High-Tech Growth In Low Wage Countries: Size and Effect

The relaxation of international trade barriers and increased emphasis on globalization have had significant effects on the world's high-tech manufacturing industry. Two recent papers look at the phenomenon. An Infobrief from the National Science Foundation focuses on the growth of high-tech manufacturing in Latin America and a working paper released by the National Bureau of Economic Research considers the changes in the composition and character of the U.S. manufacturing industry in light of globalization. Brief summaries and links to download each report follows below.

Latin America: High Tech-Tech Manufacturing on the Rise, But Outpaced by East Asia

High-tech manufacturing has grown substantially over the last decade in Latin America according to an August 2002 InfoBrief by Derek Hill for the National Science Foundation. Latin America: High Tech-Tech Manufacturing on the Rise, But Outpaced by East Asia states that the combined high-tech manufacturing production of seven Latin American countries has increased 93 percent between 1991 and 2000 to a total of $52 billion by the end of the century.

The study attributes much of this rise to a tremendous increase in foreign direct investment (FDI) to the entire region. FDI has increase from $11 billion in 1991 to $67 billion in 2000. Brazil and Mexico received a combined 60 percent of all FDI in the region in 2000. Hill reports FDI was predominantly in manufacturing in the early 1990s, but, because countries liberalized opportunities for investment in service industries, FDI shifted quickly away from manufacturing. Manufacturing, which captured a majority of FDI in Mexico and Brazil in the mid 1990s, still snared, respectively, 46 percent and 24 percent of the countries' FDI in 2000.

While 90 percent of the region's total high tech manufacturing takes place in Argentina, Brazil and Mexico, the sector is most prominent for Costa Rica's economy. The InfoBrief reveals Costa Rica has Latin America's highest ratio of R&D to gross domestic product.

The international pharmaceutical industry accounts for the largest share of total high-tech production in Latin America with the aircraft sector holding the smallest. The communications equipment sector grew by 48 percent in the region between 1991-2000.

Hill points out that, while there has been a tremendous increase in high-tech manufacturing in Latin America, it has not kept pace with many East Asian economies. The most pressing issue for Latin America is whether or not they can continue to progress and compete in the global marketplace. The InfoBrief outlines three keys for Latin America economies:

• Political Stability
• Access to Capital
• Infrastructure and institutions that can support technological and economic development

The full InfoBrief can be found at: http://www.nsf.gov/sbe/srs/infbrief/nsf02331/start.htm

Survival of the Best Fit: Competition from Low Wage Countries and the (Uneven) Growth of U.S. Manufacturing Plants

In a related NBER working paper, Survival of the Best Fit: Competition from Low Wage Countries and the (Uneven) Growth of US Manufacturing Plants, Andrew B. Bernard, J. Bradford Benson, and Peter K. Schott analyze the effect that competition from low-wage countries, such as those identified in the above paper, has had on the industrial make-up of the U.S. economy over the past three decades.

The authors state that as imports from low-wage companies increase, U.S. manufacturers have been forced to restructure toward more capital intensive and skill intensive industries, at times changing product mixes or complete sectors. Successful firms switch to industries that are more capital and skill intensive to move away from products that are being produced and imported from the low wage countries.

Manufacturers in the lowest skill, lowest wage industries have been hit the hardest; global low-wage imports have forced the closure of many of the most labor-intensive manufacturing facilities across the country. "Relative to the average plant, a 10 percentage point rise in low wage import shares decreases employment and output growth by 1.3 and 1.6 percentage points per year respectively."

The study emphasizes that this is just introductory research in this area. Further research needs to be conducted investigating items such as U.S. firms' responses to this competition in the way of investment, workforce upgrading, and product innovation.

The full paper can be found at: http://papers.nber.org/papers/W9170

Editors' Note: Many states and communities have grappled with the economic ramifications of manufacturing's transformation. The NBER work provides a strong rationale for public tech-based economic development policies to increase the affordability with which manufacturers can make the transition to more capital intensive sectors, to enlarge the high-skill workpool available for skill-intensive industries, and to help firms adopt leaner manufacturing practices, processes and technological advances.

The growing educational and technical sophistication of lower-wage nations brought about in part from the successful infusion of FDI as described in the NSF InfoBrief and through broader diffusion of information and communication technologies, suggests pressure on skill-intensive industries will increase as these nations are able to offer competitively lower wage employment pools.

Technological advances in broad fields like nanotechnology and biotech add additional pressures on the U.S. manufacturing's competitive posture.

What then, given these factors, will be the character of U.S. manufacturing, and subsequently the entire economy -- in 20 years? What should state and local technology-based economic development officials be doing now to be competitive in 2022?

Several sessions at SSTI's 6th annual conference will encourage forward-looking discussion of these and related policy questions. More information is available at: http://www.ssti.org/conference02.htm [expired]