Digital Economy
CHAPTER III
INFORMATION TECHNOLOGY INDUSTRIES (52)
The prodigious vitality of the digital economy is grounded in Information
Technology (IT) producing industries--the firms that supply the goods and
services that support IT-enabled business practices across the economy, as well
as the Internet and e-commerce. (See Table 3.1, below). Over the past decade,
and especially since the mid-1990s, these industries have been a powerful
factor in the economy's rapid and sustained growth, a significant restraint on
inflation, and a focal point of prolific technological innovation. This chapter
examines the performance of IT-producing industries and analyzes their
contribution to the new economy.
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Table 3.1
Information Technology Producing Industries
Hardware Industries Software/Services Industries
Computers and equipment Computer programming services
Wholesale trade of computers and equipment Prepackaged software
Retail trade of computers and equipment Wholesale trade of software
Calculating and office machines Retail trade of software
Magnetic and optical recording media Computer-integrated system
design
Electron tubes Computer processing, data
preparation
Printed circuit boards Information retrieval services
Semiconductors Computer services management
Passive electronic components Computer rental and leasing
Industrial instruments for measurement Computer maintenance and repair
Instruments for measuring electricity Computer related services, nec.
Laboratory analytical instruments
Communications Equipment Industries Communications Services
Industries
Household audio and video equipment Telephone and telegraph
communications
Telephone and telegraph equipment Radio and TV broadcasting
Radio and TV communications equipment Cable and other pay TV services
Note: Industries represented and measured here are defined in a manner
consistent with the 1987 Standard Industrial Classification (SIC) categories,
rather than the newly implemented North American Industry Classification
System. This was done both to provide a consistent GPO time series prior to
1997 and because Census revenue data for computer services and communication
services through 1998 continued to be released according to their SIC
categories.
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IT-PRODUCING INDUSTRIES--GROWTH ACCELERATES COMPOSITION SHIFTS TOWARD SOFTWARE
AND COMPUTER SERVICES
Since the mid-1990s, IT-producing industries have shown extraordinary dynamism.
Prepackaged software and computer services had the highest growth rate,
increasing their output (gross product originating or GPO) from 1995 to 2000 at
a remarkable average annual rate of 17 percent (nominal dollars). (Figure
3.1) Over the same period, the computer hardware and communications equipment
industries increased their output at a 9 percent annual rate, and output in the
communications services sector rose at a 7 percent annual pace.
This dynamic growth increased IT industries' share of total output from 6.3
percent in 1994 to an estimated 8.3 percent this year. (Figure 3.2) By
contrast, between 1990 and 1994, these same industries' share of the economy
grew much more slowly--by only about 0.5 percentage points overall. (54) The
rapid increase in these industries' share of the economy after 1994 is
particularly impressive in view of both the rapid growth of the economy as a
whole and the accelerated decline in IT prices over the period.
The recent swift growth of IT industries has also coincided with sharply
declining prices of IT goods and the rapid expansion of both the Internet and
network-related business processes. A modest share of IT growth also reflected
spending related to addressing Y2K-related computer problems. ESA analysts have
estimated that Y2K-related spending accounted for roughly 7 percent of the
output of IT-producing industries in 1998 and 1999. (55)
FALLING IT PRICES HAVE REDUCED OVERALL U.S. INFLATION
The declining prices of IT goods and services have worked, directly and
indirectly, to reduce overall inflation in the U.S. economy. Since the
mid-1990s, the price decline for IT products has accelerated--from about 1
percent in 1994, to nearly 5 percent in 1995, and an average 8 percent for the
years 1996, 1997, and 1998. (Figure 3.3 and Table 3.2) The steepest price
declines occurred in the computer and semiconductor industries, where prices
fell at average annual rates of 24 percent and 29 percent respectively, for the
years 1995 to 1998.
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Table 3.2
Price Changes:
IT-Producing and All Other Industries
94 95 96 97 98
(Percent)
IT-Producing Industries -1.4 -4.5 -8.1 -7.1 -8.0
GDP, not including IT industries 2.3 2.5 2.5 2.3 1.8
GDP, including IT industries 2.1 2.1 1.8 1.9 1.2
Source: ESA estimates based on BEA and Census data.
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Over the same period, lower prices in the IT sector reduced overall U.S.
inflation directly, on average, by about 0.5 percentage points a year--from 2.3
percent to 1.8 percent. In 1998, falling IT prices helped hold overall
inflation to just over 1 percent--the smallest increase in the GDP chain-type
price index since 1963. (Figure 3.4 and Table 3.2)
Moreover, because these estimates focus only on the direct effects and ignore
the indirect effects of lower prices, they almost certainly understate IT's
full importance in keeping inflation low. A more complete estimate of IT's role
would cover not only the direct effects on inflation of price reductions in 8
percent of the U.S. economy that produces IT goods and services, but also the
price effects of the increased competition and efficiency induced by IT
deployment in the 92 percent of the economy outside the IT-producing sector. We
have no way to disaggregate and measure these effects on their own. But their
embedded influence is reflected in the upper line in Figure 3.4, which shows
declining inflation in non-IT producing industries between 1996 and 1998.
IT-PRODUCING INDUSTRIES ACCOUNT FOR NEARLY ONE-THIRD OF REAL GDP GROWTH BETWEEN
1995 AND 1999
IT industries produce less than 10 percent of total U.S. output. Nevertheless,
between 1995 and 1999, because of IT industries' extraordinary growth and
falling prices, they accounted for an average 30 percent of total real U.S.
economic growth. (56)
(Figure 3.5 and Table 3.3)
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Table 3.3
IT-Producing Industries:
Contribution to Real Economic Growth
94 95 96 97 98 est. 99 est.
(1) Changes in Real (Percent)
Gross Domestic Income* 4.2 3.3 3.5 4.7 4.8 5.0
(Percentage Points)
(2) IT Contribution 0.8 1.0 1.2 1.3 1.3 1.6
(3) All Other Industries 3.4 2.3 2.3 3.4 3.5 3.4
(4) IT Portion (Percentage Share)
Of GDI Change (2)?(1) 19 30 34 28 27 32
*GDI is equal to the income that originates in the production of goods and
services attributable to labor and property located in the U.S.
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USE OF IT EQUIPMENT INCLUDING SOFTWARE
A critical factor in IT's predominant role in recent U.S. growth is the
increasingly dominant part that IT equipment, including software, plays in
business investment activity. In current dollars, industry spending on IT
equipment and software rose from $198 billion in 1992, or 44 percent of all
equipment spending, to $407 billion in 1999, or 46 percent. (Figure 3.6)
Over the same period, "other capital equipment," including industrial
equipment, fell from 38 percent of total equipment and software investment
spending to 32 percent, and transportation equipment ranged between 18 percent
and 21 percent.
Because prices for IT equipment and software have been falling, investment
spending shifts are even more pronounced when expressed in real dollars, rather
than nominal amounts. (Figure 3.7) Since 1995, prices of IT capital equipment
and software have dropped by an average 6.7 percent per year, while prices for
transportation capital equipment have increased at a 0.6-percent average annual
rate and prices for other types of capital equipment have increased at a
1.5-percent rate.
As a result, real business investment spending on IT equipment and software
more than doubled between 1995 and 1999, from $243 billion to $510 billion
(1996 dollars), while real spending on transportation equipment increased by
about half and real spending on other capital equipment increased slightly.
Over the decade of the 1990s, growing industry spending on IT equipment and
software was a significant factor in the high rate of growth of U.S. spending
on all categories of equipment to 9-to-10 percent per year, compared to 5-to-6
percent a year in the 1980s. (58) In 1999, business spending for IT equipment
and software represented more than three- fourths of the 12 percent real growth
in total equipment and software spending that year, compared to 65 percent of
the real growth in equipment spending for 1995- 1998 and less than 50 percent
for 1993- 1994. (Figure 3.8 and Table 3.4)
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Table 3.4
Contribution of IT Equipment*
To Growth in Capital Equipment and Software
93 94 95 96 97 98 99
(1) Change in real spending (Percent)
for capital equipment 11.4 11.8 11.9 11.0 11.5 15.8 12.1
(2) Contribution of real spending (Percentage Points)
for IT equipment 5.4 5.3 7.4 7.5 7.5 9.8 9.4
(3) Contribution for all other types
of capital equipment 6.0 6.5 4.5 3.5 4.0 6.0 2.7
(4) IT's contribution to change in (Percent)
real capital equipment spending 47 45 62 69 66 62 78
* Defined by BEA as information processing and related equipment
Source: ESA estimates derived from BEA data
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In nominal dollars, investment patterns within IT industries also show a
substantial shift to software. As a share of total IT equipment investment,
spending for software increased from just over 30 percent in 1992-1995 to 35
percent in 1999. (Figure 3.9) Despite the rapid decline in computer prices
(Figure 3.3, above), computers' share of IT equipment investment in nominal
dollars remained relatively constant over the 1992-1999 period. Other IT
equipment, including spending on communications equipment, remained the largest
category of IT equipment purchases, although its share declined from 47 percent
in 1992 to 41 percent in 1999.
Analysis of the composition of IT investment in real rather than nominal
dollars yields a somewhat different picture because prices have declined far
more rapidly for computer than for other kinds of IT equipment and software.
Measured in real dollars, beginning in 1994, investment in computers
accelerated more rapidly than investment in the two other IT categories,
surpassing investment in these categories by 1998. (Figure 3.10) In 1999,
price- adjusted spending for computers totaled $222 billion, compared with $149
billion for software and $170 billion for other IT equipment.
R&D INVESTMENT IN IT INDUSTRIES
The surge in IT investment since 1994 has been accompanied by sharp increases
in R&D investment in the economy as a whole and in IT-producing industries in
particular. Between 1994 and 1999, total U.S. R&D investment grew at an average
annual (inflation adjusted) rate of 6 percent. In contrast, between 1989 and
1994, R&D investment grew at an average annual rate of roughly 0.3 percent.
All of the growth in R&D investment in the 1990s came from the private sector.
(59) Between 1995 and 1998, IT industry investment accounted for 37 percent of
this growth. (60) In 1998, IT industries invested $45.7 billion on R&D, nearly
half as much again as total R&D investment by the motor vehicle, pharmaceutical
and aerospace industries--industries that traditionally invest large amounts on
R&D. (Table 3.5)
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Table 3.5
Company-funded R&D Investment by Sector, 1998
$billions Percent
All Industries 45.0 100.0
IT-Producing* 45.7 31.5
Computers 8.9 6.1
Communication equip. 10.2 7.1
Electronic components 9.8 6.8
Communication services 1.7 1.2
Software & computer services 14.3 9.9
Motor Vehicles 13.5 9.3
Pharmaceuticals 12.6 8.7
Aerospace 5.1 3.5
All Other Industries 68.1 47.0
*R&D data for IT industries from the Instrument sector are not available for
1998.
Source: National Science Foundation
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Between 1992 and 1994, IT-industries' share of all company-funded R&D grew
moderately, from 27 percent to 29 percent. Beginning in 1995, however, IT-
industries' share of company funded R&D increased to about one-third, spurred
by increases in R&D for computer services and software. (Figure 3.11)
Growth in IT industries' share of private R&D is largely the result of
increased R&D investment by manufacturers of electronic components and
software. (Figure 3.12) In the computer industry, annual R&D investment dropped
from an average $11 billion during 1990-92, to $5 billion during 1993-95, then
rose to $10 billion during 1996-98. (61) One reason for this lack of overall
growth may be that as computer demand has shifted toward micro- computers, more
computer-related R&D has shifted to component manufacturers and software firms.
CONCLUSION
Analysis of IT industry growth and investment patterns demonstrates not only
that IT industries are now a major force in the U.S. economy, but also that
their economic importance began to grow dramatically in the middle of the last
decade. Although many factors contributing to the digital revolution were in
place well before the mid-1990s, it was then that their combined effect and
potential first became evident and the new economy began to take shape.