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Remember manufacturing? For some policymakers with an eye on the future, it may be easy to forget. After all, manufacturing is on the decline in the OECD area in terms of GDP and employment. But according to “The Changing Nature of Manufacturing in OECD Economies”, an OECD working paper, there are many reasons to take manufacturing seriously, not least because of its role in technological innovation.
Indeed, manufacturing still accounts for the bulk of business spending on research and development, although it is highly concentrated in a few industries and firms. For example, in Canada, Finland, Ireland, the US and the UK, over 60% of all manufacturing R&D is accounted for by high-technology industries. In Germany, Japan, the Czech Republic and a few others, medium-high technology industries account for a large share of the total. Combined, these two technology groups account for 80%90% of total manufacturing R&D in most OECD countries.The authors point out, however, that the share of R&D in manufacturing has also declined, reflecting a variety of factors, such as growing R&D in certain services sectors and the outsourcing of R&D to specialised labs. And with the end of the “new economy” bubble in 2000, R&D in manufacturing has shrunk.Still, according to the paper, manufacturing explains much of the OECD’s dominance in global innovation. It establishes this partly by looking at the R&D undertaken by manufacturing firms and how it is turned into patentable innovations–part of the intellectual property of firms. The data for major innovations filed at all three major global patent offices–the US Patent and Trademark Office, the Japan Patent Office and the European Patent Office–show that countries such as China and the Russian Federation spend a lot on R&D, but account for a small share of these so-called “triadic” patents. These countries are still primarily oriented towards imitation. In contrast, data show that countries like Japan, Germany, Switzerland, Sweden and the Netherlands make a relatively larger contribution to such patents. These countries are the innovators.A paradox of manufacturing is that while it is in relative decline in value-added and employment terms, it continues to register healthy growth, fuelled by strong consumer and business demand for goods.So why the fall in employment? The expansion of services is an obvious structural reason. However, the authors point out that in the G7 countries–these account for approximately 70% of OECD manufacturing employment–most of the decline in employment has occurred in just two activities: textiles and metals. In areas like food products, chemicals and motor vehicles, G7 employment has been quite stable.One common mistake is to assume manufacturing employment has simply flowed into high-tech industries. This was true in the 1980s, but not so lately. In fact, only one such industry in the OECD area–pharmaceuticals–has experienced employment growth over the past decade, with the likes of computers and aircraft in sharp decline.
Nor has manufacturing employment declined because of offshoring to non-OECD countries. Sure enough, the number of manufacturing workers in non-OECD countries is far higher than in the OECD area. But estimates show that manufacturing employment in large emerging economies such as Brazil, China and Russia, has also declined.Ultimately, beyond services, a key cause of the underlying fall in manufacturing employment everywhere is rapid productivity growth, whether by restructuring inefficient plants or deploying skills, knowledge, technology and new processes to boost efficiency. The annual growth in manufacturing productivity in the OECD stands at some 2%-4%, which is far higher than the economy-wide figure. As the manufacturing story confirms, innovation is not just about new products, but new and better ways of doing old things as well. RJC
Pilat, Dirk, Agnès Cimper, Karsten Olsen and Colin Webb (2006), “The Changing Nature of Manufacturing in OECD Economies”, STI Working Paper 2006/9, OECD, Paris. It is available at www.oecd.org/sti under Publications & Documents, scroll to Working Papers.
©OECD Observer No. 261, May 2007