everything, but inthe long run it is almost everything.A country’s ability to improve itsstandard of living over timedepends almost entirely on itsability to raise its output perworker… the essential arithmeticsays that long-term growth in liv-ing standards… depends almostentirely on productivity growth…Compared with the problem of slowproductivity growth, all our otherlong-term economic concerns —foreign competition, the industrialbase, lagging technology, deterio-rating infrastructure, and so on —are minor issues. Or more accurate-ly, they matter only to the extentthat they have an impact on ourproductivity growth.5

The economics of this “essentialarithmetic” for why productivity

matters is very simple. Broadly defined, a country’sstandard of living rises with the quantity and qualityof goods and services its citizens can consume. Peopleachieve economic well-being by consuming goodsand services such as food, clothing, and medical care.Consuming these items requires some means to payfor them. For almost all people, their income is theprimary — if not the only — means they have topay for consumption.6 In turn, people’s incomecomes from producing goods and services, usually byworking with others in firms.

Thus, the more people produce — that is, the moreproductive they are — the more income they receiveand the more they can consume. Higher productivitymeans a higher standard of living.

A broad average measure of a country’s productivityis the value of its total annual output of goods andservices divided by the number of people workingthat year. There are obviously other issues to con-sider as well, such as the distribution of productivityacross people. There is, however, a strong consensusthat the ultimate concern is average productivity.


-5

0

5

10

Per

cen

t

1950 1960 1970 1980 1990 2000

Year

FIGURE 1U.S. OUTPUT GROWTH

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This point has been made in several studies inrecent years, by noted authors and internationalinstitutions such as Paul Krugman and theInternational Labor Organization (1997).

Figure 4, page 12, plots the annual growth of U.S.productivity from 1950 forward, using the commonproductivity measure of output per worker-hour inthe nonfarm private business sector. In addition tothe jagged line connecting the actual productivitychanges, three flat lines indicate average productivitygrowth over three periods of interest.7

From 1950 until 1973, the United States enjoyedrapid productivity growth of 2.86 percent per year.Then, from 1973 to 1995, productivity growthslowed to just 1.35 percent per year. From 1995through 2000, growth in labor productivity acceler-ated to 2.54 percent per year.8

This acceleration of U.S. productivity growth since themid-1990s is the single most important economicdevelopment in the United States in recent years.Although the current growth rates have not yet

returned to those of the post-World War II era, themagnitudes involved are staggering. This is becausethe acceleration in productivity growth, when accu-mulated over time, means dramatically fasterincreases in U.S. living standards.

The previous generation’s productivity growth rateof 1.35 percent per year implied that living stan-dards took 53 years to double. The faster growthrate of the late 1990s of 2.54 percent per year hasimplied that living standards now double in only 28years. This difference of 25 years spans an entiregeneration, and so carries profound implications forthe economic well-being of the United States.

C. The Sources of Rising Productivity: What Economic Theory Says

Having documented this recent acceleration in U.S.productivity growth, the obvious question to ask iswhat forces caused it. Before turning to the data toanswer this question, it is instructive first to outlinethe economics of productivity growth.

There are two basic ways toraise a country’s overall laborproductivity: invest in otherinputs like physical capital,and improve the technologicalknow-how for transforminginputs into outputs.

1. Investment in Physical Capital

One way to boost productivityis to accumulate the otherinputs people work with toproduce things. The mostimportant other input peopleneed is capital, broadly definedas goods and services that helppeople make other goods andservices — e.g., buildings,machinery, software.


0

5

10

Per

cen

t

1950 1960 1970 1980 1990 2000

Year

FIGURE 2U.S. PRICE GROWTH

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M A I N S T A Y I V

All standard theories of economic growth agree onthis point. The intuition is straightforward. Themore capital workers have at their disposal, themore output each worker can produce by utilizingthese tools. One of the earliest formulations of howcapital accumulation raises output per worker wasby the Nobel Laureate Robert Solow (1956). Herigorously modeled that investment in physical capitaltends to increase productivity over time, with high-er investment rates leading to higher productivitylevels.9 More recently, Paul Krugman (1990, p. 15)summarizes the theory this way.

What can we do to speed [productivity growth] up?There is a standard economic answer … If you wantmore output, say the economists, provide more inputs.Give your workers more capital to work with, and bet-ter education, and they will be more productive.

2. Technological Progress

The other way to raise productivity is to improvethe technological know-how for transforminginputs into outputs. Economists generally conceive

of production technology as the know-how bywhich inputs are combined to produce output. Asjust discussed, capital accumulation is one source ofproductivity growth. But for fixed amounts of laborand capital, the only way more output can be generated is by improving production technology.

Numerous empirical studies have documented thattechnology advances were an important forcebehind overall U.S. output growth in the 20th cen-tury. For example, Solow (1957) found that about75 percent of U.S. growth during the first half ofthe 20th century was driven by technological gains.Similarly, Mankiw (1997) reports that from 1950to 1994, technological change accounted for justunder half of the total output growth.

Other researchers have documented the key roletechnology innovations have played in drivinggrowth around the world. For example, it is widelythought that the invention of the steam enginedrove the first industrial revolution and facilitateddramatic growth in productivity and living standardsin many countries, with subsequent innovations

such as the development of mass-production methods andmodern factories in the 1900s.

An obvious question is how toimprove production technology.There is no simple answer tothis question, but one activity clearly related to technologyimprovements is research anddevelopment (R&D). Broadlydefined, R&D attempts to dis-cover new products and/orimproved processes for makingexisting products. These discov-eries lead to more efficient waysto combine labor and capital to


2

4

6

8

10

Per

cen

t

1950 1960 1970 1980 1990 2000

Year

FIGURE 3U.S. UNEMPLOYMENT RATE

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make output.

D. Explaining the Recent U.S. Productivity-GrowthAcceleration: What the Data Say

Because the recent acceleration inU.S. productivity growth holdssuch profound implications fornational well-being, determining itssources has been the subject of alarge number of academic studies inrecent years. One good summary ofthese studies is presented in the2001 Economic Report of thePresident by the Council ofEconomic Advisors (2001).10

Most of these studies have extend-ed the productivity framework justoutlined in two important ways.One is to delineate different kindsof capital goods. Of particularinterest have been ICT products,the exact definition of which variesacross studies but which is generallytaken to mean the hardware and software involvedin collecting, processing, and sharing informationacross all media.11 The other is to decompose aggre-gate activity into various industries, where again ICTsectors are of particular interest.

Each of these studies must confront a large set ofmeasurement and methodological issues. For exam-ple, when calculating productivity should outputgrowth be somehow adjusted for the business cycle,to focus on underlying trend output? Different studieshave addressed these issues differently, as often timesthere is no single correct standard to follow.Accordingly, different studies do not all arrive atexactly the same answer to the question of whatcaused the acceleration in U.S. productivity growth.12

That said, there is now a broad consensus aboutwhat forces have driven the recent U.S. productivity

surge. Three main forces have been identified, eachof which accounts for approximately one-third ofthe total productivity acceleration.

1. Faster Technological Progress in theProduction of ICT Goods and Services

The first force has been an acceleration in the rateof technological progress and innovation in the pro-duction of ICT goods and services. In recent yearsthere has been a tremendous amount of progress inICT sectors both in making existing products moreefficiently — e.g., personal computers — and ininventing new products — e.g., commercial appli-cations for the Internet.

Technological change is typically measured either interms of output increases not accounted for byincreases in inputs, or in terms of output-price


CHART AINDICATORS OF U.S. ECONOMIC PERFORMANCE

Notes: Output and prices show average annual growth rates. Unemployment shows average annual rate.

0

1

8

2

3

4

5

6

7

Per

cen

t

1950-1959 1960-1969 1970-1979 1980-1989 1990-1995 1996-2000

Time Period

Output

Prices

Unemployment

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M A I N S T A Y I V

declines not accounted for by input-price declines.A key indication of this acceleration in technologi-cal change in ICT sectors is widely thought to bethe acceleration in the quality-adjusted pricedeclines of many ICT goods and services.

The price evidence for computers offers a strikingexample. Many researchers have estimated that therate of quality-adjusted price declines in computerhardware more than doubled after 1995 (for anoverview see Landefeld and Grimm, 2000). Forexample, former president of the AmericanEconomics Association Dale Jorgensen (2001)reports that quality-adjusted price declines for com-puter hardware accelerated to 25.0 percent per yearfor 1995-2000 from only 12.2 percent per year for1987-1995. Berndt, et al (2000) report annualizedprice declines for personal computers of 38.7 percentper year 1994-1999 versus only about 18 percentper year for 1976-1989. Nordhaus (2001) arguesthat many estimates of price declines may actuallyunderstate the true price movements.

These accelerated price declines can have manycauses, but many researcherscite technological progress as aprominent cause. An impor-tant message of chapter 2 ofMainstay IV will be to high-light the role of trade and FDIin these price declines.13

As for an acceleration in therates of product innovations,there is widespread evidence ofincreased invention and spreadof ICT products in the laterhalf of the 1990s. Prominentexamples include the commer-cialization of the Internet viauser-friendly browsers; themove from stand-alone person-al computers to client-server neworks linking many comput-ers; and the spread of cellular

telephony. Many studies have documented thisspread of innovations (e.g., Council of EconomicAdvisors, 2001, and Bresnahan and Greenstein, 1999).

Figures 5 and 6, pages 13 and 14, both taken fromthe 2001 Economic Report of the President, offer twodifferent measures of this surge in ICT innovation.14

Figure 5 shows real growth in company-fundedR&D spending for ICT-producing industries as wellas for all industries together. While R&D spendingrose throughout the broad economy over the 1990s,the ICT-producing industries show an accelerationin this spending in the later years. For ICT indus-tries, Figure 6 shows annual patents granted, ameasure of innovation. From 1980 until about1995, annual ICT patent grants grew steadily fromaround 7,000 to about 20,000. In the few years after1995, patent grants grew much more rapidly, reaching about 45,000.

2. Greater Investment in the Use of ICT Goods and Services

The second force driving the U.S. productivity


-2

0

8

2

6

4

Per

cen

t

1950 1960 1970 1980 1990 2000

Year

average1.35%

average2.54%

average2.86%

FIGURE 4U.S. PRODUCTIVITY GROWTH

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acceleration has been the accelera-tion in the use of ICT goods andservices as capital throughout therest of the economy. Investment inICT products has risen dramatical-ly in recent years, which hasresulted in even more capital forpeople to work with and thushigher productivity.

The exact magnitude of the risein ICT investment rates dependson measurement issues includingthe scope of the set of ICT prod-ucts and services.15 Typicalcalculations find that annualizedgrowth in the economy’s invest-ment in ICT products acceleratedfrom between 10 and 20 percentbetween 1990 and 1995 to over20 to 30 percent between 1995and 2000 (e.g., Council ofEconomic Advisors, 2001;McKinsey Global Institute,2001), with contributions com-ing from all major ICT categories such ascomputer hardware, computer software, and com-munications equipment (Oliner and Sichel,2000). Certain sectors have been particularlyheavy ICT investors, including finance and busi-ness services, telecommunications, and wholesaleand retail trade.

Most studies also find that post-1995 economy-wide investment in all non-ICT capital goods didnot accelerate. Overall, then, capital investment’scontribution to accelerating U.S. productivitygrowth has been entirely concentrated in one classof capital goods: the use of ICT products.

It is important to point out the causal link betweenadvances in the production of ICT goods and servicesand their subsequent use. It is widely argued that oneof the primary drivers of the surge in ICT investmentseconomy-wide has been the rapid innovation gains inthe production in these ICT sectors. The link is simple:

when presented with dramatic price declines and qual-ity increases for a particular type of capital, firmseconomy-wide can boost their profits by investingmore in that type of capital.16

Figure 7, page 15, from the Council of EconomicAdvisors (2001), elegantly visualizes this link fromthe broad perspective of 1979 forward. As the priceof computers and peripheral equipment has fallen,investment in a wide range of major economic sec-tors in these ICT products has risen — with anoticeable acceleration in investment in the secondhalf of the 1990s.

3. Faster Technological Progress in theProduction of Goods and Services Outside of the ICT Sectors

The third force driving the U.S. productivity accel-eration has been an acceleration in the rate oftechnological progress and innovation in the pro-


FIGURE 5INNOVATION IN ICT INDUSTRIES

1992 1996 1997

100

80

120

140

160

180

Index

, 1

99

2=

10

0

Year

1993 1994 1995 1998

real company-funded r&D Spending

All Industries

ICT-producing Industries

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M A I N S T A Y I V

duction of goods and servicesthroughout the economy outsideof the ICT sectors. As with theICT sectors, many industriesthroughout the rest of the economyhave exhibited faster rates of techno-logical change since around 1995.

The role of this third force hasbeen the subject of the mostdebate among researchers. This isbecause its size is less robust tomeasurement issues than the rolesof ICT production and use. Thatsaid, most studies have found atleast some non-zero role here.

One interesting question, whichremains the subject of ongoingresearch, is whether these technol-ogy gains in non-ICT sectors havebeen somehow stimulated by ICTinvestments made in these sectors.At the level of individual firms,there is at least some anecdotalevidence that use of ICT investments facilitatesworkplace reorganizations that yield output gains(for an overview see Brynjolfsson and Hitt, 2000).For example, data-processing machinery can reducethe need for information-processing managers.What is less clear is how representative these anec-dotes are in broader industries (for a discussion ofthese issues see Brynjolfsson and Hitt, 2000;Council of Economic Advisors, 2001; andMcKinsey Global Institute, 2001).

4. Summary: Production and Use of ICT Goods and Services Accounts for Nearly Two-Thirds of the Recent Acceleration in U.S. Productivity Growth.

Drawing together all this evidence highlights thecentrality of ICT sectors. Nearly two-thirds of therecent acceleration in U.S. productivity growth isaccounted for by the production and use of ICT goodsand services. Again, the key link between these two

forces has been the dramatic rise in the rate of quality improvements and price declines of ICT products.

Just as standard economic models predict, thisacceleration in U.S. productivity growth has alsoappeared in terms of an acceleration in the growthof real wages (i.e., dollar wages adjusted for priceinflation). For several different real-wage measures,Baily (2001) reports a consistently strong pattern ofaccelerating growth in real wages since the mid-1990s. Workers making more output has directlytranslated into workers earning more income.

E. What About The Economic Slowdown of 2001?

The sharp slowdown in U.S. output growth in2001 belies the often-heard claims that the recentproliferation of ICT products has somehow killedthe business cycle. Second- and fourth-quarter


FIGURE 6INNOVATION IN ICT INDUSTRIES

1980 1992 1995

10

0

20

30

40

50

Thou

san

ds

Per

Yea

r

Year

1983 1986 1989 1998

patents granted for informationtechnology applications

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growth in U.S. real GDP was only 0.3 percent and1.7 percent, respectively, while in the third quarteroutput actually shrank by 1.3 percent.

Declining investment demand for ICT productshas been one factor contributing to the economicslowdown. This has been widely noted in the financialmedia, along with commensurate declines in equityvalues for many ICT companies.

However, it is important to note that this decline inICT demand is broadly on par with that of previousU.S. recessions in recent decades (Baily, 2001). Thebusiness cycle is not dead, and the role of decliningICT investment demand in the current slowdown isnot markedly different from earlier slowdowns.

What about productivity growth during the slow-down of 2001? The annualized rate of productivitygrowth for all of 2001 was 1.9 percent. There arethree important points to makeabout this growth.

First, although productivitygrowth slowed in 2001, itremained well above the slowgrowth rates of the previous 1973-1995 generation. The 2001growth rate of 1.9 percent wasbelow the 1995-2000 growth rateof 2.54 percent, but was still wellabove the 1973-1995 growth rateof 1.35 percent.

Second, this slowdown in produc-tivity growth was entirelyconsistent with standard econom-ic models, in which productivitygrowth tends to slow around thepeaks of business cycles. This isbecause as output growth slows,firms tend to wait before respond-ing by reducing payrolls.17

Third, this slower growth rate in productivity wasstill higher than that of the previous three U.S.recessions. The Council of Economic Advisors(2002) reports that U.S. productivity growth sur-rounding the 2001 downturn was higher thanproductivity growth during each of the previous sixrecessions. This can be seen in Figure 4: productiv-ity growth was just under 1.2 percent during1990-1991, and was actually negative during reces-sions of 1980-1982 and 1974.

The length of the current economic slowdown, andits commensurate long-term effects on U.S. productivity, remain to be seen. But it is importantto emphasize that although productivity growthslowed during 2001, this slower growth was both aspredicted by economics and also was higher than productivity growth during earlier U.S. recessions and


FIGURE 7COMPUTER PRICES AND ICT INVESTMENT

BY MAJOR INDUSTRIES

Notes: ICT investment comprises computers and peripheral equipment, software, andcommunications equipment.

1979 1981 1983

20015

400

600

800

1,000

1,200

1,400

0

Chain-type index (1996 =100) Billions of chained 1996 dollars

Year

1985 1987 1989 1991 1993 1995 1997 1999

Price of computers andperipheral equipment

(left scale)Investment by wholesale

and retail trade(right scale)

Investment byfinancial services

(right scale)

Investment bymanufacturing

(right scale)

0

30

45

60

75

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M A I N S T A Y I V

during the slow-growth generationof 1973 to 1995.

F. Is There a Role forInternational Trade and Investment in ThisProductivity Resurgence?Some Initial Evidence

What role, if any, have internationaltrade and investment played inthis productivity resurgence in theUnited States? An initial answer isoffered by Chart B. For selectedyears since 1950, Chart B reportsthe sum of U.S. exports andimports as a share of U.S. output.For selected years since 1980, italso reports the sum of the stocksof outward and inward U.S. foreigndirect investment as a share ofU.S. output.18

In Chart B, this page, trade as a share of U.S. output has morethan quadrupled since 1950.What is particularly notable, however, is that thisshare rose by 6.4 percentage points from 1995 to2000 — a larger increase in just five years than wasrealized in any of the ten-year decades since 1950.

Foreign investment shows a similar pattern. Foreign-investment stocks as a share of U.S. output havebeen rising since 1980, but with a particularly sharprise over 1995 to 2000 of 5.4 percentage points thatis double the rise of the previous 15 years.

The key message is that the rising importance of tradeand foreign investment in the overall U.S. economyaccelerated from 1995 to 2000, commensurate withthe acceleration in U.S. productivity growth. At the same time that U.S. productivity has grown

at rates not seen for a generation, the country wasalso deepening its global trade and investment tiesat rates not seen for even longer periods.

Taken alone, the coincidence of these accelerationpatterns does not reveal exact causal links. Still, thepatterns are striking, and strongly suggest thatinternational trade and investment have playedsome important role in the U.S. productivity resur-gence. Subsequent chapters of Mainstay IV willdocument this important role in greater detail.


CHART BRISING FOREIGN TRADE AND INVESTMENT

FOR THE UNITED STATES

Notes: Foreign trade is the sum of U.S. exports plus imports. Foreign investment is the sum of out-ward plus inward U.S. foreign direct investment stocks. “N.A.” indicates data not available.

1950 1960 1970 1980 1990 1995 2000

0

5

30

10

15

20

25

Per

cen

t

Year

Foreign Trade as a Percentage of Output

Foreign Investment as a Percentage of Output

N.A. N.A. N.A.

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T E C H N O L O G Y - P R O D U C I N G I N D U S T R I E S

The end of Chapter 1 documented how the economy-wide productivity acceleration in the United Statesin recent years has coincided with an economy-wideacceleration in the level of U.S. trade and foreigndirect investment. This suggests a role for globaliza-tion in fostering the productivity gains. This, infact, has been the case: trade and American companieswith global operations are strongly linked withfaster productivity growth.

To see how U.S. trade and American companieswith global operations have fostered the recentstrong U.S. productivity growth, it helps to lookseparately at the two key drivers of productivitygains: the production and the use of ICT goods andservices. As Chapter 1 documented, the productionand use of ICT goods and services account for themajority of recent productivity gains. This chapterfocuses on ICT production, and leaves ICT use forthe next chapter.

Much of this chapter focuses on the ICT industriesof industrial machinery and electronic goods. Thisis both because almost all studies of U.S. produc-tivity growth cite these two industries as key ICTproducers, and because of data considerations. Datapermitting, specific ICT industries within these twowill also be highlighted, such as computers andoffice products and semiconductors.19

A. International Trade and the Production of ICT Goods and Services

To gauge the role of international trade in the production of ICT goods and services, a sensiblestarting point is to present trade flows for some spe-cific ICT industries. Take, for example, computers

Chapter Overview

O n many measures, the structure ofproduction in the central ICTindustries of machinery and elec-

tronic goods is very global — relative to thebroader economy and/or over time as well.Much of the output in these industriesentails multiple production stages acrossmultiple countries, all linked via trade andinvestment. The acceleration since 1995 inquality improvements and price declines inmany ICT products coincides with threemajor WTO agreements. The TRIPSAgreement, which came into effect in 1995and which aims to foster innovation andprotect intellectual property in all indus-tries, is of paramount importance for ICT producers. The 1997 InformationTechnology Agreement was a dramaticmove to eliminate all tariffs worldwide for awide array of ICT products, and therebystimulate innovation and competition. Andthe 1997 Basic TelecommunicationsAgreement liberalized world productionand investment in this key ICT serviceindustry. The correlation between these liberalizations and ICT performance isstriking, and strongly suggests a prominentrole for policy liberalization in explainingthe recent performance of ICT industries.

CHAPTER II

The Central Role of Trade and American Companies with Global Operations in the Production

of ICT Goods and Services


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and office products, and electronic components andaccessories (which includes items such as semicon-ductors and circuit boards). These two industriesrepresent some of the most high-profile ICT sectors.

Chart C, this page, reports current-dollar tradeflows in these two industries for three years span-ning most of the 1990s — 1992, 1996, and 2000.The bottom of Chart C also reports the share of economy-wide trade flows accounted for by these two industries.20

Over the 1990s exports in these industries have beenrising slightly more than the national total, such thattheir share of that total rose from 4.9 percent to 6.4percent. But a more striking feature of Chart C isthe even higher level of imports in these ICT indus-tries. Over the 1990s their national import shareranged from 8.0 percent to 10.6 percent. All thismeans that these two central ICT industries are sub-stantial net importers whose trade imbalance waswidening throughout the 1990s as import growthexceeded export growth. By 2000 this trade deficitwas $60 billion, fully 16.5 of the overall U.S. trade

deficit that year. For a similarlydefined group of ICT industries,the World Trade Organization(2001) reports that from 1990through 2000 U.S. exports grew at12 percent per year but U.S.imports grew at a faster 13 percentper year.21

Chart D, page 19, offers someadditional evidence on the tradeintensity of ICT industries,defined as trade flows as a share ofvalue-added output. For the year1994, Chart D shows exports,imports, and net exports, all as ashare of value-added output fortwo ICT industries — industrialmachinery and electronic goods —as well as for the overall economy.These two ICT industries arebroader than the ICT industries inChart C, with computers and

office products a major part of industrial machineryand electronic components and accessories a majorpart of electronic goods.22

The key message of Chart D is that ICT industriesare much more trade intensive than the overall U.S.economy. In these industries both exports andimports as a share of value added range between 40and 58 percent. These measures of trade intensityare four to over five times the trade intensity of theoverall U.S. economy, for which exports andimports are just above 10 percent of output. And asin Chart C, these ICT industries are substantial netimporters. Their trade deficit as a share of output isseveral times that of the overall economy.

Taken together, Charts C and D indicate that manyof the central ICT industries in the United Statesare much more trade-intensive than is the rest of theeconomy. Moreover, the high levels of exports inICT industries are matched by even higher levels ofimports, such that these industries are actually sub-stantial net importers.


CHART CINTERNATIONAL TRADE IN THE ICT INDUSTRIES

OVER THE 1990S

Industry Trade Quantity 1992 1996 2000

Computers & Exports 14,941 21,439 23,000Office Products Imports 21,783 39,306 50,150

Trade Balance -6,842 -17,867 -27,150

Electronic Exports 16,216 32,824 47,629 Components Imports 31,567 63,033 80,559

Trade Balance -15,351 -30,209 -32,930

Share of Economy Exports 4.9 6.2 6.4for Computers Imports 8.0 10.6 8.9

plus Elec. Comp.

Notes: Trade quantities for the two industries are reported in millions of current dollars. The shares of economy-wide trade accounted for by these two industries are reported as percentages. Trade balance is defined as exports minus imports.

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Have these ICT industries always displayed thesetrade patterns? Or are high trade intensities andtrade deficits relatively new? Answering these ques-tions might offer some insight about the overalleconomic performance of these industries, which,as Chapter 1 documented, became particularlyimportant during the 1990s.

To offer a longer-term perspective on ICT indus-tries beyond just the 1990s, Figures 8 through 11,pages 20-23, show trade data from 1958 through1994 for four important ICT industries: industrialmachinery; electronic goods; computers and officeproducts; and semiconductors. The data shown arethe same as in Chart D: exports, imports, and tradebalances, all as a share of value-added output.23

Trade patterns are broadly similar across these fourICT industries. Their imports and exports as a shareof value added have been high andrising for decades. In recent years,imports and exports have been atleast 50 percent of value added. Itis notable that in the 1960s and tosome extent into the 1970s, thetrade intensity of these industrieswas not much different from thatof the overall economy (as reportedin Chart B). Thereafter, however,the trade intensity of these indus-tries increased sharply, such thatby the 1990s trade intensity hadrisen far higher than in the broader economy.

Another notable feature of theseICT industries is the evolution oftheir trade-balance position. Inthe two decades up until around1980 these industries mostly rantrade surpluses, with exports mod-estly higher than imports. Thenaround 1980, import intensitybegan surging ahead of exportintensity. Trade surpluses swungsharply into trade deficits, such

that over most of the time after about 1980 these ICTindustries have been large and growing net importers.

These patterns show up most dramatically for thecore ICT industry of computers and office products,in Figure 10. In the 1960s and 1970s export intensitygrew steadily with basically unchanged importintensity. By 1980, this industry’s trade surpluspeaked at about 25 percent of value added. Shortlythereafter import intensity surged rapidly, far outpacing continued growth in export intensity. Bythe 1990s imports exceeded 100 percent of theindustry’s value added, and its trade deficit hadreached 50 percent of value added.

Figures 8 through 11 document clear changes in thetrade patterns for U.S. ICT industries startingaround 1980. One obvious question is what drovethe sharp rise in imports in these figures?


CHART DMEASURES OF TRADE INTENSITY

OF THE ICT INDUSTRIES

Notes: Cell entries report each industry’s relevant trade ratio for the year 1994, expressed in percentage terms. Trade balance is defined as exports minus imports.

Overall EconomyElectronicsMachinery

-20

-10

60

0

10

20

30

40

50

Per

cen

t

Industry

Exports/Output

Imports/Output

Balance/Output

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M A I N S T A Y I V

Figures 12 and 13, pages 24 and 25, suggest ananswer to this question. For two ICT industries,industrial machinery and computers and officeproducts, respectively, these figures plot for eachyear from 1958 through 1994 total industry purchases of intermediate inputs as a share of outputmeasured as total sales.24 The clear message of thesefigures is that inputs have been accounting for a risingshare of total output activity in these industries.This rising role for intermediate inputs was partic-ularly pronounced starting around 1980 — that is,around the same time at which imports startedsurging as well (as shown in Figures 8 through 11).

This coincidence of rising reliance on intermediateinputs with rising trade flows suggests that in recentyears many ICT industries have adapted a moreglobal structure in which multiple productionstages span multiple countries. In recent years, U.S.ICT firms appear to have focused on a finer set ofactivities within these industries, activities that arethen combined with other ICT activities performedabroad for making final goods and services.

The evidence thus far in these charts and figures onglobal production networks in ICT industries isonly suggestive. More-concrete evidence can begained by analyzing data on American companieswith global operations. Let’s now turn there.

B. American Companies with GlobalOperations and the Production of ICT Goods and Services

1. The Prominent Role in U.S. ICT Industries of the U.S. Parents of American Companieswith Global Operations

U.S.-government data on American companies withglobal operations can offer additional insight on theglobal production patterns of ICT industries. This isbecause detailed information is collected by theBureau of Economic Analysis (BEA) on both theU.S. and foreign operations of these firms, informationthat is not collected more broadly. Of course, howrepresentative data for these companies are of overall ICT industries depends on how promi-

nently the companies figure in these industries.

Chart E, page 26, offers some evidence on this. For two key ICTindustries, industrial machineryand electronic goods, it reportsthe share of total U.S. salesaccounted for by the sales ofgoods of U.S. parents ofAmerican companies with glob-al operations whose main line ofbusiness is in those industries.Shares are reported for 1982,1989, and 1996; similar sharesfor the rest of manufacturingother than these two ICT indus-tries are also reported.25

Over the 1980s and into the1990s, U.S. parents of Americancompanies with global opera-tions account for over 60 percent


19901960 1970 1980

-.1

0

.1

.2

.4

.5

.6

.3

Per

cen

t

Year

Exports as a Share of Output

Trade Balance as a Share of Output

Imports as a Share of Output

FIGURE 8TRADE INTENSITY IN MACHINERY

317889 7/25/02 12:55 PM Page 20


of total U.S. sales in these twoprominent ICT industries.Moreover, the importance ofthese industries has generallybeen rising over time. Inmachinery, this sales share rosefrom 54.8 percent in 1982 to62.2 percent in 1996. In elec-tronics, this sales share actuallydeclined over the 1980s, butsurged in the 1990s from 66.6percent to 77.6 percent. Thisprominent presence for U.S.parents in these industries is farlarger than the presence of U.S.parents in the rest of manufac-turing. The parent sales sharefor other manufacturing rosefrom 45.0 percent in 1982 to49.3 percent in 1996. Moreover,during the 1990s in the rest ofmanufacturing this share wasvirtually unchanged, while inthe two ICT industries it wasrising substantially.

All this suggests that American companies with globaloperations account for a sizable share of total U.S.ICT activity, a share which has been both rising overtime — particularly during the 1990s — and whichappears larger than in most other industries.

2. The Prominent Role of Foreign Affiliates in ICT American Companies with Global Operations

Having established that U.S. parents of Americancompanies with global operations account for a risingmajority of U.S. ICT activity, it is also of interest toknow how prominently foreign affiliates appear inthe worldwide activity of these firms. Do Americancompanies with global operations in ICT industrieslook more global than those in other industries interms of having affiliates account for a higher shareof firm-wide activity?

Data answering this question are in Chart F, page27. This reports the share of worldwide firm valueadded and employment accounted for by majority-owned foreign affiliates. These shares are reportedfor 1982, 1989, and 1997 for machinery, electronicgoods, and all industries together.26 Chart F showsthat in 1997, foreign affiliates in these central ICTindustries accounted for between 26 and 40 percentof worldwide firm value added and employment.These shares were generally rising by several percentage points over the 1980s and 1990s. Theyalso are uniformly higher by 1997 than for the broad economy, where the increases were generally smaller.

So not only do the U.S. parents of American com-panies with global operations account for a highand rising share of U.S. activity in central ICTindustries (Chart E), but within these firms in theseindustries a high and rising share of total activity is


19901960 1970 1980

Year


Trade Balance as a Share of OutputImports as a Share of Output

-.3

0

-.1

-.2

.1

.2

.4

.5

.6

.3

Per

cen

t

FIGURE 9TRADE INTENSITY IN ELECTRONICS

317889 7/25/02 12:55 PM Page 21

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accounted for by their foreign affiliates (Chart F).Together, these charts are broadly suggestive ofglobal production networks within these ICTindustries that are more extensive than elsewhere inthe economy.

It is also important to emphasize that for many producers of ICT products, foreign customers maybe served much more effectively through foreignaffiliates rather than through exports. This may beparticularly true for ICT services, many of whichrequire firms to interact on-site with customers.Affiliates of American companies with global oper-ations, then, can also figure prominently in terms ofserving foreign markets.

Chart G, page 28, demonstrates this predominanceof foreign-affiliate sales over U.S. exports for thekey ICT industries of computer services, data-processing and network services, and electronic-information services. For these industries, this chartreports both total foreign sales by majority-ownedaffiliates and total U.S. exports in three years overthe 1990s — 1992, 1994, and 1998.27 Affiliate saleswere about eight times larger than exports in 1992,and by 1998 this gap had grownto nearly 20 times. This showsthat for many ICT services, foreign affiliates have becomean increasingly important chan-nel for serving foreign markets.

Additional evidence of the globalstructure of production in ICTindustries is evident in data onthe trade flows of American com-panies with global operations.These data are presented next.

3. Global Production Networks in ICTIndustries: Evidence From Exports ofAmerican Companies with Global Operations

Section A of this chapter already documented thestrong export intensity of ICT industries. Are theseexports primarily of finished goods that go to finalcustomers, or of intermediate goods that receive fur-ther processing abroad? Global production networksmay make heavy use of this latter type of exports.Data on overall U.S. trade flows do not have thiskind of detail, however. But for the BEA, Americancompanies with global operations must periodicallydistinguish two types of exports from U.S. parentsto foreign affiliates: exports of intermediate goodsfor further processing, and exports of goods for finalsale. These exports for further processing are clearlyone sign of global production networks.

Chart H, page 29, documents that within ICTindustries the overwhelming majority of intra-firmexports are of intermediate goods for further pro-cessing. This chart reports the share of intermediategoods in total parent-to-affiliate exports (where


19901960 1970 1980-.6

0

-.3

.3

.6

.9

1.2

1.5

Year

Trade Balance as a Share of OutputImports as a Share of Output

Per

cen

t


FIGURE 10TRADE INTENSITY IN COMPUTERS

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these are majority-owned affiliates). Shares arereported for 1982 and 1994 for machinery, elec-tronic goods, and all industries other than thosetwo.28 Over these years, the machinery shares rosefrom 66.6 percent to 87.0 percent, while the elec-tronics shares rose from an even-higher 89.0 percentto 95.3 percent. These levels and increases weremuch higher than those for all other industriestogether, where the share of intermediates in totalexports was virtually unchanged at just over 44 percent.This evidence suggests that cross-border productionlinks are much more extensive in ICT industriesthan in the broader economy.

Exports figure prominently not just for U.S. parentsin ICT industries, but for their foreign affiliates aswell. Affiliates must periodically break out totalsales between sales within host countries and exportsales. These export sales are not further disaggregat-ed between intermediate and final goods, as inChart H, but are nonetheless consistent with theiroutput being part of global production networks.

Chart I, page 30, reports the share of exports intotal majority-owned affiliate sales for 1982, 1989,

and 1998 for machinery, electronic goods, and allindustries together.29 Over these years, the two ICTexport shares rose from just over 40 percent toabout 60 percent. The increases over the 1990s weremuch larger than over the 1980s. In contrast, overthis same period the export intensity of affiliatesacross all industries together remained unchanged.Thus, for all affiliates together about two-thirds ofsales are within the host-country markets, but forICT affiliates about three-fifths of sales are exportsout of these host countries. This much strongerexport intensity for ICT affiliates is further evi-dence consistent with international productionlinks being much more extensive in ICT industriesthan in the broader economy.

4. Global Production Networks in ICTIndustries: Evidence From Imports of American Companies with Global Operations

Exports of intermediate goods become, for recipi-ents of these exports, imports of intermediateinputs. So just as patterns of exports for Americancompanies with global operations can offer evidence

of global production networks, sotoo can the patterns of importsand intermediate purchases forthese companies.

Starting with a firm-wide per-spective on American companieswith global operations, Chart J,page 31, reports the share offirm-wide sales accounted for bypurchases of intermediate inputs.This share is reported for 1989and 1997 for machinery, elec-tronic goods, and all industriestogether.30 Over the 1990s firmsin both ICT industries haveincreased their reliance on pur-chased inputs as a share of totalsales by several percentagepoints. These large increasescontrast with just a two-percentagepoint increase for all


19901960 1970 1980Year

Trade Balance as a Share of Output

Imports as a Share of Output

-.3

0

-.2

-.1

.1

.2

.3

.4

.6

.7

.5

.8

Per

cen

t


FIGURE 11TRADE INTENSITY IN SEMICONDUCTORS

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industries taken together. ICT industries’ reliance onpurchased inputs thus rose from below to just about ator above the reliance of all industries together.

This worldwide evidence on rising input reliancefor American companies with global operations isconsistent with the U.S.-industry-wide evidence onrising-input reliance presented in Figures 12 and 13.But the data on American companies with globaloperations offer additional evidence on the use ofimported versus domestically sourced inputs, whichthe U.S.-industry-wide data cannot.

Chart K, page 32, documents reliance on importedintermediate inputs separately for U.S. parents andfor majority-owned foreign affiliates. For parents,imported intermediate inputs as a share of total par-ent sales is reported for 1989 and 1997 for machinery,electronic goods, and all industries together. For affil-iates, U.S.-sourced intermediate inputs as a share oftotal affiliate sales is analogously reported.31

In both years, U.S. parents in ICT industries reliedmore on imported intermediate inputs than did allindustries together. Moreover, the increase in thisreliance over the 1990s was larger for these ICT

industries as well (three percentage points in the ICTsectors versus one for all industries). As was docu-mented in Mainstay III, Chart K shows that thelarge majority of parent input purchases come fromdomestic sources, not foreign ones. That said,reliance on imported inputs is higher and growingmore for the ICT industries than in the overall econ-omy. Affiliates show a similar picture. In both years,ICT affiliates — especially in electronic goods —depended more heavily on U.S. inputs than didaffiliates in all industries together. And the changeover the 1990s in this dependence was at least as bigin the ICT affiliates as it was for in all affiliates.

Thus, in central ICT sectors both parents and affili-ates are increasingly dependent on importedintermediate inputs. The shares of these inputs intotal sales have been rising over time, and are higherthan the comparable shares for the broader economy.

Taken altogether, the data in this chapter’s Section Bon the business practices of American companieswith global operations offer clear evidence of theglobal nature of production in many ICT industries.In these industries, much production appears to takethe form of cross-country networks in which goods

and services are produced viamultiple activity stages acrossmultiple countries.

All the evidence from SectionsA and B on the role of interna-tional trade and investment forthe production of ICT goodsand services is put into contextin this chapter’s next section,which discusses the economicsof how trade and investmentfoster worldwide production inICT industries.


.42

.44

.46

.48

.5

Per

cen

t

1960 1970 1980 1990

Year

FIGURE 12FIGURE 12INTERMEDIATE INPUTS AS A SHARE OF

OUTPUT IN MACHINERY

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C. The Economics of How InternationalTrade and Investment Foster theProduction of ICT Goods and Services

One of the striking facts from Sections A and B ofthis chapter is that many key ICT industries run substantial trade deficits, not trade surpluses. Recallfrom Figures 8 through 11 that these trade deficitsemerged around the early 1980s, after decades inwhich these industries ran trade surpluses.

These trade deficits might seem puzzling in light ofstandard economic theory. Economists’ standardmodels of international trade predict that a countrytends to run trade surpluses in industries in whichit has a comparative advantage, i.e., in which it is anefficient producer relative to the rest of the world.That same country tends to run trade deficits inindustries in which it has a comparative disadvantage,i.e., in which it is an inefficient producer relative tothe rest of the world.

Following this logic, the data presented earlier inChapter 2 would seem to indicate that the UnitedStates has a weak position rel-ative to the rest of the worldin many central ICT indus-tries — with that weaknessgrowing over time and espe-cially throughout the 1990s.But surely this contradicts theevidence from Chapter 1 thatU.S. ICT industries are globalleaders driving much of thestrong U.S. economic per-formance in recent years. Ifthese ICT industries truly aresources of strength for theU.S. economy, then why havethey become ever-increasingnet importers?

The answer to this question isthat standard models of inter-national trade do not accountfor the rise of global produc-

tion networks within industries. These models typ-ically assume that each industry is located entirelywithin a country and produced using only thatcountry’s resources. This assumption may have char-acterized U.S. ICT production reasonably well inearlier decades. But as this chapter has shown, thereis ample evidence that this assumption is way off themark for ICT production today. Instead, global ICTproduction appears to be one in which goods andservices are produced via multiple activity stagesacross multiple countries. Production for eachindustry is thus located in many countries, not one.

With this production structure, patterns of com-parative advantage do not show up across industries,as economic theory typically assumes. Instead pat-terns of comparative advantage show up withinindustries, as the range of activities within thoseindustries spreads across countries in global produc-tion chains. The fact that broad ICT industries runtrade deficits is not a signal of U.S. weakness inthese industries. It is instead a signal of U.S.strength whereby the United States combines itsICT activities with those of the rest of the world.32


.3

.4

.5

.6

Per

cen

t

1960 1970 1980 1990Year

FIGURE 13INTERMEDIATE INPUTS AS A SHARE OF

OUTPUT IN COMPUTERS

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What ingredients are required forthis kind of global productionstructure within an industry?There are at least three mainrequirements. One is that theindustry consist of separablestages of production of differingfactor intensities that can be mostefficiently performed in differentcountries with different strengthsand factor costs. A second is lowtrade barriers, lest the efficiencygains of separating productionstages across countries be dissipat-ed through the necessary multipleborder crossings of intermediateproducts. And a third require-ment is low barriers to foreigndirect investment: relocating pro-duction stages out of the UnitedStates, for example, may be bestdone (although not necessarily)through the foreign affiliates ofAmerican companies with globaloperations. A clear discussion ofthe economics here is Feenstra(1998), who emphasizes how the“integration of trade” fosters the“disintegration of production.”

Do ICT industries meet theserequirements? Consider each in turn. There is sub-stantial evidence that many ICT industries involveproduction stages of very different factor intensities.Activities intensive in more-skilled labor and/orcapital include research and development (R&D),prototype production, and management servicessuch as supply-chain management and marketing.Activities intensive in less-skilled labor includecomponent assembly and packaging. Thus, theunderlying nature of many ICT industries appearsto have different stages with different factor intensi-ties. This should allow countries like the UnitedStates, which are abundant in more-skilled laborand capital relative to most of the world, to focus onICT activities like R&D and high-end production.What about barriers to trade and international

investment? One important kind of barrier are the“natural” barriers of information and transportationcosts. These surely have been declining in recentdecades — thanks in significant part to the inven-tion of new ICT products such as fax machines,email, and electronic data networks that are aimedprecisely at reducing information and coordinationcosts for businesses (as well as increasing trade flowsgenerally). These new products reduce natural barriers to trade and investment for all industries, aswill be discussed in Chapter 3 in the context of firmsusing ICT products. But there is strong reason tosuppose that the ICT firms actually inventing theseproducts would be among the first to implementthem effectively in international commerce.


CHART ETHE SHARE OF U.S. SALES IN ICT INDUSTRIES

ACCOUNTED FOR BY U.S. PARENTS OFAMERICAN COMPANIES WITH GLOBAL OPERATIONS

Notes: Cell entries report the share (in percentage terms) of each industry’s U.S. sales accountedfor by the sale of goods of American companies with global operations whose main line of business is that relevant industry. Other Manufacturing is all manufacturing lessmachinery and electronics.

Other ManufacturingElectronicsMachinery

Industry

1982

1989

1996

0

10

80

20

30

40

50

60

70

Per

cen

t

317889 7/25/02 4:15 AM Page 26


This leaves “political” barriers to trade and invest-ment: tariffs, non-tariff barriers, and the like. Havethese been declining in recent decades? The generalanswer is “yes,” thanks to bilateral and multilateralnegotiations on many fronts.

More than this general pattern, however, thereappears to have been a dramatic role played by policy liberalization in ICT industries in the crucialperiod of the 1990s. The next sub-section addressesthis in detail.

D. The Contribution of Policy Liberalization tothe Production of ICT Goods and Services

The preceding discussion suggests that policy liber-alizations in trade and/or foreign direct investmentrelated to ICT industries should stimulate globalproduction activity in these industries. As Chapter 1presented, since the mid-1990s, the pace of activityin U.S. ICT industries has picked up dramatically,with technology innovations in terms of price

declines and quality improvements accounting forapproximately one-third of the overall accelerationin U.S. productivity.

This raises the question of whether there have beenany such policy liberalizations that arguably wouldhave contributed to the recent progress in ICT production. The short answer is an emphatic “yes.”

The acceleration since 1995 in quality improvementsand price declines in many U.S. ICT industries coincides with three major WTO agreements. TheTRIPS Agreement, which came into effect in 1995and which aims to foster innovation and protectintellectual property in all industries, has been ofparamount importance for ICT producers. The1997 Information Technology Agreement was adramatic move to eliminate all tariffs worldwide fora wide array of ICT products, and thereby stimulateinnovation and competition. And the 1997 BasicTelecommunications Agreement liberalized worldproduction and investment in this key ICT service


CHART FTHE SHARE OF WORLDWIDE ACTIVITY OF AMERICAN COMPANIES WITH

GLOBAL OPERATIONS ACCOUNTED FOR BY FOREIGN AFFILIATES

Notes: Cell entries report the share (in percentage terms) of worldwide activity of American companies with global operations accounted for by foreignaffiliates (where data are available for majority-owned affiliates only).

All IndustriesElectronicsMachineryIndustry

198219891997

Value–Added data

0

5

40

10

15

20

25

30

35

Per

cen

t


198219891997

employment data

0

5

40

10

15

20

25

30

35

Per

cen

t

317889 7/25/02 4:15 AM Page 27

M A I N S T A Y I V

industry. The correlation between these liberalizationsand ICT performance is striking, and strongly suggestsa prominent role for policy liberalization in explain-ing the recent performance of ICT industries in termsof both innovation and price declines. It is instructiveto address each agreement in turn.33

1. The WTO Agreement on Trade-RelatedAspects of Intellectual Property Rights

The WTO Agreement on Trade-Related Aspects ofIntellectual-Property Rights (TRIPS) committed signatory countries to enact and enforce laws pro-tecting all forms of intellectual property such ascopyrights, patents, and trademarks. Negotiated inthe WTO’s Uruguay Round and coming into effectat the start of 1995, the Agreementhad three main features.

First, it set out minimum stan-dards of protection — includingsubject matter to be protected,rights conferred, and duration —that each member country mustestablish for a wide range of intel-lectual-property areas. Includedwere copyrights, trademarks, geo-graphical indications, patents,trade secrets, and — notably forthis chapter — an entire sectionon integrated circuit designs. Thesecond set of provisions addressedenforcement of these standards.Here, methods were establishedfor domestic procedures andremedies for enforcement. Third,it provided that disputes wouldfall under the purview of thenewly established WTO dispute-settlement procedures. Overarchingall these features were the basic WTOprinciples of national and most-favored-nation treatment.

The overarching goal of the TRIPSAgreement was to strengthenworld recognition of intellectual-

property rights and thereby reduce the trade imped-iments arising from violation of these rights. TheAgreement took effect at the start of 1995, withdeveloped countries given just one year to ensurecompliance, developing countries five years, andleast-developed countries 11 years.

It is widely believed that this Agreement has grant-ed firms in all industries more incentive to createand proliferate new ideas. But this incentive willsurely have been sharper in intellectual-property-intensive industries — among which ICTindustries figure prominently. And within theseICT industries, the R&D and other intellectual-property-related activities tend to occur in countriesthat are relatively abundant in the necessary scien-


CHART GTHE RELATIVE IMPORTANCE FOR ICT SERVICESINDUSTRIES OF U.S. EXPORTS VERSUS SALES BY

FOREIGN AFFILIATES OF AMERICAN COMPANIES WITH GLOBAL OPERATIONS

Notes: Cell entries report the value of either total U.S. exports or total affiliate sales, in millions of current dollars, for the ICT industries of computer services, data-processingand network services, and electronic-information services (where data cover majority-owned affiliates only).

199819941992Year

U.S. Exports

Affiliate Sales

0

10,000

80,000

20,000

30,000

40,000

50,000

60,000

70,000

Mil

lion

s of

Dol

lars

317889 7/25/02 4:15 AM Page 28


tists and other forms of more-skilled labor — i.e., countries likethe United States.

All this suggests that with the entryinto force and implementation ofthe TRIPS Agreement, U.S. ICTindustries should have boosted theirinnovation and invention. What isnotable is that the implementation ofthe TRIPS Agreement has coincidedwith the U.S. acceleration in the rateof technological progress and innova-tion in the production of ICT goodsand services. As documented earlierin Chapter 1 (Figures 5 and 6),since the mid-1990s, U.S. researchand development spending by ICTfirms has accelerated, both relativeto the past and relative to the broad-er economy. And the number ofICT patents granted has also risen.

2. The WTO InformationTechnology Agreement

The WTO Information Techno-logy Agreement (ITA) committed signatory countries to eliminate alltariffs on a wide range of nearly 200 ICT products.These cover both finished and intermediate goodsincluding computers and networking and peripheralequipment; circuit boards and other passive/activecomponents; semiconductors and their manufac-turing equipment; software products and media;and telecommunications equipment.

The original Ministerial Declaration on Trade inInformation Technology Products was concluded inDecember 1996 at the first WTO Ministerial inSingapore. This declaration stipulated that for theITA to take effect, signatory countries would haveto collectively represent at least 90 percent of worldtrade in the covered products. The 29 original sig-natories accounted for only about 83 percent ofcovered trade. But by April 1997 many more coun-tries had signed on to push the share over 90 percent,

and the agreement entered into force in July 1997.As of this writing there are more than 50 ITA signatories that account for more than 95 percent ofworld trade in the covered ITA products.

All ITA signatories agreed to reduce to zero theirtariffs for all covered ITA products in four equal-rate reductions starting in 1997 and ending no laterthan the start of 2000. Some developing countrieswere granted permission to extend rate cuts beyond2000, but no later than 2005. Also, an ITA ReviewCommittee was established to monitor compliance.This committee has overseen a formal reviewprocess for non-tariff barriers, but no binding com-mitments were made regarding these. It has alsooverseen regular discussions about expanding thelist of covered products to keep pace with industrydevelopments. These discussions have been ongoing


CHART HTHE SHARE OF TOTAL EXPORTS FROM U.S. PARENTS TO THEIR FOREIGN AFFILIATES ACCOUNTED FOR

BY EXPORTS OF INTERMEDIATE GOODS FOR FURTHER PROCESSING

Notes: Cell entries report the share (in percentage terms) of each industry’s U.S. parent exports to foreign affiliates accounted for by exports of intermediate goods that receive further processing abroad. Other Industries is all industries less machinery and electronics.

0Other IndustriesElectronicsMachinery

20

100

40

60

80

Industry

1982

1994

Per

cen

t

317889 7/25/02 4:15 AM Page 29

M A I N S T A Y I V

since late 1997, but no formalagreements have been reached.

The overarching goal of the ITAwas to eliminate world tariffs in awide range of ICT products.Thanks to the number and com-mitment of signatory countries, ithas virtually achieved that goal.What does economic theory pre-dict to be the impact of thisagreement? Such a sweeping liber-alization should be expected tohave two big effects.

First, the ITA should have been apowerful force for reducing theworld price of ICT products. Pricesshould tend to fall for a number ofreasons: by forcing firms to pricemore competitively in response tothe reduced trade protection; byreducing costs in existing interna-tional production networks withmultiple stages in multiple coun-tries; and by facilitating the creationof newer, less-costly productionnetworks as well.

Second, the ITA also should have stimulated theinnovative activity of ICT producers. There are twoimportant reasons for this. First, greater product-market competition and exposure to worldwide “bestpractices” through international trade and otherforms of global engagement induce firms to innovateto improve productivity and overall firm perform-ance. There is now a large and growing body ofevidence on how international competition spursinnovation. Nobel Laureate Robert Solow andMartin Baily (2001, p. 167) argue that a wide rangeof firm- and industry-level evidence for manufacturing“is consistent with the view that the more a givenmanufacturing industry is exposed to the world’sbest-practice high-productivity industry, the higher isits relative productivity… Competition with the pro-ductivity leader encourages higher productivity.”34

The second channel by which the ITA may havestimulated innovation is a market-size story. To theextent that innovation is costly for firms, the oppor-tunity granted by liberalization to sell the fruits ofthat innovation more freely in a larger world mar-ket boosts the incentives for innovation.35 Largerglobal markets can be particularly important forinnovation in the many ICT products that enjoynetwork effects, whereby the value of these productsto each user rises the more total users there are.

Theory, then, predicts that the ITA should havebeen a force for lower prices and greater innovationin ICT industries. What is notable is that the imple-mentation of the ITA from 1997 to 2000 coincidedwith the U.S. acceleration in ICT sectors both in therate of technological innovation and in the rate ofquality-adjusted price declines. As documented earlier


CHART ITHE SHARE OF TOTAL SALES BY FOREIGN AFFILIATES

ACCOUNTED FOR BY EXPORTS OUT OFTHE HOST COUNTRIES

Notes: Cell entries report the share (in percentage terms) of each industry’s affiliate sales accounted for export sales out of the host country (where data are available for majority-owned affiliates only).


1982

1989

1998

0

10

80

20

30

40

50

60

70

Per

cen

t

317889 7/25/02 4:15 AM Page 30


in Chapter 1, since the mid-1990s, U.S. researchand development spending by ICT firms has accel-erated, both relative to the past and relative to thebroader economy. The number of ICT patentsgranted has risen. And quality-adjusted pricedeclines for central ICT products accelerated toabout twice their earlier pace.

Further supportive evidence of the ITA’s effect onICT prices comes from earlier episodes where tradeprotection in certain ICT products slowed pricedeclines. Grimm (1998) reports statistical evidencethat quality-adjusted prices for U.S. semiconduc-tors fell less slowly during the late 1980s when theU.S.-Japan Semiconductor Trade Agreement waswidely believed to be inhibiting price declines.Similarly, Luzio and Greenstein (1995) find thatquality-adjusted personal-computer prices in Brazilfell more slowly than in the UnitedStates when Brazil protecteddomestic computer producersduring the 1980s — but thatBrazilian price declines acceleratedsharply after trade liberalizationstarting in 1990.

3. The WTO BasicTelecommunicationsAgreement

The WTO Basic Telecommunica-tions Agreement (BTA) committedsignatory countries to liberalizetheir domestic markets for a widerange of telecommunications services including voice telephony,data transmission, telex, telegraph, facsimile, satellite services, cellulartelephony, paging, and personalcommunications systems. Theoriginal ministerial declaration forthe BTA was concluded inFebruary 1997 with commitmentsfrom 69 governments that accountfor over 90 percent of worldtelecommunications revenue.

Today there are over 100 participating countriesthat account for over 95 percent of world telecoms revenue.

The BTA had three main components. First was theagreement to guarantee market access for telecom-munications providers through any networkingtechnology. Second was the agreement to dramati-cally liberalize FDI rules in the covered industries.Nearly all signatories agreed to allow full foreignownership of national telecoms operations. Thirdwas the adoption of a pro-competitive regulatorystructure. This structure was outlined in aReference Paper to which signatories agreed, andcovers issues such as competition safeguards, inter-connection guarantees, licensing rules, and theindependence of regulators.36


CHART JTHE SHARE OF WORLDWIDE ACTIVITY OF

AMERICAN COMPANIES WITH GLOBAL OPERATIONSACCOUNTED FOR BY INTERMEDIATE-INPUT

PURCHASES

Notes: Cell entries report the share (in percentage terms) of worldwide sales of American companies with global operations accounted for by input purchases (where data are available for majority-owned affiliates only).

0All IndustriesElectronicsMachinery

80

60

50

40

70

30

20

10

Industry

1989

1997

Per

cen

t

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The BTA grew out of the WTO’s Uruguay Roundagreements on trade in services. Telecoms negotia-tions started during the Uruguay Round, butcontinued after it ended in 1994, in part building onthe unilateral domestic telecoms reforms manycountries were undertaking (including the UnitedStates). The majority of BTA signatories agreed toinitiate liberalizations by the start of 1998. Manyadvanced countries agreed to implement all majorreforms by that starting date. Other countries adoptedlonger periods to phase in parts of agreements.

The overarching goal of the BTA was to stimulateinternational competition in a wide range oftelecommunications industries. Thanks to thenumber and commitment of signatory countries, ithas made significant progress towards that goal.

What does economics predict to be the impact ofthis agreement? Like the ITA, the BTA should havebeen a powerful force reducing the price oftelecommunications services thanks to greater com-

petition among producers. And the BTA, again likethe ITA, should also have stimulated innovationamong telecommunications producers thanks tocompetition and market-size effects.

Theory, then, predicts that the BTA should havebeen a force for lower prices and greater innovationin telecommunications services. What is notable isthat the implementation of the BTA since 1997 hascoincided with dramatic growth in the United Statesin this important ICT industry. Evidence on thisgrowth has been presented earlier in this chapterand also Chapter 1. Additional evidence will appearin Chapter 3, not just in terms of this industry’sproduction of an important ICT service but also interms of its use of other ICT goods.

In concluding this sub-section, two comments areimportant to make. The first is that these threeagreements — TRIPS, ITA, and BTA — built multilateral frameworks in part on the success ofearlier bilateral and unilateral liberalizations. For


CHART KU.S. PARENT AND FOREIGN-AFFILIATE RELIANCE ON

IMPORTED INTERMEDIATE INPUTS

Notes: Cell entries for U.S. parents report the share (in percentage terms) of their total sales accounted for by imported intermediate inputs. Cell entries for foreign affiliates report the share (in percentage terms) of their total sales accounted for by intermediate inputs imported from the United States(where data are available for majority-owned affiliates only).


19891997

U.S. Parents

0

15

12

9

6

3

Per

cen

t

All IndustriesElectronicsMachinery

Industry

19891997

Foreign Affiliates

0

25

20

15

10

5

Per

cen

t

317889 7/25/02 4:15 AM Page 32


example, before the ITA many countries had low-ered ICT trade barriers alone or in agreement witha small number of other countries. And the same istrue of the BTA: the United States, for example,had passed sweeping domestic telecommunicationsliberalization just a year earlier. The major new liberalizations of these agreements, therefore, arebest seen as multilateral expansions of earlier more-piecemeal liberalizations rather than as completelynew liberalizations in previously static areas.

The second comment is that the acceleration post-1995 of innovations and quality-adjusted pricedeclines in U.S. ICT industries were gains almostsurely driven by many forces. That said, it is notablethat these gains coincided with three major world-wide policy liberalizations that strengthenedintellectual-property protection and eliminatedtrade and investment barriers for ICT industries.While other factors are certainlyrelevant, it strongly appears thatthe TRIPS Agreement, the ITA,and the BTA were importantforces stimulating the pricedeclines in U.S. ICT industriespost-1995.

E. The ComplementarityBetween Foreign and U.S. Production of ICT Goods and Services

There is one important final pointto make in this chapter on the pro-duction of ICT goods and services.This is the point that in ICTindustries, increased trade and FDIhas tended to complement U.S.activity in these industries, notsubstitute for it.

This issue of complementarity ver-sus substitutability was a centralfocus of Mainstay III, as men-

tioned in the Preface to this report. In Mainstay IIIa wide range of evidence — academic research, dataon American companies with global operations,and corporate case studies — demonstrated thatU.S. FDI generally complements U.S. parent activity.The economic linkages between parents and affili-ates involve far more than the simple assumptionthat activities across the two necessarily substitutefor each other. Within American companies withglobal operations, affiliate expansion generally triggers in U.S. parents additional investment,research and development, and trade — all activitieswhich help maintain high U.S. living standards.

The findings of this chapter underscore this com-plementarity finding. The strength of U.S. ICTindustries in recent years has been largely because oftheir global engagement, not in spite of it.Improvements in the production of ICT goods and


FIGURE 14RISING U.S. EMPLOYMENT IN

ICT SERVICES INDUSTRIES

Notes: ICT services industries comprise computer and data processing services andcommunications services.

2.4

2.0

2.8

3.2

3.6

4.0

Mil

lion

s

19921990 1994 1996 1998 2000

Year

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M A I N S T A Y I V

services, which account for a sub-stantial fraction of rising U.S.living standards in recent years,owe much to trade, FDI, and thetendency for these foreign activi-ties to support U.S. activities aswell. Indeed, there is strong reasonto suppose that measures to limitthe trade and investment activitiesof U.S. ICT firms would haveweakened them, not strengthenedthem.

Figure 14, page 33, presents astrong image of this complemen-tarity. Taken from the 2001Economic Report of the President, itplots U.S. employment over the1990s in a wide group of ICTservices industries.37 Employmentgrew by about 15 percent over thefirst half of the decade, and thenby an even more-rapid 50 percentover the second half.

Chart L, this page, presents aneven broader view of this comple-mentarity by reporting 1990s employment growthfor both ICT services and ICT goods industriescombined.38 Total ICT employment grew by600,000 in the first four years, but then by an evenlarger 700,000 in the next two.

This high and rising employment growth for theseICT industries came hand in hand with their highand rising global engagement documented in thischapter. This is strong evidence that the globaloperations of these industries complemented, ratherthan substituted for, their U.S. operations.39

F. Corporate Case Studies on the Production of ICT Goods and Services

This chapter’s discussion of academic studies anddata on trade and American companies with globaloperations has maintained a comprehensive focus ofindustries and the entire economy. To complementthis aggregate evidence, this chapter closes by narrowing the focus to individual firms.

Two ECAT member companies, AgilentTechnologies and AOL Time Warner, provide con-crete examples of how their production of ICT goodsand services relies heavily on their international tradeand investments — and of how all this internationalactivity tends to boost U.S. activity as well.


CHART LRISING U.S. EMPLOYMENT IN

ICT GOODS AND SERVICES INDUSTRIES

Notes: Each cell reports total U.S. employment (in millions) in ICT-producing industries — both goods and services (see text for details).

19981994 19961992Year

0

1

5

2

4

3

6

Mil

lion

s

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Case Study: Agilent Technologies



This case study offers a detailed look at how the manufacture of a central information and com-munication technology (ICT) product — testingequipment for cellular phones — involvesextensive international trade and foreign direct investment.

Agilent Technologies, Inc. is a global, diversifiedtechnology company focusing on high-growthmarkets in the communications, electronics,and life sciences. Headquartered in Palo Alto,California, Agilent’s 43,000 employees servemarket-leading customers in more than 120countries. More than half of the company’s netrevenue is derived from outside the UnitedStates, and the company maintains facilities in40 countries.

In the year 2000, more than 400 million cellular-phone handsets were produced worldwide, and industry forecasts project onebillion subscribers by the end of 2002. A cellphone is essentially a radio device — a trans-ceiver with the capability to send and receiveinformation via radio waves. Before any cellphone can be sold to a customer, however, it hasto be tested to ensure its reliability for all itsbasic and special features. A lot of this testing isdone on the factory floor of major cell phoneproducers — Nokia, Samsung, or LG (Korea)— as a step in the overall handset assembly.

One of the main instruments used in the quality-assurance process is called a radio-frequency (RF) test set. This instrument— approximately the size of a stereo tuner —tests the cell phone before it leaves the factoryby plugging the cell phone into the RF test set.An example of the tests performed is Specific

Absorption Radiation (SAR). Manufacturersneed to assure customers that they are not beingsubjected to excessive amounts of radiated RFpower, which have been associated with adverse,long-term health effects.

Agilent is the leading worldwide supplier of RFtest sets. On every cell phone technology in usetoday (e.g., CDMA, GSM, TDMA, PCS, etc.),the majority of the handsets is tested on Agilentproducts. Each Agilent RF test set sells forabout $70,000. This price reflects the sophisti-cated hardware and software that comprise thisproduct. It is extremely fast and the quick, reli-able tests it performs allow customers to speedup their factory-floor volume tremendously. Forexample, Agilent’s RF test set makes extremelyfast and accurate radiated-power measurementsfor SAR, to allow manufacturers to make hand-sets that work well with a minimum ofradiation emissions.

Agilent’s production and sales of its RF testsets rely heavily on the company’s trade andFDI practices. Research and development,production, and sourcing of inputs are allstages of the overall production process thatare very international.

Agilent designs and tests these devices at an“initial manufacturing center” in Spokane,Washington. Here prototypes of test sets —both hardware and related software — areresearched, designed, created, tested, and

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Case Study: Agilent Technologies (continued)

M A I N S T A Y I V


refined by scores of engineers and other highly-skilled workers. This is an ongoing process.Different test sets and software are required fordifferent wireless technologies, and as thesetechnologies continually evolve (e.g., the emer-gence of a variety of third-generationstandards), test sets must keep up. The develop-ment process involves close collaboration withwireless manufacturers around the world, tostay current on technologies and scientificbreakthroughs. In many cases, Agilent test tech-nology enables the development of themanufacturers’ most innovative new products.

Once a prototype test set has proven to be tech-nologically and economically feasible, volumeproduction moves to Agilent’s facility in SouthQueensferry, Scotland. Concentrating world-wide production of this instrument inQueensferry allows Agilent to realize sizablecost savings via scale economies, as well as to becloser to key wireless customers outside theUnited States to whom the finished instrumentsare then exported.

Agilent relies on both locally produced andimported intermediate inputs for itsQueensferry operations. The sourcing of inputsused in high-tech products is changing rapidly.Whereas Agilent’s supply base once was princi-pally the United States, Agilent now procures allover the globe from a rapidly consolidating andshifting international base. For example,Agilent’s displays are sourced from Japan; partswith a high level of intellectual property such assemiconductors typically come from the UnitedStates; and connectors come from Mexico.Agilent in South Queensferry is using a partic-ular part made by a U.S. company that is

manufactured in Florida. It is not unusual foran electronic part to originate in one countryand proceed to two or three more around theglobe before it is finished. One particular inte-grated circuit used by Agilent begins its life in aEuropean wafer fabrication factory, goes to Asiafor its package (i.e., the tiny case that enclosesit), and may be tested on yet another continent.As one Agilent global procurement managerput it recently, “We chase parts wherever we canfind them, especially key parts such as thoseused in optics products.”

Agilent employees who source inputs must keepabreast even of developments that might affectthe supply of raw materials for those inputs. Forexample, tantalum is a key element used in elec-tronic capacitors, tiny components found invirtually every electronic product imaginable,not just state-of-the-art instruments like RF testsets. This element is mined in Australia andSouth Africa, and is then refined into a powderused to make capacitors. In summer of 2000,for various reasons the worldwide demand fortantalum capacitors spiked. As a result, Agilent’sglobal procurement department started track-ing spot-market prices for tantalum powder.

Overall, Agilent’s development and productionof RF test sets is truly a global endeavor forwhich both exports and imports are crucial andfor which operations in Spokane andQueensferry are complementary: more develop-ment in Spokane means more production inQueensferry, and vice versa. To quote the pro-curement manager, “The global supply chainhas so many links. It’s all interconnected. If anyone link breaks, we’re in trouble.”

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Case Study: AOL Time Warner



This case study provides a good example of howa producer of information and communicationtechnology — in this case, internet services —uses foreign direct investment (FDI) to reachcustomers worldwide, and of how this FDItends to complement U.S. activity as well.

AOL Time Warner is the world’s first Internet-powered media and communications company,whose leading businesses include interactiveservices, cable systems, publishing, music, networks and filmed entertainment.Headquartered in New York, it employs over70,000 people in 15 countries. AOL is theworld’s largest traditional Internet-servicesprovider (ISP), with over 30 million membersworldwide. The company is committed to theexpansion of information and communicationtechnologies, both in the United States andabroad. This rapid growth has been driven byboth significant investment in foreign marketsand the promotion of technologies which con-tribute to the growth of the online medium. Aprime example of this is the company’s recentFDI in Japan, which is aimed at expanding itsengagement of this crucial market.

Japan is the second-largest economy in theworld. Despite the country’s ongoing macro-economic difficulties of the past decade, itspopulation remains one of the most technolog-ically sophisticated in the world. Japan has theworld’s largest wireless Internet penetration,and may soon boast the world’s largest broad-band internet penetration. Japan also leads theworld in advanced consumer electronics,including advanced high-definition TV. Japanpossesses a large and growing personal-comput-er and Internet market — with the interesting

distinction of more wireless internet users thantraditional PC-based fixed-line users. Clearly,the Japanese market for ISP services is an attrac-tive one for AOL. Commensurate with theoverall size of the Japanese economy, AOLthinks Japan should be its second-largest marketworldwide. But at present it is not.

To enter the Japanese market initially, in 1997,AOL formed a joint venture with Mitsui andNikkei. In 2000 a new partner, NTTDoCoMo, entered into the shareholder group.Today AOL and DoCoMo are the majorityshareholders in this joint venture (withDoCoMo holding the largest stake, at about42%), and as such are funding its ongoing oper-ations. Last year each agreed to inject about$100 million into the business.

AOL has found this kind of joint venture to bea highly effective way to access foreign markets:its capital requirements are lower than would befor fully owned foreign investments, and theopportunity for local partners to team withAOL’s business strengths through joint venturescreates strong incentives for these partners todeliver strong business results. In the specificcase of Japan, DoCoMo brought into the jointventure its position as the world’s largest wire-less Internet provider — the DoCoMo iModeservice today boasts over 26 million users.Matching this large subscriber base and distri-bution network with AOL’s Internet-contentservices is expected to enable AOL to greatlyexpand its Japanese presence.

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Case Study: AOL Time Warner (continued)

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It is important to emphasize that AOL’s foreigninvestments tend to increase the company’sbusiness activity back in the United States aswell. Through its foreign operations and part-ners, AOL learns new marketing and businesstechniques that can be implemented firm-wide.Also, AOL sells technology services and hostingservices to its foreign partners. As many ofthese services are developed in AOL’s U.S. oper-ations, more joint-venture activity tends tostimulate more U.S. activity as well. AOL cur-rently hosts all of its worldwide Internetoperations in northern Virginia (USA). Thisgives AOL a great cost benefit on hosting versuslocal competitors, as countries around theglobe, in different time zones, with shiftingbusy (high load) periods, all share the same cen-tral host complex. With a single host complex,the high fixed cost of this operation is sharedover millions of users around the planet. Andfrom the standpoint of U.S.-foreign comple-mentarity, more foreign users gained throughjoint ventures means more activity in AOL’sVirginia operations.

AOL’s global operations also benefit insofar asjoint ventures help reduce procurement costs.More joint-venture activity means more totalAOL volume for a range of procured productsand services, which can translate into lowerfirm-wide costs. For example, AOL Japan canobtain CD-ROMs, used to propagate its ISP-access software, at preferred rates when it poolsits demand with that of the larger U.S. market.

AOL has found this joint-venture approach ofservicing foreign markets to be highly effective,and has followed this strategy in many othermarkets. In AOL Latin America, the companyhas teamed with Grupo Cisneros and BancoItau. In AOL Canada, AOL and Royal Bankare partners. In Australia, AOL is partneredwith AAPT, a wireless operator. And in China,AOL has formed a partnership with LegendHoldings, the country’s leading PC manufac-turer. In all these cases, AOL’s foreigninvestments have matched its competitiveadvantages with the partners’ host-countrystrengths — with the result of expanding AOL’soperations not just in these host countries butin the United States as well.

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CHAPTER III

The Central Role of Trade and American Companies withGlobal Operations in the Use of ICT Goods and Services

T E C H N O L O G Y - U S I N G I N D U S T R I E S

Chapter Overview

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Recall from Chapter 1 that the economy-wide pro-ductivity acceleration in the United States in recentyears has coincided with an economy-wide acceler-ation in the level of U.S. trade and foreign directinvestment. This economy-wide pattern suggests arole for globalization in fostering the productivitygains. This, in fact, has been the case: trade andAmerican companies with global operations arestrongly linked with faster productivity growth.

Chapter 2 documented how the production of ICTgoods and services has been fostered by U.S. tradeand American companies with global operations.This chapter turns to the use of ICT goods and serv-ices. It finds that in many cases the heavy use ofICT products throughout the U.S. economy inrecent years coincides with a deepening of trade andinvestment linkages of these using industries.

A. The Economics of How InternationalTrade and Investment Interact with theUse of ICT Goods and Services

In recent years, a lot of research has explored howthe use of ICT products influences business strategies. Of particular interest here is how ICTuse affects the international strategies of firms.There are four important ways in which ICT useintensifies the global linkages of U.S. firms throughtrade and/or investment.

� ICT products lower the information and commu-nication barriers to international trade in goodsand services, and thereby facilitate greater tradegiven the initial production structure of firms.

� ICT products alter the production structure of firms by fostering new ways to serve foreign markets and thereby creating newexport opportunities.

� ICT products alter the production structure offirms by fostering reliance on imported inter-mediate inputs.

Chapter Overview

T he heavy use of ICT productsthroughout the U.S. economy inrecent years coincides with a

deepening of trade and investment linkages.Furthermore, industries investing mostheavily in ICT products also appear to bethe industries engaging most heavily on aglobal basis through both trade and invest-ment, with patterns suggesting expansion ofglobal production networks. Two of themost intensive ICT-using industries inrecent years — telecommunications andfinancial services – have also benefited fromtrade and investment liberalization as aresult of major WTO agreements, the 1997Basic Telecommunications Agreement andthe 1997 Agreement on Financial Services.This suggests that trade and investment liberalization in ICT-using industries hashelped stimulate their demand for ICT products.

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� ICT products alter the production structure offirms by increasing their ability to undertake andorganize FDI — not just free-standing opera-tions but also integrated global productionnetworks — thanks to reduced cost and greaterease of information flows.

Before turning to empirical evidence, it is instruc-tive to first elaborate on each of these four linkagesbetween ICT and global engagement.40

The Use of ICT Products Lowers Trade Barriers

Barriers to international trade are both political andnatural. Government policies can impede tradeflows, but so, too, do the natural information andtransportation costs that trade necessarily incurs.

ICT goods and services have greatly reduced theseinformation and transportation costs of trade.Cross-border quotes on pricing, delivery schedules,and other aspects of trade are now much easier andfaster to obtain; relevant parties can now more easily monitor shipments in transit; and all modesof transportation that make international ship-ments can operate more efficiently.

ICT products reduce trade costs for goods and services that were already traded. But they alsohave made tradable a wide range of previously non-traded goods and services. This has beenparticularly true for ICT-intensive services, such ascomputer programming and customer service.

All this suggests that, given the initial structure ofhow firms operate, ICT products reduce the tradecosts for these firms and thereby promote anincrease in exports and in imports.

The Use of ICT Products Improves the Service of Export Markets

ICT goods and services allow firms to communi-cate more easily with current and potentialcustomers. Firms can convey information aboutproduct specifications much more easily, e.g., by

posting product descriptions on web pages and byupdating customers via email. In the other direc-tion, firms can obtain information, often timesvery detailed, about customer purchases and tastes(e.g., from supermarket scanners, email surveys,and data on on-line purchases). This, in turn, canallow firms to tailor output to better suit these cus-tomer tastes. Importantly, ICT use can allow firmsto deliver products to customers in entirely newways. This is particularly true of many informa-tion-intensive products: e.g., software, newspapers,and magazines can now be transmitted on-line inaddition to physically.

As a result of these easier two-way informationflows between firms and their clients, sales canincrease. And this potential to boost sales is true notjust of domestic sales, but of export sales as well.Indeed, to the extent that information barriersbetween firms and their customers tend to be larg-er across borders than within them, the use of ICTproducts should stimulate export sales in particular.

The Use of ICT Products Fosters the Use ofImported Intermediate Inputs

One of the most widely discussed uses of ICT prod-ucts is to facilitate inter-firm transactions ofintermediate inputs. This business-to-business, orB2B, use is widely regarded to be one of the largestpotential markets for ICT applications. Fraumeni(2001) reports a range of estimates for current andfuture U.S. activity in both B2B and business-to-consumer (B2C) commerce. Estimates range widelywithin each of these two types, but there is broadconsensus that the size of B2B activity is and will bemuch larger than its B2C counterpart.

Integrating ICT products into the input-procure-ment process is widely thought to trigger majorstructural changes thanks to lower information,transaction, and shipping costs. Firms can nowaccess a much wider range of potential suppliers,which thickens the market of bidders and therebywidens input variety and lowers input prices. This istrue not just for already procured inputs, but also-

317889 7/25/02 4:15 AM Page 40



for activities previously done in-house as part ofvalue added by hired labor and capital. B2B’s abili-ty to lower input costs can induce firms tooutsource activities previously done in-house as partof the value added by hired labor and/or capital.

It is important to emphasize the magnitudesinvolved in intermediate-input purchases. AsMainstay III and its Update documented forAmerican companies with global operations, inputpurchases account for nearly two thirds of the totalvalue of sales. In 1997 the U.S. parents of thesecompanies purchased from other companies over$3.3 trillion in inputs.

The international dimension to B2B activity is thatall these procurement gains arise not just frominteractions with domestic suppliers but also for-eign suppliers all over the world. The informationgains from ICT products allow firms to widen theirgeographic range of suppliers to, literally, all coun-tries. Opportunities to import intermediate inputs,then, can reinforce the gains of thicker markets interms of greater variety and lower prices.41

More generally, the increased opportunities forinputs to cross borders mean increased opportuni-ties for firms to establish global productionnetworks, which were examined for ICT-producing

CHART MTHE SHARE OF EXPORTS IN TOTAL SALES OF U.S. PARENTSOF AMERICAN COMPANIES WITH GLOBAL OPERATIONS

Notes: Cell entries report the share (in percentage terms) of total sales of U.S. parents of American companies with global operations accounted for by exports.

Food Chemicals Metals Machinery Electronics Transportation OtherIndustries

AllManuufacturing

Industry

1982

1989

1997

30

25

20

15

10

5

0

Per

cen

t

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M A I N S T A Y I V


firms in Chapter 2. ICT use for international sourc-ing allows production to be spread across countries,in accord with their different relative strengths. Thisagain tends to lower costs and boost output. Forexample, ICT-intensive activities like telephonecustomer support can now be located anywhere in the world.

The Use of ICT Products Induces MoreInternational Investment for American Companieswith Global Operations

A firm undertakes global operations when it per-ceives advantages to undertaking economic activityin foreign countries within that firm rather thanarm’s length through market transactions with otherfirms. Reasons to “internalize” foreign operationscan include the desire to protect intellectual prop-erty or to maintain product-quality control.American companies with global operations neces-sarily incur large costs of communication andcoordination between the U.S. parent and foreignaffiliate(s), however. Decisions for these companies

CHART NTHE SHARE OF EXPORTS IN TOTAL SALES OF FOREIGN AFFILIATES

OF AMERICAN COMPANIES WITH GLOBAL OPERATIONS

Notes: Cell entries report the share (in percentage terms) of each industry’s affiliate sales accounted for export sales out of the host country (where data areavailable for majority-owned affiliates only).

80

70

60

50

40

30

0

20

10

Food Chemicals Metals Machinery Electronics Transportation OtherIndustries

AllManuufacturing

Industry

1982

1989

1997

Per

cen

t

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about the extent of their global operations, there-fore, depend a lot on the magnitude of thesecommunication and coordination costs.

A wide variety of ICT products reduce these costsof cross-border corporate control. Accordingly, ICTinvestments tend to make it easier for firms toestablish and/or expand international investments.

This link between ICT products and Americancompanies with global operations applies for allkinds of parent-affiliate arrangements. It surelymatters for American companies with global opera-tions that are structuring international productionnetworks, as they allocate different activities acrossparents and affiliates. But it also applies in caseswhere affiliates may be more stand-alone operationsnot as tightly linked into a firm-wide productionchain. This may apply more to services firms, wheremany of the inputs to production are inherently dif-ficult to trade across borders.

B. The Evidence of How International Tradeand Investment Interact with the Use ofICT Goods and Services

Section A summarized the economics of how theuse of ICT products interacts with internationaltrade and investment. ICT goods and services lowerthe costs of trade; they improve the ability of firmsto service export markets; they expand the opportu-nities of firms to import intermediate inputs; andthey lower the communication and coordinationcosts between U.S. parents and foreign affiliates. Inprinciple, these links between ICT use and globalengagement can apply to all firms in all industries.

Given this breadth, the empirical evidence of theselinkages is of two kinds. First, Sections B and Coffer some industry-level evidence on trade andFDI. Section B presents data on trade and FDIactivity, while Section C looks more specifically attwo recent important trade liberalizations.

Second, Section D presents three case studies ofindividual ECAT member companies. These cases

are intended to complement the more-suggestiveindustry evidence by offering concrete examples ofICT use and global engagement. These cases are par-ticularly compelling to the extent that many of thegains from ICT use are still to be realized as firmsfully integrate ICT products into their operations.

At the industry level, it is notable that in recentyears telecommunications, finance and insurance,and wholesale trade have been particularly heavyusers of ICT products. In the early 1990s, theseindustries were all among the largest total pur-chasers of both computer equipment andtelecommunications equipment.42 In the later partof the 1990s, these same industries were among thelargest per worker purchasers of a range of ICTproducts.43 It will be instructive to look for linksbetween ICT use and global engagement for theseindustries in particular.

1. International Trade and the Use of ICT Goods and Services

The broadest evidence consistent with the idea thatthe use of ICT goods and services stimulate bothexports and imports thanks to lower trade costs canbe seen in already presented Chart B, which reportsU.S. exports and imports as a share of U.S. output.Trade as a share of output rose during the recentperiod of intense ICT use economy-wide, 1995 to2000, by 6.4 percentage points. This increase in justfive years was larger than the increases in any of the10-year decades since 1950. Throughout the U.S.economy, both trade and ICT use were acceleratingat exactly the same time. This is consistent with theidea that greater ICT use has helped stimulate trade.

Does this economy-wide correlation between ICTuse and trade hold for individual industries? Figure15 presents strong evidence that it does. Each datapoint in this figure represents a snapshot of one of 20U.S. manufacturing industries (that together consti-tute all of that sector) during one of four years (1972,1979, 1987, and 1990) in recent decades. The hori-zontal axis plots the share of ICT capital goods in thetotal capital stock for each industry-year. The vertical

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axis plots exports as a share of output measured astotal sales for each industry-year.44

The clear message of Figure 15 is that industriesthat use ICT more heavily, in terms of ICT share oftotal capital, are also industries that export more asa share of total output. For the 80 observationsplotted in this figure, the correlation between ICTuse and export intensity is 0.64, which is quite highand is statistically different from zero correlation.Moreover, if instead this correlation is calculatedseparately each year for the 20 industries each year,its value is rising over time.45

There are very similar correlations between Figure15’s measure of ICT intensity and industry imports,or between ICT intensity and the sum of industryexports and imports. The same is true if ICT inten-sity is measured not in terms of share of capitalstocks but rather in terms of capital investmentexpenditures. And again, these correlations havegenerally been rising over time.

The overall message from Figure 15 and similar datais clear. Since the early 1970s, manufacturing indus-

tries that use IT more heavily(either in terms of its share oftheir total capital stock or inflow terms measured as currentIT investment as a share of totalinvestment) are also industriesthat both export more andimport more as a share of totalindustry output. As with theeconomy-wide evidence inChart B, this industry-level evi-dence is consistent with the ideathat greater ICT use has helpedstimulated trade.

Additional evidence on the link-ages between ICT use and tradecan be gained by focusing onthe trade patterns of Americancompanies with global opera-tions. This more-detailed level

offers insights on whether ICT use refines the abil-ity of U.S. firms to service markets and/or establishproduction networks via exports.

Chart M, page 41, reports the share of total sales ofU.S. parents of American companies with globaloperations accounted for by exports. This share isreported for 1982, 1989, and 1997 all manufactur-ing together and for seven broad sectors withinmanufacturing.46

Chart M shows that the export share of total parentsales rose in every industry over both the 1980s and1990s. It also shows that the magnitude of theseincreases were uniformly larger in the 1990s than inthe 1980s. This coincidence of greater export-shareincreases over the 1990s with the increased ICT useduring this decade is broadly consistent with ICTuse refining the ability of U.S. firms to service mar-kets via exports.

One caveat to this interpretation of the increasedexport intensity is the data do not distinguish exportsof final sales from exports of intermediate inputs thatmight be part of emerging global production net-

0

.1

.2

.3

Exp

orts

as

a Shar

e of

Outp

ut

0 .1ICT Share of Total Capital Stock

.2 .3 .4

FIGURE 15INDUSTRY ICT USE AND TRADE INTENSITY

317889 7/25/02 4:15 AM Page 44



works. The particularly large levels and increases inexport intensity in Chart M for the ICT-producingindustries of machinery and electronics suggests thispossibility. This sort of rising trade would be consis-tent with the argument in Section A that ICT usefacilitates the purchase and shipment across bordersof intermediate inputs, and thereby facilitates the riseof global production networks.

Chart N, page 42, offers additional evidence on ris-ing export intensity, here for the foreign affiliates ofAmerican companies with global operations. Itreports the share of exports in total majority-ownedaffiliate sales for the same years and industries as inChart M.47 The same patterns appear in Chart N.

Over the 1990s, affiliates in all industries (exceptmetals) exported a larger share of their output overtime, with larger increases over the 1990s than the1980s. This evidence is broadly consistent with ICTuse facilitating the rise of global production networks(as already discussed in Chapter 2, which presentedthese data in Chart N for machinery and electronics).

Chart O, this page, presents additional evidence onemerging global production networks. It reportsestimates of what share of total U.S. industry pur-chases of intermediate inputs were imported. Theseshares are reported for chemicals, machinery, elec-tronics, transportation, and all manufacturing for1975, 1985, and 1995.48 Chart O shows that the

CHART OU.S. INDUSTRY RELIANCE ON IMPORTED INTERMEDIATE INPUTS

Notes: Cell entries report the share (in percentage terms) of total U.S. industry purchases of intermediate inputs accounted for by imported intermediate inputs.

20

15

10

0

5

Per

cen

t

Chemicals Machinery Electronics Transportation AllManuufacturing

Industry

1975

1985

1995

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M A I N S T A Y I V


large majority of U.S. input purchases come fromdomestic sources, not foreign ones, consistent withthe earlier evidence in Chapter 2 (and in MainstayIII) on the input purchases of U.S. parents ofAmerican companies with global operations.

That said, the chart also shows that reliance onimported inputs has been rising in all industries, withlarger increases in this reliance over the second decadethan the first. This evidence is broadly consistent withU.S. firms increasing their sourcing of inputs fromabroad, a process that ICT use is likely to enhance.

Taken together, the evidence presented in this sub-section suggests a link in a wide range of industries

between ICT use and increased global engagementvia trade. Of course, many other forces may havecontributed to the trade patterns documented here, such as declining political trade barriers.Accounting for all these forces is beyond the scopeof this study. But the broad timing of these tradepatterns with intense ICT use in the United Statesis consistent with this ICT use being linked withevolving trade patterns.

2. American Companies with Global Operationsand the Use of ICT Goods and Services

In addition to refining and deepening trade patterns,ICT use can also facilitate the expansion of American

CHART PTHE WORLDWIDE GROWTH OF AMERICAN COMPANIES WITH GLOBAL OPERATIONS

Notes: Each cell reports the annualized growth rate for that cell’s activity measure and time period. Output is measured in terms of value added, and affiliate data are available for only majority-owned affiliates.

10

8

6

0

4

2

An

nual

ized

Gro

wth

Rat

e

Foreign-AffiliateInvestment

Foreign-AffiliateEmployment

Foreign-AffiliateOutput

U.S.-ParentInvestment

U.S.-ParentEmployment

U.S.-ParentOutput

Firm-WideInvestment

Firm-WideEmployment

Firm-WideOutput

1982-1994

1994-1998

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companies with global operations because, as dis-cussed in Section A, ICT products can reduce thecosts these firms incur to coordinate and communi-cate between U.S. parents and foreign affiliates.

One broad piece of evidence consistent with thelinkage between ICT use and international invest-ment is the acceleration in the 1990s in the growthof American companies with global operations —both in the United States and abroad. Chart P, page46, reports annualized growth rates in value-addedoutput, employment, and capital investment forAmerican companies with global operations, theirU.S. parents, and their foreign affiliates. Thesegrowth rates are for 1982-1994 and then 1994-1998, periods roughly before and during theacceleration in U.S. ICT investment.49

Chart P shows that output, employment, and capi-tal investment by American companies with globaloperations grew at a faster rate between 1994 and1998 than they did between 1982 and 1994. Thiswas true not only of the overall worldwide opera-tions of these firms, but also of both their U.S.parents and their foreign affiliates (with the slightexception of affiliate output). This expansion inChart P echoes the expansion of U.S. cross-borderFDI flows documented earlier in Chart B.

All this is consistent with the idea that greater ICT usein recent years has stimulated the growth of Americancompanies with global operations. That said, otherfactors may have played a role, too, including tradeliberalization, as will be discussed in Section C.

A second piece of evidence that ICT use has stimulat-ed FDI comes from the evolving industry mix amongall foreign affiliates of American companies with glob-al operations. As noted above, in the United States,certain industries have been the heaviest ICT investors:telecommunications, finance and insurance, andwholesale trade. Were ICT use an important stimulusfor FDI, then these high-ICT industries might accountfor a growing share of total FDI activity.

Chart Q, page 48, shows this to be the case foractivity measured in terms of sales. It reports theshare of worldwide affiliate and parent salesaccounted for in 1982 and 1998 by these threeindustries.50 Each of these industries accounted fora larger share of both total foreign-affiliate sales andtotal U.S. parent sales in 1998 than in 1982, withlevel rises in the range of 2.4 to 5.1 percentagepoints. By 1998 these three ICT-intensive indus-tries accounted for over 25 percent of total parentactivity and over 30 percent of total affiliate activi-ty. Again, other forces such as trade liberalizationmay have played a role in these increases in ChartQ, but ICT use quite likely mattered as well.

Chart R, page 50, offers a third piece of evidencesuggesting that ICT use stimulates FDI. It reportsthe share of worldwide R&D of American compa-nies with global operations being performed bymajority-owned foreign affiliates in 1982, 1989,and 1998. 51 R&D is a central method by whichcompanies obtain knowledge assets such as patentsand production techniques. As such, for Americancompanies with global operations to conduct R&Dabroad as well as in the United States, they needreliable methods for transferring informationamong R&D locations. In principle, ICT goodsand services should make it easier for such intra-firm knowledge transfers. The evidence in Chart Ris consistent with this: the share of worldwide R&Dperformed by foreign affiliates has risen from 6.4percent in 1982 to 11.6 percent in 1998.

C. The Contribution of Policy Liberalizationto the Use of ICT Goods and Services

The preceding discussion in Sections A and B sug-gests that policy liberalizations in trade and/or foreigndirect investment might stimulate the use of ICTgoods and services. As Chapter 1 presented, since themid-1990s the pace of U.S. investment in ICT indus-tries has picked up dramatically, with this accelerationin ICT use accounting for approximately one-third ofthe overall acceleration in U.S. productivity.


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This raises the question of whether there have beenany such policy liberalizations that arguably wouldhave contributed to the recent surge in ICT use.There is compelling evidence the answer is “yes.”

The acceleration since 1995 in U.S. ICT investmentscoincides with two major WTO agreements in twovery ICT-intensive industries. The 1997 BasicTelecommunications Agreement stimulated world-wide liberalization in all main telecommunicationsindustries. And the 1997 Agreement on FinancialServices did the same for financial services. The cor-relation between these liberalizations and ICTinvestment suggests an important role for policy liber-alization in helping trigger the recent acceleration inICT investment. It is instructive to address eachagreement in turn.52

1. The WTO Basic TelecommunicationsAgreement

As discussed in detail in Chapter 2, the WTO BasicTelecommunications Agreement (BTA) sought toreduce entry barriers to and stimulate competitionin a wide range of telecommunications industries.Thanks to the number and commitment of signa-tory countries, it has made significant progresstowards that goal.

What does economics predict to be the impact ofthis agreement? Such a major liberalization shouldbe expected to stimulate worldwide expansion intelecommunications, thanks to greater competitionand to the wider and more stable market access. Inturn, this expansion should boost worldwidetelecommunications demand for ICT products.Because U.S. firms in this industry are widelyregarded as world leaders, this worldwide telecom-


CHART QTHE SHARE OF WORLDWIDE SALES OF AMERICAN COMPANIES WITH

GLOBAL OPERATIONS ACCOUNTED FOR BY INDUSTRIESTHAT INTENSIVELY USE ICT PRODUCTS

Notes: Cell entries for foreign affiliates report the share (in percentage terms) of affiliate worldwide sales accounted for by affiliates classified in that indus-try. Cell entries for U.S. parents report the share (in percentage terms) of total U.S. parent sales accounted for parents classified in that industry.

Wholesale TradeTelecommunicationsFinance/Insurance

Industry

19821998

foreign affiliates

0

25

20

15

10

5

Per

cen

t

Wholesale TradeTelecommunicationsFinance/Insurance

Industry

19821998

U.S. Parents

0

15

12

9

6

3P

erce

nt

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munications liberalization should lead to theirexpansion. And to facilitate this expansion, invest-ment by these firms in ICT goods and services islikely to rise (as well as in response to the increasedcompetition, per the discussion in Chapter 1 of how international competition stimulates firmsto boost productivity).

This prediction broadly coincides with the factsdocumented earlier in this chapter that in recentyears the U.S. telecommunications industry hasbeen one of the heaviest ICT users and has alsobeen expanding its international investments.Indeed, the Council on Economic Advisors (2001)notes that the worldwide value of cross-bordermergers in this industry rose nearly 10 times from1991-1994 to 1995-1998, and it cites the BTA asone of the driving forces here. Surely other forceshave mattered as well, such as the domestictelecommunications liberalization of 1996. But thetiming of the BTA suggests that this liberalizationplayed a positive role in this industry’s demand forICT products and related FDI activity.

2. The WTO Agreement on Financial Services

The WTO’s 1997 Agreement on Financial Servicesinvolved 70 member countries agreeing to a widerange of liberalizations in their financial-servicessectors — i.e., insurance and insurance-related serv-ices, and banking and other financial services suchas securities underwriting, asset management, trad-ing in derivatives and foreign exchange, advising,and the provision of financial information. Thisagreement was reached in December 1997, and itsprovisions went into force among signatories byearly 1999. By 1999, the number of signatorycountries making commitments had risen to over100. The Agreement covers more than 95 percentof world activity in banking, insurance, securities,and financial information.

An important dimension to the Agreement waseliminating restrictions on FDI by foreign finan-cial-services providers. This included eliminating/

relaxing limits on the extent of foreign ownership,on the jurisdictional form of commercial presence,and on expansions of existing operations. FDI isparticularly important in these industries, as manyfinancial-services activities are not easily tradedacross borders. Another important feature of thisAgreement was that rules affecting trade in financialservices became subject to GATS rules on a perma-nent basis, rather than the previous interim basis.

As with the BTA, this Agreement built on negotia-tions of the Uruguay Round. At the end of that round, agreement could not be reached on liberalization in financial services. Accordingly,negotiations resumed post-Uruguay Round, withan interim agreement reached in mid-1995 to continue talks into 1997 with the goal of broader liberalizations.

The overarching goal of this Agreement was to stimulate international competition in a widerange of financial-services industries. What does eco-nomics predict to be the impact of this agreement?

As with the BTA, a major liberalization like thisshould be expected to stimulate worldwide expan-sion in financial services and, thereby, worldwidefinancial-services demand for ICT products.Because U.S. firms in this industry are widelyregarded as very competitive in world markets, thisworldwide financial-services expansion shouldmean expansion for its U.S. firms. And to facilitatethis expansion, investment by these firms in ICTgoods and services is likely to rise (again, as well asin response to the increased competition).

This prediction broadly coincides with the factsdocumented earlier in this chapter that in recentyears the U.S. financial-services industry has beenone of the heaviest ICT users and has also beenexpanding its international investments. The tim-ing of the Financial Services Agreement suggeststhat this liberalization played a positive role in thisindustry’s demand for ICT products and relatedFDI activity.


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D. Corporate Case Studies on the Use of ICTGoods and Services

This chapter’s presentation of data on trade andAmerican companies with global operations hasmaintained a comprehensive focus of industries andthe entire economy. To complement this aggregateevidence, this chapter (like Chapter 2) closes bynarrowing the focus to individual firms.

BusinessWeek, The McGraw-Hill Companies, andStandard & Poor’s provide concrete examples ofhow their use of ICT goods and services interactsheavily with their international trade and investments — and of how all this internationalactivity tends to boost U.S. activity as well.


CHART RTHE SHARE OF WORLDWIDE R&D OF

AMERICAN COMPANIES WITH GLOBAL OPERATIONSPERFORMED BY FOREIGN AFFILIATES

Notes: Each cell reports the share (in percentage terms) of worldwide research and development of American companies with global operations performed by foreign affiliates (where affiliate data are available for only majority-owned affiliates).

01989 19981982

2

10

4

8

6

12

Year

Per

cen

t

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Case Study: Corporate Name Goes Here


Case Study: Business Week

This case offers a good example of how a com-pany’s ICT investments are linked with itsinternational operations in terms of how it bothproduces and exports its output.

BusinessWeek offers analysis and insight on thefull range of global business issues, with its printversion that reaches an estimated 5.1 millionreaders every week. By virtue of its internation-al subject matter, BusinessWeek (BW) hastraditionally maintained a global productioninfrastructure. Its staff of more than 250reporters, editors and correspondents operateout of its main editorial office in New York; for-eign editorial offices in Beijing, Bombay,Frankfurt, Hong Kong, London, Mexico City,Moscow, Paris, Rome, Singapore, and Tokyo;and 24 bureaus worldwide. BW’s print versionis actually printed in four plants in the UnitedStates, one in Europe (Netherlands) and one inAsia (Singapore), and it has advertising, sales,and circulation operations in Asia and Europe.

Thanks to large ICT investments in recent years(total procurement and installation of$739,000), BW has dramatically improved thelinks between its domestic and foreign staff.Communications that are integral to the produc-tion of BW’s content — transmittingassignments, reporting files, editor feedback,subject queries, etc. — have been dramaticallyimproved thanks to links such as email andinstant messaging. These technologies also allowglobal teams to support specific projects in realtime, in ways that simply would not have beencost- or time-effective a few years ago. In short,technology has made communication and coor-dination with BW’s international offices andstringers much stronger. This has resulted inricher, timelier, and more robust content both inprint and on-line.

Switching focus from how BW produces itsinformation to how it distributes that informa-tion, BW’s ICT investments have dramaticallyexpanded the channels by which it reaches read-ers worldwide. Before 1996, the body ofinformation produced by BW was disseminatedprimarily via print. Today, thanks to the rise ofthe Internet and wireless technology, BW com-plements its flagship print edition withcontinuously updated information on-line.Currently, www.businessweek.com averages 20million page views a month by 500,000 uniqueusers —of which more than one in four(130,000) are from domains outside NorthAmerica. Beyond its main web site, BW has alsolaunched two new sites whose content is tai-lored to Europe and Asia. BW also has 60,000wireless users via its new PDA offering,AdvantGo.

This ability to access readers worldwide throughan entirely new distribution channel, and tocustomize content both in print and online forreaders around the globe, is directly related toBW’s technology investments. This expandedaccess has helped tap new markets: currently, 44percent of the unique on-line users are betweenthe ages of 25 and 34, an age segment with lowpenetration for BW’s print version. It also hasan important international dimension, with theability to stimulate demand across differentmarket segments: e.g., about 5 percent of thetotal print subscriptions sold online are frominternational customers.

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Case Study: The McGraw-Hill Companies

This case study offers an example of how a com-pany’s demand for information-technologyproducts is best served via international trade,with complementarities arising between U.S.and foreign activity in the process.

Founded in 1888 and headquartered in NewYork, The McGraw-Hill Companies is a globalinformation-services provider meeting world-wide needs in the financial services, educationand business-to-business information marketsthrough leading brands such as McGraw-HillEducation. The corporation has more than 300offices in 33 countries, with 17,000 employeesworld-wide. Sales in 2000 were $4.3 billion.

In January 2001, McGraw-Hill Education(MHE) launched a new on-line educationalservice, the McGraw-Hill Learning Network(www.MHLN.com). This unique learningcommunity offers a seamlessly integrated net-work of complete, interactive onlinee-textbooks, plus a comprehensive suite of sup-port resources for teachers, administrators,students, and families. The network’s goal is tomeet ongoing educational needs from kinder-garten through high school via interactivetechnologies that facilitate collaboration, infor-mation exchanges, and student evaluation. Forexample, teachers can communicate with par-ents and students; stay informed ofdevelopments in their subject areas and schoolsystem; create original lesson plans or use net-

work templates; correlate lessons to state andnational standards; track student progress; andindividualize curriculum by generating cus-tomized tests, assignments, and presentations.

In developing this Learning Network, MHEfaced the challenge of translating its conceptsand ideas into a tangible, functioning network.The education group recognized that it did nothave all the technical skills and resources neces-sary to take on such a complex assignmentinvolving software development and Internetdistribution. Accordingly, the group decided toconcentrate on its strengths — curriculumdevelopment, product design, systems specifica-tions, and project management — and to seekan external partner to undertake the project’stechnical development.

This search led to Tata Interactive, a $400 mil-lion company based in India that offers a highlyskilled work force knowledgeable in new tech-nologies and best practices. Tata was chosen overtwo U.S.-based companies for reasons includingits recognized best-practices approach and aworkforce that was both highly trained and read-ily available. Realized savings from Tata’sperformance included faster time to market andincreased product reliability and quality. InIndia, Tata engaged approximately 150 engineerson the project. A small oversight group rotatedbetween local Tata offices and MHE sites inColumbus, Ohio. This oversight group helpedmeet all schedules, with its ability to interact reg-ularly with local Tata staff. The overall projectwas completed on time and on budget.

Within MHE, the integration of Tata’s work intothe overall Learning Network project required

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Case Study: The McGraw-Hill Companies (continued)

the addition of 150 skilled engineers. This com-plementarity between McGraw-Hill’s import oftechnology services and its own employment lev-els is notable: more imports meant more U.S.jobs. MHE did not have adequate technical skillsinternally to undertake Tata’s portion of the proj-ect. Had MHE attempted to do this, the likelyoutcome would have been higher costs (due, forexample, to the need for extensive training),reduced quality, and longer time to market. Inshort, without an external partner the projectmay not have been undertaken. By complement-ing MHE’s product and curriculum knowledgewith Tata’s technical expertise, a more robustproduct now exists.

Tata’s input allowed a successful completion ofthe Learning Network project. Based on thissuccess, today McGraw-Hill and Tata are con-tinuing this relationship in a multi-yearrefinement of the Learning Network.

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Case Study: Standard & Poor’s

This case demonstrates how a company’s ICTinvestments allow it to service new internationalmarkets and, in so doing, stimulate its activitiesboth abroad and here in the United States.

Standard & Poor’s, a division of The McGraw-Hill Companies, is a worldwide provider ofindependent financial information, analyticalservices, and credit ratings to the world’s finan-cial markets. Among the company’s manyproducts are the S&P Global 1200, a real-time,global equity index; the S&P 500, a U.S. port-folio index; and credit ratings on more than220,000 securities and funds worldwide. Withmore than 5,000 employees located in 21 coun-tries, Standard & Poor’s is an integral part of theworld’s financial architecture. As a number offorces in recent years have made capital marketsmore global, S&P has tailored its ICT activitiesto allow its cross-country operations to keeppace with capital-market developments world-wide. A prime example of this synergy betweenS&P’s ICT investments and its foreign activitiesis its Compustat database.

Compustat is an electronic database that trackshistorical data for publicly traded companies.Started in 1962, Compustat originally trackedonly U.S.-listed companies, with the bulk of itsoperations located in Denver, Colorado. In1991, however, S&P decided to expandCompustat to include foreign-listed companiesas well. Reasons for this shift included increased

U.S. interest in foreign equities, increased cross-border investing worldwide, the dramaticexpansion of international capital markets, andthe international adoption of more quantitativeresearch. These forces stimulated worldwidedemand for fundamental financial information.

The international expansion raised a question:how best to extend Compustat’s reach? Typicalbuild, buy, or rent options were assessed. From1991 to 1996, partnering with two differentinternational providers was attempted unsuc-cessfully. In 1996, the decision was made tobring the international expansion in-house andalso to sequence this expansion by focusing firston developed countries and index constituents,including emerging markets, at a latter date.The question of how best to extendCompustat’s reach remained. One optionwould have been to replicate the Denver opera-tions in each new foreign market, with eachlargely independent office doing its own datacollection and processing. Advances in informa-tion technologies, however, presented S&P witha better option of using ICT to bring foreigndata into its up-and-running Denver opera-tions. S&P found that its strong competitiveadvantage in working with U.S. companies wasbest extended to new foreign companies bymaintaining the bulk of its work in one location. Proximity advantages of local presence — e.g., familiarity with local account-ing and presentation, timeliness for hard-copydocuments — were outweighed by the oppor-tunity to leverage existing ICT systems andoperations all located in Denver with a reason-ably priced, well-educated, multi-culturalworkforce.

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Case Study: Standard & Poor’s (continued)

Of course, this one-location option required theDenver staff to have timely, reliable access to allthe raw foreign data. S&P’s ICT investmentshelped address this need, building on theworldwide trend towards formatted electronicsource documents. S&P invested $2.7 millionin ICT products and staff to facilitate itsDenver expansion. New international ICT sys-tems were built for source documentmanagement, data collection, databasing, andintegration of market and other qualitativedata. Some of these ICT systems, processes andprocedures were new, while others were lever-aged from existing U.S.-based business.

It is notable that S&P expanded not just inDenver but in foreign locations as well. Evenwith ICT-facilitated access to foreign data col-lection and integration, some host-country staffwas required — with some being drawn fromthe local staff of other S&P groups. Source doc-uments are generally more timely when in theirnative language, and familiarity with native-country accounting and data presentation is amust for those pieces of normalization processthat can not be automated. In Denver, thegrowth of “international” Compustat has led to45 new associates. The over 20 new employeesin the International Financial ResearchDepartment are from close to 20 countries andspeak 23 languages. Specialized by industry andby language, this financial-research staff is a key

part of the process of normalizing companyreports according to international accountingstandards.

Today, the S&P Denver Operations Center fol-lows 47,000 companies in over 70 countriesrepresenting over 90 percent of the world’sequity market capitalization. Thousands ofdetailed data definitions and validity rules areused by S&P to normalize “as-reported” com-pany financial statements for comparativeanalysis across companies and time periods byS&P’s clients. In 2001, S&P planned to furtherexpand its international data capabilities byintroducing technology that enables as-reporteddata collection over the Internet. This newcapability will facilitate partnerships with otherdata providers and will also enable S&P to buildan offshore data collection capability to com-plement the Denver-based international team.

In short, this case demonstrates both how theuse of new ICT products is intricately linkedwith serving foreign markets and also how, inthe process, foreign and domestic activity ofAmerican companies with global operationstend to move together in concert.

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T H E S P L I T I N P U B L I C O P I N I O N

Chapter Overview

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This report has presented a large body of evidencethat both the production and the use of ICT prod-ucts are intricately linked with trade and foreigndirect investment. One might expect this synergybetween ICT activity and globalization to bereflected in broadly similar public opinions abouteconomic policy over these two.

This is not the case, however. There is a wide gulf sep-arating American public opinions about ICT productson the one hand and trade and investment on the other.Most Americans think quite positively of ICT produc-tion and use, but at the same time hold strongreservations about trade and investment.

A. Public Opinions about ICT Production and Use

First, consider opinions about ICT products. Largemajorities of Americans think that ICT productshave been a main driver of overall economic growthin recent years. Moreover, pluralities to majoritiesalso credit ICT products with labor market improve-ments including rising wages, rising employment,and falling poverty. Here is a sample of these atti-tudes, starting with ICT and the overall economy.

Question: “Do you agree or disagree with the following statement: New informationtechnology such as the Internet is goodfor the economy.”

Answers: Agree Strongly: 43%Agree: 33%Neutral/Don’t Know: 18%Disagree: 7%(Source: University of Connecticut, 2/00)

Chapter Overview

D espite the preponderance of evi-dence that the production anduse of ICT products are intricate-

ly linked with trade and investment, there isa wide gulf separating American publicopinions about ICT products on the onehand and trade and investment on theother. Large majorities of Americans thinkthat ICT products have been a main driverof overall economic growth in recent years.Moreover, pluralities to majorities also cred-it ICT products with labor-marketimprovements including rising wages, risingemployment, and falling poverty. At thesame time, the majority of Americans thinktrade and FDI hurt the U.S. economy, onbalance, with large majorities also worryingthat trade and investment generate labor-market costs in terms of job destruction andlower wages. The majority of Americanssupport ongoing technological progresseven if that progress entails job losses insome traditional industries, but at the sametime the majority of Americans also favorprotecting jobs over liberalizing trade.

CHAPTER IV

The Split in Public Opinions about ICT Products and Globalization

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Over three-quarters of respondents agree that ICTproducts benefit the U.S. economy. When askedquestions about technology and the U.S. labor mar-ket, people are similarly positive. First, a plurality ofAmericans think computer use tends to boostemployment.

Question: “Over the next few years in the UnitedStates, do you think the growing use ofcomputers in the workplace willincrease or decrease the number of jobs,or won’t it make much of a difference?”

Answers: Increase: 43%Decrease: 32%Won’t Matter Much: 23%Don’t Know: 2%(Source: Kaiser Foundation, 11/99)

An even-larger majority think that computer usewill help reduce unemployment.

Question: “Do you think computers and workdone by computers will have a majorrole, minor role, or no effect in address-ing this issue, or make the problemworse? … Reducing unemployment.”

Answers: Major/Minor Role: 75%No Effect/Worsen Problem: 25%(Source: Intel/Yankelovich, 11/97)

A plurality think that ICT products tend to increaseU.S. wages.

Question: “Have more computers and other newtechnology in the workplace done moreto increase wages or keep wages down,or hasn’t it had much effect either way?”

Answers: Increase Wages: 47%Decrease Wages: 28%Not Much Effect: 25%Don’t Know: 4%(Source: Wisconsin Public Television, 6/97)

And an even larger majority think computers willhelp reduce U.S. poverty.

Question: “Do you think computers and workdone by computers have a major role,minor role, or no effect in addressingthis issue, or make the problem worse?… Reducing poverty.”

Answers: Major/Minor Role: 61%No Effect/Worsen Problem: 39%(Source: Intel/Yankelovich, 11/97)

The above evidence suggests that Americans thinkICT production and use contribute to strong eco-nomic performance in terms of higher outputgrowth and favorable labor-market outcomes likehigher wages and employment.

But as earlier chapters of this report have docu-mented, in recent times both ICT production anduse have induced a lot of change in the U.S. econ-omy. Strong growth in ICT production andemployment (e.g., Figure 14) has come partly byworkers and capital being drawn away from other,less dynamic industries. And the greater use of ICTgoods and services has very often allowed firms toreorganize dramatically large segments of their busi-ness through extensive hiring and/or firing.

A crucial policy question is whether people are will-ing to tolerate the labor-market churning generatedby ICT production and use. The following questionindicates they are. By a wide margin, the majority ofAmericans support ongoing technological progresseven if that progress entails job losses in some tradi-tional industries.

Question: “Do you think it is important thatAmerica remain on the cutting edge oftechnological leadership even if thatmeans losing some jobs in traditionalindustries, or should we concentrate onprotecting traditional jobs even if thatmeans sacrificing American leadershipin technology?”

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Answers: Important that America remainon the cutting edge: 57%Jobs more important: 35%Don’t Know: 8%(Source: Democratic Leadership Council, 12/99)

B. Public Opinions about International Trade and Investment

American attitudes about trade and investment arevirtually the reverse of attitudes about ICT.53 Thegenerally strong support for technology contrastswith a generally strong ambivalence towards tradeand investment. ICT is seen as good for the overalleconomy and growth, trade and investment bad.ICT is seen to improve labor-market outcomes,trade and investment to worsen them. And whilethe majority are willing to accept the labor-marketchurning related to technology, a similar majoritydo not tolerate it for trade.

In terms of the overall economy, a consistent major-ity of Americans think that trade is a net minus.

Question: “Now, I am going to read you two state-ments about foreign trade, and I wouldlike you to tell me which statement bestreflects your views on the issue.Statement A: Foreign trade has beengood for the U.S. economy, becausedemand for U.S. products abroad hasresulted in economic growth and jobsfor Americans here at home. Or,Statement B: Foreign trade has beenbad for the U.S. economy, becausecheap imports from abroad have hurtwages and cost jobs here at home.”

Answers: Good for the U.S. economy: 32%Bad for the U.S. economy: 58%Some of Both: 6%Not Sure: 4%(Source: NBC News/Wall Street Journal, 12/98)

Here is a similar question regarding FDI, whereagain a majority think that the overall economy ishurt, not helped.

Question: “There are different opinions about for-eign investment. Some people thinkthat foreign investment is necessary andhas a positive influence on our econo-my. Others say that foreign investmentis dangerous because it allows outsiderstoo much control over our affairs.Which view is closer to your own?”

Answers: Necessary and positive: 42.7%Dangerous: 51.5%Don’t Know/Refused: 5.8%(Source: PIPA, 10/99)

Americans’ concern over trade and investmentfocuses heavily on the perceived labor-market costsof lost jobs and/or reduced wages. A consistent plu-rality to majority think that trade destroys U.S. jobs.

Question: “Do you think expanded trade leads toan increase or decrease in U.S. jobs?”

Answers: Increase in Jobs: 37%Decrease in Jobs: 56%Don’t Know: 6%Not Sure: 4%(Source: Business Week/Harris, 9/97)

The majority of Americans also think that trade has pressured U.S. wages, in particular for less-skilled workers.

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Question: “Do you think that the growth of inter-national trade has increased the gapbetween rich and poor in this country,decreased the gap, or has had no effect?”

Answers: Increased: 56.2%Decreased: 10.4%Neither: 27.2%Don’t know/Refused: 6.1%(Source: PIPA, 10/99)

For FDI, there is a widespread belief that Americancompanies with global operations “export jobs” outof the United States and thereby hurt the U.S.economy.

Question: “I am going to read you another list ofreasons, having to do with U.S. busi-nesses, that some people have given forwhy the economy is not doing betterthan it is. For each one, please tell me ifyou think it is a major reason the econ-omy is not doing better than it is, aminor reason, or not a reason at all.How about, companies are sending jobsoverseas?”

Answers: Major reason: 68%Minor reason: 25%Not a reason: 6%Don’t know/No opinion: 1%(Source: Washington Post, 7/96)

As with ICT activity, so, too, with trade and invest-ment an important policy question is whetherpeople are comfortable with the labor-marketdynamics involved. Indeed, many of the essentialgains from trade in standard economics arise pre-cisely from the reallocation of labor and capitaltowards a country’s comparative-advantage activities – i.e., the activities a country is relativelygood at relative to the rest of the world. Many of thegains from trade are realized only through theprocess of hiring and firing — just as with the gainsfrom producing and using ICT goods and services.

But in terms of policy choices, a majority ofAmericans consistently support protecting U.S.jobs over liberalizing trade. In the followingextreme case, this trade-off is chosen even when joblosses are assumed to be both temporary and fol-lowed by higher wages.

Question: “As you may know with freer trade, jobsare often lost due to imports from othercountries, while new jobs are createdwhen the US exports more products toother countries. I’d like you to imaginein one industry some jobs are lostbecause of foreign competition, while ina different industry an equal numberare created, but these new jobs payhigher wages. Which of the followingstatements do you agree with the most?A: Even if the new jobs that come fromfreer trade pay higher wages, overall it isnot worth all the disruption of peoplelosing their jobs. B: It is better to havethe higher paying jobs, and the peoplewho lost their jobs can eventually findnew ones.

Answers: Statement A: 55.5%Statement B: 40.3%Don’t know/Refused: 4.2%(Source: PIPA, 10/99)

The contrast in American attitudes on this policyissue of labor-market dynamics between technologyand trade is very striking.

There is evidence that Americans tend to supportmore open trade only when liberalization is explic-itly linked to policies that seek to address anynegative labor-market effects, such as trade adjust-ment assistance. The following question elicits aplurality in support of more open trade only if lib-eralization is gradual enough to allow people timeto adjust to the changes.

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Question: “As you may know, international tradehas increased substantially in recentyears. This increase is largely due to thelowering of trade barriers betweencountries by, for example, loweringimport taxes. Lowering trade barriers isa controversial issue. Here are threepositions on the issue. Which comesclosest to your point of view? A: Weshould keep up barriers against interna-tional trade, because importing cheapproducts from other countries threatensAmerican jobs. B: We should removetrade barriers now because this allowsAmericans to sell in other countrieswhat they do the best job of producing,and to buy products that other coun-tries do the best job producing, savingeverybody money. C: We should lowertrade barriers, but only gradually, soAmerican workers can have time toadjust to the changes that come withinternational trade.”

Answers: Statement A: 31.3%Statement B: 24.0%Statement C: 42.9%Don’t know/Refused: 1.8%(Source: PIPA, 10/99)

C. The Split in Public Opinions

The evidence of this chapter documents a clear splitin American opinions about ICT products on theone hand and international trade and investmenton the other. Policy attitudes are generally quitefavorable towards ICT production and use, but quitenegative towards trade and investment.

This split does not accord with the large body of evi-dence in this report that both the production and theuse of ICT products are intricately linked with inter-national trade and investment. One might expectthis synergy between the economics of ICT activityand globalization to be reflected in broadly similarpublic opinions about economic policy over thesetwo. But opinions show no such similarity.

This split in attitudes is unwarranted. Those interest-ed in the continued production and use of ICTproducts need to be interested in the continued liber-alization of trade and investment policies. More opentrade and investment facilitate the production and theuse of these new technologies, and thereby facilitate ris-ing U.S. living standards.

The following chapter expands on this point withspecific policy recommendations.

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CONCLUSIONS

This Mainstay IV report has been motivated by two broad developments in the U.S. economyin recent years.

The first development is the acceleration in thegrowth of U.S. labor productivity. In the generationbefore 1995, U.S. labor productivity in the non-farm business sector rose at about 1.35 percent peryear. From 1995 to 2000, this growth rate acceler-ated to 2.54 percent per year. As was emphasized inMainstay III, labor productivity is the single bestmeasure of a country’s standard of living.Accordingly, this uptick in U.S. productivitygrowth holds enormous implications for the well-being of all Americans. Many have cited as animportant driver of this productivity uptick ICTgoods and services such as personal computers and the Internet.

The second development is the rising backlash inthe United States and elsewhere against further lib-eralization of trade and foreign direct investment. Alarge number of political events in recent years sug-gest a marked turn away from liberalization: thelapse of “fast-track” trade negotiating authority forthe U.S. president; close Congressional votes overtrade bills such as the North American Free TradeAgreement; the collapse of the OECD negotiationsfor a Multilateral Agreement on Investment; and,perhaps most visibly, disruptive protests in Seattle,Washington, D.C., Genoa, and elsewhere againstintergovernmental organizations, including theInternational Monetary Fund and the World TradeOrganization. In light of these events, many promi-nent observers have raised alarms about a rising“globalization backlash.”

P O L I C Y R E C O M M E N D A T I O N S

CHAPTER V

Conclusions and Policy Recommendations


Motivated by these two broad developments, thisreport has documented the role of internationaltrade and investment in America’s acceleration inproductivity growth. The hope is that this evidencebrings to policy discussions some new arguments insupport of more open trade and investment, in con-trast to the arguments in support of theglobalization backlash.

The central conclusion of Mainstay IV is that thegrowth in both the production and the use of ICTproducts — activities which together account for themajority of the recent acceleration in U.S. productivity — is intricately linked with trade andforeign direct investment. Trade and investment play acritical role in fostering the growth of and the demandfor ICT in ways that support increased productivityand economic growth. The incentives for companiesto produce and/or use these new technologiesdepend crucially on the ability of these companiesto integrate these technologies into their trade andinvestment activities worldwide.

This central conclusion has been based on the following key facts and arguments.

� Since 1995, labor productivity in the UnitedStates has accelerated markedly. From 1973 to1995, output per worker hour in the nonfarmbusiness sector grew at 1.35 percent per year.From 1995 through 2000, growth in labor productivity accelerated to 2.48 percent per year.Higher productivity growth rates directly trans-late into higher U.S. living standards, and themagnitudes involved are dramatic.

� Approximately two-thirds of the productivityacceleration is accounted for by ICT products —

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both their production and their use. Accelerateddeclines in the quality-adjusted price of manyICT products have been the key link betweenICT producers and users.

� On many measures, the structure of productionin the central ICT industries of machinery andelectronic goods is very global — relative to thebroader economy and/or over time as well. Muchof the output in these industries entails multipleproduction stages across multiple countries, alllinked via trade and investment.

� The acceleration since 1995 in quality improve-ments and price declines in many ICT productscoincides with three major WTO agreements. TheTRIPS Agreement, which came into effect in1995 and which aims to foster innovation andprotect intellectual property in all industries, is ofparamount importance for ICT producers. The1997 Information Technology Agreement was adramatic move to eliminate all tariffs worldwidefor a wide array of ICT products, and therebystimulate innovation and competition. And the1997 Basic Telecommunications Agreement liber-alized world production and investment in thiskey ICT service industry. The correlation betweenthese liberalizations and ICT performance is strik-ing, and strongly suggests a prominent role forpolicy liberalization in explaining the recent per-formance of ICT industries.

� The heavy use of ICT products throughout theU.S. economy in recent years coincides with adeepening of trade and investment linkages.Furthermore, industries investing most heavily inICT products also appear to be the industriesengaging most heavily on a global basis.

� Two of the most intensive ICT-using industries inrecent years — telecommunications and financialservices — have also benefited from trade andinvestment liberalization as a result of major WTOagreements, the 1997 Basic TelecommunicationsAgreement and the 1997 Agreement on

Financial Services. This correlation supports theconclusion that trade and investment liberaliza-tion has helped stimulate demand for ICT goodsand services.

POLICY RECOMMENDATIONS

The previous chapter documented a wide gulf sep-arating American public opinions about ICTproducts on the one hand and trade and investmenton the other. Most Americans think quite positive-ly of ICT production and use, but at the same timehold strong reservations about the trade and invest-ment that has promoted ICT production and use.

This split in public opinions does not accord withthe economics linking ICT production and usewith trade and investment. Those interested in thecontinued production and use of ICT productsneed to be interested in the continued liberalizationof trade and investment policies. Freer trade andinvestment facilitate the production of and invest-ment in these new technologies, and therebyfacilitate rising U.S. living standards.

In light of all the findings of this report, U.S. tradeand investment policies should take into accountthe following recommendations.

Recommendation 1

At a general level, policy makers and business leaders should articulate the essential role that tradeand investment play in the creation and use of ICT goods and services — and thereby play in theimprovement of U.S. living standards.

The globalization backlash has generated the needfor new arguments in favor of more open trade andinvestment. There is widespread public support forthe creation and use of new ICT goods and servic-es — in part thanks to the belief, consistent withthe empirical evidence, that ICT activity has been apowerful force behind rising U.S. living standards.

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Contrary to public perception, this report has alsodocumented how trade and investment liberaliza-tion has contributed significantly to the growth ofthe ICT-producing and consuming industries, andthereby to the growth of the overall U.S. economy.Explaining this linkage may provide an effectivemeans of talking to policymakers and the broaderpublic about the critical importance of pursing tradeand investment liberalization policies to support theprosperity of U.S. companies, their workers, and theU.S. economy.

Recommendation 2

Congress and the Executive should continue to pro-mote expansionary U.S. trade and investmentpolicies that make important contributions toAmerica’s high living standards.

Both Mainstay IV and its predecessor, MainstayIII, emphasized that more open trade and invest-ment matter most of all because they contribute tohigher living standards. Barriers to trade and invest-ment that remain should be the target of furtherliberalization efforts.

In particular, it is important to pursue the followingspecific policies in order to maximize the productionand use of ICT technologies and thereby promoteeconomic growth and a high standard of living.

� Trade Promotion Authority: The enactment andrenewal of Trade Promotion Authority legislationis critical to enhance the President’s ability tonegotiate and implement new trade- and invest-ment-liberalizing agreements. This legislation willrenew the Executive-Congressional partnershipthat existed for almost 20 years to promote tradeand investment liberalization worldwide. Thislegislation will facilitate the President’s ability tonegotiate new trade and investment agreementsand Congress’ ability to implement such agree-ments. It will also ensure that Congress and thePresident consult closely and extensively. TradePromotion Authority is a critical policy tool toencourage the negotiation and implementation ofnew agreements that, as discussed below, are of

particular importance for ICT-producing andconsuming industries.

� Negotiation of New Agreements: The Administrationshould continue to negotiate and Congressshould continue to implement trade and invest-ment liberalizing agreements globally in theWTO, regionally in the Americas and elsewhere,and bilaterally. Such agreements will create newopportunities for U.S. companies, workers, andtheir families. Such agreements should provideliberalization that will benefit both ICT-produc-ing and consuming industries in order to reducebarriers worldwide and spur price declines andadvances in productivity. Such agreements arealso critical to ensure that U.S. companies are notput at a competitive disadvantage as the governmentsof our competitors negotiate trade-liberalizingagreements that exclude U.S. companies. Foreigngovernments have already negotiated over 150free trade agreements, while the United States hasnegotiated free trade agreements with only fourcountries: Canada, Mexico, Israel, and Jordan.

� Policies to Promote and Protect InternationalInvestment: The Administration and Congressshould continue to pursue policies that promotestrong investment protections abroad, includingthrough the negotiation of investment treaties andinvestment chapters in free-trade agreements.Such investment protections – including compen-sation for expropriation and guarantees ofnondiscriminatory and fair and equitable treat-ment for all investors – are a critical prerequisite tothe foreign investment that has contributed signif-icantly to the growth of ICT-producing andconsuming industries. Without such protections,foreign investment will be inhibited in new mar-kets to the detriment of these and other U.S.industries and the overall U.S. economy. Suchprotections are also essential to ensure that U.S.companies are not put at a competitive disadvan-tage in overseas markets where foreign competitorsalready benefit in many instances from stronginvestment protections.

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In addition, U.S. trade and tax policy should alsorecognize the importance of international invest-ments and be designed in a manner to promote,not undermine, such investment or the compet-itiveness of U.S. companies operating abroad.

Recommendation 3

The positive role that trade and investment liber-alization has played in the development andgrowth of ICT products should be maintained inat least five specific ways.

The second half of the 1990s witnessed a largeacceleration in U.S. productivity growth. It alsowitnessed a flurry of substantial trade and invest-ment liberalizations relevant to both the productionand the use of ICT goods and services. This coinci-dence strongly suggests that additionalliberalizations can provide additional impetus toproductivity growth. In particular, the followingspecific policies should be pursued.

First, countries that did not originally sign onto theInformation Technology Agreement, the BasicTelecommunications Agreement, and the FinancialServices Agreement should be actively encouragedto do so.

Second, the extension of the original ITA to an“ITA II” should be strongly pursued. This follow-on agreement both would extend zero-tariffcoverage to wider and ever-evolving categories ofICT products and also would move to eliminatenon-tariff barriers as well.

Third, negotiators should continue to press for the dismantling of non-tariff barriers to ICT tradeand investment.

Fourth, policymakers should ensure that no newbarriers to trade and investment are erected, partic-ularly those that may impede the growth of the

ICT-producing and consuming industries. In par-ticular, it will be important for policymakers toensure that electronically-delivered goods and serv-ices receive no less favorable treatment thanproducts delivered in physical form and that theWTO moratorium on duties on electronic trans-missions is extended.

Fifth, it is critical to ensure that intellectual proper-ty rights protections keep pace with technologicaldevelopments and that they are fully and consistent-ly implemented worldwide. The Executive shouldcontinue to press, therefore, for full implementationof the TRIPS agreement and the World IntellectualProperty Organization copyright treaties.

Recommendation 4

Finally, policy makers and business leaders shouldactively support on a bipartisan basis a compre-hensive reform and modernization of adjustmentassistance programs to address more fully theneeds of today’s workers.

A majority of Americans consistently support pro-tecting existing U.S. jobs over liberalizing trade.This policy opinion does not accord with the factthat the majority of Americans support ongoingtechnological progress even if that progress entailsjob losses in some traditional industries.

Despite this split in policy opinions, the reality is thatAmericans do favor more open trade and investmentif liberalizations are explicitly linked somehow topolicies that ameliorate the labor-market impacts. Tothis end, the extension and improvements of adjust-ment assistance on a bipartisan basis will help offsetany dislocations brought about by new or existingtrade and investment agreements and may broadensupport for trade and and investment liberalizations.


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D A T A A P P E N D I X


Glossary of Terms

Here are a few definitions of key concepts usedthroughout the report. Information and communi-cation technology products are taken to mean thehardware and software involved in collecting, pro-cessing, and sharing information across variousmedia. Productivity is taken to mean the productiv-ity of labor, i.e., the amount of output produced perhour worked. Technological change is measuredeither in terms of output increases not accountedfor by increases in inputs, or in terms of output-price declines not accounted for by input-pricedeclines. Exports measure sales by American compa-nies to entities located in other countries. Importsmeasure purchases by American entities of goodscoming from other countries. All these values canbe measured for the entire economy or for individ-ual industries; this report does both.

Data Sources and Description

The data used in this report on U.S. productivity,trade, and foreign direct investment come from var-ious statistical agencies of the U.S. federalgovernment. A brief overview is provided here;additional details on data and measurement is pro-vided in relevant endnotes throughout the report.

The Bureau of Economic Analysis (BEA), U.S.Department of Commerce, the Bureau of LaborStatistics (BLS), and the U.S. Census Bureau pro-duce much of the data related to productivity forboth the overall economy and individual industries.The BLS is the agency that reports standard pro-

ductivity measures for the United States. In recentbusiness, media, and policy discussions of produc-tivity, the most commonly used measure of theoverall economy is the nonfarm business sector.This measure excludes from total national outputthe following: general government, nonprofit insti-tutions, paid employees of private households, therental value of owner-occupied dwellings, and farm-ing. Nonfarm business accounted for about 76 percent of national gross domestic product in1996. Measures of labor hours come from a wide rangeof sources depending on industry and worker type.

Data on U.S. exports and imports come from theCensus Bureau.

Data on the U.S. and foreign operations ofAmerican companies with global operations (i.e., U.S.-headquartered multinational companies)come from the BEA. The BEA refers to Americancompanies with global operations by the alternativephrase, “U.S. multinational corporations.” Thisreport treats the two terms equivalently but usesonly the former. American companies with globaloperations are defined as business enterprises consist-ing of one American parent and at least one foreignaffiliate. A parent is a U.S.-incorporated businessenterprise controlled by an individual, trust, part-nership, or corporation. A foreign affiliate is abusiness enterprise located outside the United Statesin which there exists “outward foreign direct invest-ment” —i.e., direct or indirect control by a singleU.S. parent of at least a 10-percent ownership stake.Majority-owned affiliates are those in which the par-ent has more than a 50-percent ownership stake.

DATA APPENDIX

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1 In this report, the term “American companies with global operations” is synonymous with the com-monly used term “U.S. multinational corporations.” This is defined as a company consisting of one U.S.“parent” business enterprise and one or more foreign “affiliate” business enterprise in which the parentmaintains at least a 10-percent ownership stake. See the Appendix for more details.

2 Output is measured in terms of real gross domestic product (GDP). Prices measure the implicit GDPdeflator. Unemployment is the annual average civilian unemployment rate, constructed each year as thesimple average of that year’s 12 monthly unemployment rates . Data for output and prices come fromthe website of the Bureau of Economic Analysis (www.bea.doc.gov); data for unemployment come fromthe website of the Bureau of Labor Statistics (www.bls.gov).

3 Economists generally think that times of full employment still correspond to non-zero unemploymentrates, thanks to ongoing turnover in labor markets which entail short unemployment spells for peopletransitioning between jobs. The exact level of this “frictional” or “natural” unemployment rate is notknown for sure, but today is widely thought to be around 4 percent.

4 It is important to stress that this report defines productivity as the productivity of labor. Economists useother productivity measures as well. For example, capital productivity is a measure of the average valueof output produced per unit of capital. “Total factor” productivity is a measure of the average value ofoutput produced per bundle of inputs such as labor and capital.

5 Krugman, 1990, pp. 9-13.6 Other options include selling assets or borrowing, but these are not sustainable indefinitely.7 Data for productivity come from the website of the Bureau of Labor Statistics (www.bls.gov), series iden-

tification # PRS85006092.8 There has recently been much discussion in the United States about the accuracy of productivity meas-

ures. One common concern has been whether the growing relative size of hard-to-measure servicesectors complicates output measurement. The U.S. government continually revises its productivitymeasures (and similarly with much other data as well) to account for improvements in both raw under-lying data and technique. It should be noted that the productivity measures reported here incorporateall BLS revisions as of the time of writing, including the substantial downward revision for the late 1990sissued in August 2001, the slight upward revision for 2000 issued in December 2001, and the prelimi-nary 2001 estimates issued in February 2002.

9 The link from higher investment to higher productivity assumes that an economy has not reached its“steady state” at which capital investment just offsets capital depreciation (i.e., the inevitable wear andtear on capital goods from their use). In the steady state (with constant technology and no populationgrowth), output per worker is constant. Most economists think, however, that countries in the real worldtend not to be in steady states.

10 In addition to the 2001 Economic Report of the President, helpful overviews of studies explaining pro-ductivity growth include Baily (2001), Bosworth and Triplett (2000), McKinsey Global Institute(2001), and Stiroh (2001). The main studies of interest that decompose aggregate productivity growthinto its various elements include Gordon (2000), Jorgensen (2001), Jorgensen and Stiroh (1999, 2000),and Oliner and Sichel (2001). Federal Reserve Bank of Kansas City (2001) presents a collection of essayson policy implications of ICT-related productivity growth.

E N D N O T E S

ENDNOTES


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11 Within the widely used Standard Industrial Classification (SIC), many studies term ICT sectors part or allof electrical and non-electrical machinery (SIC 36 and 35, respectively). These industries contain much ofthe ICT hardware such as computers and office products (SIC 357) and semiconductors (SIC 3674).Other ICT sectors include telecommunication services (SIC 48) and information services (SIC 737).

12 Any study of productivity growth must take a range of stances on different measurement and method-ological issues. One is whether output should be measured in terms of GDP, national income, or somemix of both options. Another is, when calculating productivity, should output growth be somehowadjusted for the business cycle. Different stances on these issues largely accounts for the range of exactanswers to the question of what caused the productivity acceleration.

13 A crucial measurement issue for correctly calculating ICT price changes is properly accounting forincreases in product quality. For example, personal computers have enjoyed dramatic quality increasesalong dimensions such as processor speed and memory. These quality increases tend to increase the priceof products, and so must be controlled for in calculating price changes (through methods known in eco-nomics as hedonic regressions). Data requirements for these calculations are very high, as researchersneed very-detailed information on product specifications. For many ICT products, government statisti-cians do not have the requisite product information to calculate quality-adjusted prices. Accordingly, itis widely acknowledged that official price statistics for many ICT products understate true quality-adjusted price declines due to inadequate quality controls. See Jorgensen (2001) for a discussion.

14 Figures 5 and 6 are part of Chart 1-5 from the Council of Economic Advisors (2001). The underlyingdata come from the National Science Foundation and the Patent and Trademark Office of theDepartment of Commerce.

15 A good example of these measurement issues is the treatment of software. Before the 1998 revisions ofthe U.S. National Income and Product Accounts, expenditures for software were not classified as invest-ment (except for software embedded in equipment). Instead, business purchases of software wereclassified as current business expenses for intermediate inputs, and government purchases of softwarewere classified as consumption.

16 This is not to say that technology gains in the ICT sectors have been the only force driving rising ICTinvestments. These investments have also been driven by the overall economic growth and by access tocapital markets — for 1995-2000, both in terms of low interest rates and rising equity values. This linkbetween the production and use of ICT products has been characterized in a number of different waysby economists. For example, Bresnahan and Greenstein (1996) argue that the use of ICT productsentails a substantial amount of “co-invention,” i.e., of adapting general ICT technologies to user-spe-cific needs.

17 It is commonly argued that hiring and firing costs induce firms to wait to gauge the severity of the down-turn before trimming their workforces.

18 In Chart B trade flows are measured in terms of real trade in all goods and services, so output scalingthese trade flows is measured in terms of real GDP. Inward and outward FDI stocks are the current-costvaluation of FDI in the United States and U.S. FDI abroad, respectively. These are valued in nominaldollars (as there is no ready price deflator for FDI flows and/or stocks), so output scaling these FDIstocks is measured in terms of nominal GDP. Unfortunately, FDI data are not available as far back asare the trade data. All data come from the website of the Bureau of Economic Analysis(www.bea.doc.gov), with the FDI data coming specifically from Scholl (2000). Also, data for 2000 FDIstocks are not yet publicly available; accordingly, values for 1999 were used.

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19 Industrial machinery is SIC major group industry 35, and electronic goods is SIC major group indus-try 36. Computers and office products is SIC industry 357, and electronic components and accessories(which includes semiconductors) is SIC industry 367.

20 Trade data for these industries come from The McGraw-Hill Companies, et al (2000). Trade data forthe overall U.S. economy come from the web site of the Bureau of Economic Analysis(www.bea.doc.gov), with all data measured in nominal billions of dollars.

21 These WTO statistics were for trade in office machines and telecommunications equipment, for whichthe United States reported an overall trade deficit in 2000 of $65.28 billion.

22 Trade and output data for these industries come from the National Bureau of Economic Research(2001). Trade and output data for the overall U.S. economy come from the web site of the Bureau ofEconomic Analysis (www.bea.doc.gov). Note that the output concept used here is value added, the out-put concept of GDP at the national level. Value added measures output of goods and services net ofintermediate-input purchases. For a firm or industry, it measures total sales (i.e., gross output) minuspurchases of intermediate inputs. To make its output of goods and/or services, the typical firm not onlyhires labor and capital, but it also purchases intermediate inputs from other firms. These intermediateinputs are then transformed by the hired capital and labor into the finished goods and services.

23 These industry groups and data definitions are as in notes 18, 19, and 22. These data are again from theNational Bureau of Economic Research (2001).

24 These industry groups and data definitions are as in notes 18 and 19. These data are again from theNational Bureau of Economic Research (2001). As stated in note 22, for firms and industries total salesequals value-added output plus purchases of intermediate inputs.

25 Sales data for these industries in the overall United States come from the National Bureau of EconomicResearch (2001). Sales data for the U.S. parents of American companies with global operations comefrom the Bureau of Economic Analysis (www.bea.doc.gov). What is reported for these parents is theirsales of goods only, not of goods and services. This is to maximize comparability with the U.S. indus-try-wide sales data. That said, one potential limitation of these parent data is they classify all of a parent’ssales of goods into the single industry in which that parent is classified. To the extent that some parentsspan multiple lines of business, and thus sell goods across multiple industries, these data may be noisy.That said, for a smaller number of years sales data are also classified by industry of sales, rather than byindustry of parent. Sales data across these two methods are very close to each other. In fact, for ICTindustries parent sales by industry of sales are slightly larger than parent sales of goods by industry ofparent, so this alternative sales measure would make U.S. parents look even more prominent than theyalready do in Chart E.

26 These data on American companies with global operations come from the Bureau of Economic Analysis(www.bea.doc.gov).

27 These data on American companies with global operations come from the Bureau of Economic Analysis(www.bea.doc.gov). The export data come from The McGraw-Hill Companies, et al (2000). The ICTservice industries in this chart together constitute SIC industry 737.


29 These data on American companies with global operations come from the Bureau of Economic Analysis(www.bea.doc.gov), as reported in Hanson, et al (2001). Local sales are defined by whether or not the enti-ty to which an affiliate sells a good resides in the same country as the affiliate. These entities can, of course,export their purchased goods to foreign markets. Given that such second-party exports are not captured inthe data, the measured ratio of affiliate exports to total sales is a lower bound for the true value.

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30 These data on American companies with global operations come from the Bureau of Economic Analysis(www.bea.doc.gov). These firm-wide calculations measure U.S. parents plus majority-owned foreignaffiliates. Minority-owned affiliates do not report sufficient data to be part of these calculations.

31 These data on American companies with global operations come from the Bureau of Economic Analysis(www.bea.doc.gov). For parents, reliance on imported intermediate inputs may be understated to theextent that inputs purchased from domestic suppliers had in turn been sourced from abroad. Also, notethat parents’ imported inputs measure imports from both affiliates and unaffiliated parties as well. Foraffiliates, data are not reported for input purchases from countries outside host countries other than theUnited States. Accordingly, affiliate total imports of inputs from all possible sources is not known, butwould be greater than the U.S. component of that total.

32 Additional evidence supporting this idea that comparative advantage falls across fine activities withinindustries comes from the ICT trade balances of many low-income countries. The McGraw HillCompanies, et al (2000) reports that in many central ICT industries, many low-income countries suchas Mexico, Malaysia, Philippines, and South Korea are large exporters running net trade surpluses. Thisis consistent with global production networks in which these countries tend to import ICT intermediates,add value to these intermediates, and then export them on to additional countries. There are also com-pelling studies of international production networks for very specific activities within ICT sectors — e.g.,McKendrick’s, et al (2000) coverage of producing hard-disk drives. Moran (2001) discusses this andother studies from the standpoint of benefits to countries hosting foreign affiliates. Council of EconomicAdvisors (2001, chapter 4) also discusses hard disks, as well as semiconductors.

33 Much of the information on these trade agreements was obtained from the web site of the World TradeOrganization (www.wto.org).

34 For other discussions of the evidence linking international competition with innovation, see Baily(2001), Baily and Gersbach (1995), and Lawrence (2000). A large amount of compelling firm- andindustry-level evidence on this link has been assembled by McKinsey Global Institute (1993, 2001).

35 The situation can be more complex when trade liberalization affects not just the returns to innovationbut also the costs of innovation, thanks to changes in a country’s underlying cost structure. The stan-dard economics reference on theoretical linkages between innovation and economic openness isGrossman and Helpman (1991).

36 The modifier “basic” in the BTA refers to the fact that this agreement did not cover “value added”telecommunications services. These are defined as telecommunications activity in which customer infor-mation is somehow enhanced, stored, or retrieved by the supplying firm. Examples here include on-linedata processing, storage, and retrieval; email, and voice mail. For a comprehensive overview of the nego-tiating history and implications of the BTA, see Hufbauer and Wada(1997).

37 This is part of Chart 1-5 from the Council of Economic Advisors (2001). The industries included inthis figure are computer, data processing services, and communication services; the underlying datacome from the Department of Labor’s Bureau of Labor Statistics.

38 These numbers are taken from Figure 5.1 of U.S. Department of Commerce (2000), the underlyingdata come from the Department of Labor’s Bureau of Labor Statistics. The definition of ICT industrieshere is very broad and includes computer and networking hardware, communications equipment, soft-ware, and a range of services.

39 ICT employment after 1998 almost surely rose to even higher levels by early 2000, and then fell backwith the general economic slowdown. A reasonable guess might be that by the end of 2001 ICTemployment was about at its 1998 level. To put the employment levels in Chart L in context, 1998 U.S.employment in apparel and fabricated textiles (SIC industries 22 and 23) was about 1.2 million while

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1998 U.S. employment in metals manufacturing (SIC industry 33) was about 0.6 million, of whichabout 0.2 million worked in steel-related activities. These numbers come from The McGraw HillCompanies, et al (2000).

40 The two most recent Economic Reports to the President (Council of Economic Advisors, 2000, 2001)each discuss how ICT use alters firms’ operations. Litan and Rivlin (2001) summarize the findings ofBrookings Task Force on the Internet (2001) on several industries’ use of Internet technologies. Mann,et al (2000) examine various kinds of e-commerce. Brynjolfsson and Hitt (2000) offer firm-level evi-dence on the clustering of operational changes.

41 An example of the international dimension to ICT-mediated input procurement appears in Council ofEconomic Advisors (2000, p. 119): “In one such auction for printed circuit boards, the auction special-ist first identified 29 bidders in North America, Asia, and Europe. Eight of the firms had done businesswith the buyer before, but the remainder had not … By the time the auction had concluded … threebidders had submitted virtually identical low bids, and the buyer was able to reduce its expected cost by42 percent.”

42 Bonds and Aylor (1998) report 1992 U.S. investment by industry and type of capital good. That year,the five industries that were the largest purchasers of computer equipment were, in order, financial serv-ices, business services, wholesale trade, communications, and insurance. These five industries accountedfor more than 50 percent of total U.S. computer investment that year. That same year, the top threeinvestors in telecommunications equipment were communications, air travel, and finance/insurance.These industries accounted for about 67 percent of total U.S. telecommunications-equipment invest-ment that year.

43 Council of Economic Advisors (2000) reports calculations of 1996 U.S. investment per worker in infor-mation-technology products. Among the top 15 industries were telecommunications (#1),nondepository institutions (#2), insurance carriers (#9), depository institutions (#10), holding andinvestment offices (#11), and wholesale trade (#13).

44 Capital-stock data for these industries comes from the Bureau of Labor Statistics, as reported in Feenstraand Hanson (1999). The measure of ICT capital includes office, computing, and accounting machin-ery; communications equipment; and scientific and engineering instruments. The trade and output dataare from the National Bureau of Economic Research (2001).

45 This correlation of 0.64 is weighted by industry value of shipments, and is significantly different fromzero well beyond the one percent significance level. A regression (like the correlation, weighted by ship-ments) of export intensity on ICT use yields the same qualitative information as this correlation, interms of a significantly positive coefficient estimate. This is true even if the regression includes a full setof 20 industry dummy variables to account for level differences across industries. The significant corre-lation is also robust to excluding certain industries — in particular, the ICT-producing industries ofmachinery and electronics.

46 These data on American companies with global operations come from the Bureau of Economic Analysis(www.bea.doc.gov). For 1998 data were available for exports of goods only, rather than of goods andservices. Accordingly, 1998 total parent sales are also of just goods, rather than of goods and services.The publicly-available BEA data suppress most of the export data for service industries; accordingly,these industries are excluded from Chart M. U.S. sales are defined by whether or not the entity to whichthe U.S. parent is selling resides in the United States. These entities can, of course, export their pur-chased goods to foreign markets. Given that such second-party exports are not captured in the data, themeasured ratio of parent exports to total sales is a lower bound for the true value.

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47 These data on American companies with global operations come from the Bureau of Economic Analysis(www.bea.doc.gov), as reported in Hanson, et al (2001). Local sales are defined by whether or not the enti-ty to which an affiliate sells a good resides in the same country as the affiliate. These entities can, of course,export their purchased goods to foreign markets. Given that such second-party exports are not captured inthe data, the measured ratio of affiliate exports to total sales is a lower bound for the true value.

48 These data on come from Table 5, p. 40, of Feenstra (1998). Note that U.S. statistical agencies do notdistinguish imported from domestically sourced inputs for all U.S. firms. Accordingly, these importshares are estimated as described in Feenstra (1998).


50 These data on American companies with global operations come from the Bureau of Economic Analysis(www.bea.doc.gov). Affiliate data for finance/insurance and wholesale trade were reported in Hanson,et al (2001).


52 Much of the information on these trade agreements was obtained from the web site of the World TradeOrganization (www.wto.org).

53 The following survey questions about trade and investment are drawn from Scheve and Slaughter (2001).

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NOTES

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