Structural change, growth and innovation: the roles of medium and low-tech industries, 1980-2000

It is often argued that high tech industries drive growth processes, and that they are the sources of growth in output, employment and productivity in the knowledge economy. This is a special case of a more general argument that economic growth is characterized by the creation of new and the replacement of old industries. ICT sectors are often treated as the most important examples of this enhanced role of high tech at the present time. This approach implies that low tech industries have declining shares of output for two reasons: their growth is lower (or they are declining absolutely) and they are relocating to low wage economies. That is, they exhibit trade-driven 'hollowing out'. If true, these claims would imply that shares of high tech output are rising significantly in growing economies, while low tech shares are falling significantly, and that countries with larger high tech sectors will exhibit higher growth rates. This paper examines such claims. The issues are explored using OECD manufacturing and trade data for the twenty-year period 1980-1999. We show that overall economic structures of OECD economies have changed, particularly reflecting the growth of financial services and social and community services. Within manufacturing, however, structural change has occurred but has been rather small, and does not account for the manufacturing growth that has occurred. We show that there is considerable variation in manufacturing structures across OECD economies, and argue that structural diversity would diminish over time if growth was high-tech driven. This does not occur - comparative structures persist over time, and growth performance across countries is not correlated with shares of high tech in manufacturing. The slowness of structural change means that low tech and medium low tech sectors remain by a wide margin the largest components of manufacturing output and employment in OECD economies. We examine trade patterns for low and medium low tech sectors, and show that changing domestic demand for low tech manufactures has largely been met by changing domestic production. There has been some widening of trade deficits, but this has been small: there is no trade-driven 'hollowing out'. We argue that these industries persist because of pervasive innovation within them: they are constantly renewed by technological upgrading, which accounts for their survival.