Reindustrialization in USA - Euler Hermes

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Euler HermesEconomic Outlook n° 1187 | Special Report | The Reindustrialization of the United States• • •u However, the concentration in one industry israther risky to U.S. manufacturing as a whole. An offsetto that risk is that the second largest U.S. concentrationis in medical technology; none of the othermajor economies have that in their top three, representinga competitive U.S. advantage in this industry.Similarly, the third largest U.S. industry concentration– pharmaceuticals - appears in only one other country’slist: China. Other countries show concentrationrisk. Over 40% of Japan’s increase in new patents isrelated to computers or electronics. This situation isespecially dangerous given that Japan’s once dominantelectronics manufacturers are now strugglingto survive in the global marketplace. South Korea isless concentrated with only about 16% in high technology.China however is the most diverse, suggestingthat the Chinese leadership is fostering developmentacross many industries as the country seeks tosupport its rapid growth rate.than half of China’s. Clearly the U.S. needs to increaseits dedication and funding to R&D to compete in thefuture global economy. The last column in the tableshows how effective a country’s R&D program is bycomparing how many patent applications are maderelative to the amount of R&D spending. Once again,South Korea, Japan, and China far outpaced the U.S.in 2010.u Finally, Figure 28 below shows two measures ofR&D activity, averaged from 2000-2012. The U.S. performsreasonably well by these measures. For example,Japan and the U.S. have the largest number ofresearch workers per 1,000 total workers. But whileU.S. R&D spending as a percentage of GDP exceedsthe average for the OECD countries, it still lags behindJapan, Korea, and Switzerland. ©uAnother measure of a country’s innovation comparesthe number of patent applications to its GDP,as shown below in Table K in the first column. Thismeasure conceptually shows a country’s commitmentto its R&D efforts, and by this measure U.S.dedication to R&D is very weak at only a fraction ofthat of South Korea’s and Japan’s and only a bit more28. Research and Development, Averages 2000-20101210Researchers/1000 workers8R&D as a % of GDPJ. Contribution of Fields of Technology to the Change in Volume of Filings Between 1995 and 2008TotalComputer technology 10.5Electrical machinery, apparatus 7.0Pharmaceuticals 6.6Digital communication 6.4Medical technology 5.6Semiconductors 5.4Measurement 4.6Audio-visual technology 4.3Transport 3.8Telecommunications 3.8Others (25 fields) 41.8Total 100Source: World Intellectual Property Organization (WIPO)30USComputer technology 19.0Medical technology 9.7Pharmaceuticals 8.8JapanElectrical machinery, energy 15.9Semiconductors 14.8Computer technology 11.6ChinaDigital communication 7.5Electrical machinery, energy 6.9Pharmaceuticals 6.5Korea6420JapanUSAustraliaCanadaFranceKoreaUKOECDGermanyRussianSwitzerlandSpainItalyChinaMexicoSource: Organisation for Economic Co-operation and DevelopmentSemiconductors 8.9Computer technology 7.5Electrical machinery, energy 7.3GermanyTransport 12.7Semiconductors 9.0Electrical machinery, energy 8.5Note: Total refers to the world total. The IPCtechnologyconcordance table (availableat: www.wipo.int/ipstats/en) was used toconvert IPC symbols into corresponding fieldsof technology. Data include both first andsubsequent filings.K. 2010 Measures of InnovationApplicationApplication toBusiness sectorCountry to GDP ratio R&D ratioKorea 99.8 4.1Japan 73.7 3.0China 32.2 2.8US 18.4 0.8Germany 17.2 0.9Source: World Intellectual Property Organization(WIPO)
Economic Outlook n° 1187 | Special Report | The Reindustrialization of the United StatesEuler HermesCash hoard instinct: debunking the mythClearly the U.S. is falling behind incritical R&D programs. So how will theU.S. increase its investment in R&Dspending? What policies can the federalgovernment undertake to encouragethis effort? An examination of currentbusiness practices reveals somepossibilities.u U.S. manufacturers have grown their profits rapidlyover the past decade, largely due to increasedproductivity. Yet over the same period, manufacturershave increased investment much more slowly,and employment has actually fallen in the sector.Clearly, U.S. manufacturers need to resume a fasterpace of investment to become more competitive inthe global marketplace. Profits need to be re-distributedto promote investment.Figure 29 below shows the growth in corporateand non-corporate business profits as a percentageof total assets. The rising profits are clearly evidenthere also, but this chart breaks the profits down intodividends and undistributed profits. It is evident thatover the past decade, manufacturers have paid outdividends at approximately the same rate, but theyhave more than tripled the portion of profits whichremain undistributed. Where have the undistributedprofits been allocated on balance sheets?u Figure 30 below shows the composition of thebalance sheet of all corporate and non-corporatebusinesses. As shown by the blue line, contrary topopular belief, corporations are not hoarding cashand other liquid assets on their balance sheets. Theproportion of liquid assets as a percentage of totalassets has barely budged from a low of 5.8% to ahigh of 7.3% to the current value of 6.4%. Instead, theundistributed profits went to pay down liabilities andto increase net worth. These efforts have occurred intwo distinct periods. After the tech bubble burst andequity values plummeted, businesses began rebuildingnet worth and paring down liabilities. Then thefinancial crisis started to emerge in 2007, drasticallymarking down the value of financial assets, loweringnet worth and increasing liabilities. After 2009, businessesonce again undertook the task of restoringfiscal prudence to their balance sheets, reducing liabilities,and rebuilding net worth. The financial crisisand the great recession pushed businesses into the“risk aversion” mode to rebuild their balance sheetsand make investment a secondary priority.u The good news is that although this risk aversionstrategy is still in place, it has been easing. Bankshave started to make commercial and industrialloans again. Consumer confidence is on the rise. Thehousing market may have bottomed, and employmenthas firmed in recent months, although it is wellbelow the rate of job creation needed to bolster theanemic recovery. Expectations are that all of thesetrends will continue and that businesses will start toincrease their risk appetite such that profits will beused less to bolster the balance sheet and more toincrease investment. • • •29. Distribution of Profits as a % of Assets30. Net Worth, Liabilities, and Liquid Assets as a % of Total Assets6%profits6%trying to buildnet worth....financial crisis drovenet worth down...trying to buildnet worth again...net worth5%5%Liabilities4%undistributed profits4%liabilities tryingto de-lever ...financial crisis droveasset values down...trying tode-lever again...3%3%2%dividends2%1%1%5.8% liquid asset - no cash hoar 7.3% 6.4%liquid assets0%2000 01 02 03 04 05Source: Federal Reserve060708091011Q1 2012Q2 20120%2000 01 02 03 04 05Source: Federal Reserve060708091011Q1 2012Q2 201231
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