Executive Summary

Key takeaways:

  • Knowledge- and technology-intensive (KTI) industries—industries that globally invest the largest shares of their output in research and development (R&D)—contributed 11% to both U.S. gross domestic product (GDP) ($2.3 trillion) and global GDP ($9.2 trillion) in 2019.
  • Value added generated by domestic KTI industries increased by 2.2% in 2019–20 as industries responded to a surge in demand, even as the overall U.S. GDP declined during the COVID-19 pandemic.
  • U.S. KTI production is geographically concentrated, with 15 states accounting for 76% of the total value added generated domestically by KTI industries. California accounts for the largest share (25% in 2020), followed by Texas (8%), Washington (6%), and New York (5%).
  • U.S. KTI industries employ disproportionately more workers in science, technology, engineering, and mathematics (STEM) occupations compared to other industries and have high concentrations of foreign-born workers, primarily from India, China, the Philippines, Vietnam, and Mexico.
  • The United States and China share the top spot as the world’s largest producers of total KTI output (each with a 25% global share of KTI value added in 2019). The United States leads production in KTI services industries, whereas China leads in KTI manufacturing.
  • The United States is the world’s third-largest exporter of KTI products, behind China and Germany. U.S. KTI exports, however, contain a higher portion of domestic value compared to the KTI exports of China and Germany, indicating a lower reliance on foreign inputs.
  • The demand for artificial intelligence (AI)- and biotechnology-related skills, two technologies critical for the rapid response in 2020 to the global pandemic, has grown consistently over the last few years, although it is concentrated within a few states.

R&D activities that advance science and technology (S&T) play a central role in a country’s economic growth and competitiveness. KTI industries comprise both manufacturing and services industries with the largest investments in R&D relative to their production. KTI manufacturing industries include air and spacecraft and related machinery; pharmaceuticals; computer, electronic, and optical products; chemicals and chemical products; transportation equipment (excluding aircraft); electrical and other machinery and equipment; and medical and dental instruments. KTI services industries include information technology (IT) and other information services; software publishing; and scientific research and development.

In the United States, the share of GDP produced by KTI industries has been relatively stable at 11% since 2002. However, a shift has occurred in the composition of U.S. KTI output away from manufacturing industries and into services industries. The value added generated by KTI services industries increased much faster than that of manufacturing industries, and as a result, the services share of total KTI value added increased from 29% in 2002 to 47% in 2020. IT and other information services generated the most value added among the KTI services industries, followed by software publishing; these two services industries jointly accounted for 40% of U.S. total KTI value added in 2020.

During the COVID-19 pandemic (2019–20), the value added generated by KTI industries increased even as GDP declined. This increase was led by increases in output of industries that supported aspects of transitioning to remote work and learning and to supplying medical products. During this period, the value added of medical and dental instruments, pharmaceuticals, IT and other information services, software publishing, and computer, electronic, and optical products increased, while manufacturing of chemicals, transportation equipment, and electrical and other machinery and equipment declined.

Although KTI output continues to increase in the United States, it is highly concentrated and specialized geographically. Fifteen states account for 76% of the total value added generated domestically by KTI industries, with California producing the largest share (25% in 2020). KTI industries in Washington account for the largest share of state GDP (24%) compared to other states. KTI manufacturing is concentrated in the Midwest, along the coasts, and in a few states in the South, while KTI services are concentrated along the coasts and a few Southwestern states. For instance, Michigan, Indiana, and Kentucky are the most specialized in motor vehicles manufacturing, while California and Virginia are the most specialized in IT and other information services.

U.S. KTI industries employed 16% of the U.S. science, technology, engineering, and mathematics (STEM) workforce in 2019. Most KTI manufacturing industries employed STEM workers without a bachelor’s degree, also known as the skilled technical workforce (STW), at higher proportions compared to STEM workers with a bachelor’s degree or above. In contrast, all KTI services industries, as well as pharmaceuticals and computer, electronic, and optical products manufacturers, employed disproportionately more STEM workers with a bachelor’s degree or above relative to the STW. Similarly, foreign-born workers make up proportionately more of the STEM workforce in these same industries. Across all KTI industries, foreign-born workers constituted 26% of the STEM workers employed by KTI industries, with India, China, the Philippines, Vietnam, and Mexico being the top 5 countries of birth.

China surpassed the United States to become the world’s largest producer of KTI manufacturing output in 2011, and it has been driving the rapid increase of global output for many KTI manufacturing industries over the past decade. China’s global share of KTI manufacturing value added has increased from 20% in 2011 to 31% in 2019. Although U.S. KTI manufacturing output continues to increase and the United States continues to account for the largest shares of global value added generated by the air and spacecraft, medical and dental instruments, and pharmaceuticals industries, its share of global KTI manufacturing value added has fluctuated between 19% and 21% since 2011. During this period, the United States has increased its global share of KTI services value added from 30% in 2011 to 37% in 2019. The United States is the largest producer of IT and other information services, which is the largest global KTI industry.

Consistent with its declining global share of KTI manufacturing output, the U.S. share of global KTI exports has fallen over the last decade, and the U.S. trade deficit has widened. In 2019, the United States was the world’s third-largest exporter of KTI products, behind China and Germany. The United States, however, has a positive and growing trade balance in KTI services. The decomposition of KTI exports into domestic and foreign value-added content shows that the United States has a lower proportion of foreign value in its KTI exports (averaging 15% in 2002–18) compared to both China (27%) and Germany (24%), indicating a lower reliance on foreign intermediate inputs for its KTI exports. The foreign content share of KTI exports has gradually declined for many countries since 2011, consistent with rising S&T capabilities worldwide. The decline is more pronounced in China (33% in 2004, down to 23% in 2018) and is largely a result of China’s efforts to build domestic S&T capacity.

Many KTI industries are either developing or using biotechnology and AI technologies, which are essential to the U.S. life sciences research enterprise and were key to coronavirus research and the development of COVID-19 vaccines. The pharmaceutical industry performs most biotechnology R&D in the United States, and since 2010, the rate of increase in business R&D performance in biotechnology has outpaced that of total domestic R&D. Analysis of the geographic distribution of demand for AI- and biotechnology-related talent shows an increasing demand for both skill sets over the last few years, which accelerated during the COVID-19 pandemic. The demand for AI- and biotechnology-related skills is mainly concentrated in a few states in the West and Northeast. Regional analysis of venture capital data for the U.S. AI and biotechnology sectors shows that venture capital financing is also highly concentrated in the West and Northeast. The dominance of the Northeast and West across these measures is consistent with these regions producing the most KTI output.

Limited internationally comparable data on biotechnology show that the United States performs the most R&D on biotechnology, patents the most biotechnology products, and attracts the most venture capital investment. However, China has recently committed resources to support research and commercialization of biotechnology and has an increasing role in biotechnology patenting and venture capital. Similar to biotechnology, the United States and China are investing heavily in the research and commercialization of AI. Both countries have AI initiatives to increase public funding of AI R&D, develop and improve the skills necessary at the workplace to utilize AI effectively, and promote collaboration between the private sector, universities, and government.