Towards sustainable industrialization and higher technologies

SDG indicators

Target 9.2: Promote inclusive and sustainable industrialization and, by 2030, significantly raise industry’s share of employment and gross domestic product, in line with national circumstances, and double its share in least developed countries.
Indicator 9.2.1: Manufacturing value added as a proportion of GDP and per capita (Tier I)
Indicator 9.2.2: Manufacturing employment as a proportion of total employment (Tier I)


Target 9.b: Support domestic technology development, research and innovation in developing countries, including by ensuring a conducive policy environment for, inter alia, industrial diversification and value addition to commodities.
Indicator 9.b.1: Proportion of medium and high-tech industry value added in total manufacturing value added (Tier I)


Target 9.5: Enhance scientific research, upgrade technological capabilities of industrial sectors in all countries, in particular developing countries, including, by 2030, encouraging innovation and increasing the number of research and development workers per 1 million people and public and private research and development spending.
Indicator 9.5.1: Research and development expenditure as a proportion of GDP (Tier I)
Indicator 9.5.2: Researchers (in full-time equivalent) per million inhabitants (Tier I)

Structural transformation has been an important driving force of economic development over the last decades. According to the theory of structural transformation -—
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, development is driven by a shift from the extraction of raw materials and primary sector activities to increasingly complex technical transformation processes, commonly referred to as manufacturing. On the supply side, the sources of that transition include the development of know-how, increase in high-skilled labour and technological advancement, and enabling the application of new production methods. On the demand side, the rising standard of living induces a shift from the consumption of food and other primary commodities towards consumer goods, that are usually manufactured. This transformation leads to higher value added and greater economic welfare. In line with this thinking, SDG target 9.2 promotes inclusive and sustainable industrialization and aims to significantly raise industry's share of employment and GDP by 2030.

During the later phases of economic development, a sectoral shift from manufacturing to services has typically been observed. Once a certain standard of living is reached, the demand for services increases relative to the demand for physically produced goods. According to Haraguchi and Rezonja -—
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this level is reached when GDP per capita amounts to around US$13 000 at 2005 prices. At that stage, manufacturing usually accounts for around one fifth of value added. Based on these estimates, -—
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considers countries to be industrialized when their manufacturing value added, adjusted to purchasing power parities, exceeds US$2 500 per capita.

Rapid industrialization in developing economies of Asia and Oceania

In 2019, manufacturing value added per capita amounted to US$5 108 at constant 2015 prices in developed economies (see figure 1). It was 2.7 times higher than in developing Asia and Oceania (US$1 423) and 3.6 times higher than in developing Latin America and the Caribbean (US$1 074). It exceeded the value in Africa (US$212) by almost 23 times.

Over the last 20 years, manufacturing value added per capita in developing Asia and Oceania has steadily increased – by two and a half times since 1999 – with the result that the region overtook Latin America and the Caribbean in 2015. In Latin America and the Caribbean, the indicator has remained constant. Africa has seen a slight increase, by one fifth over 20 years. Developed economies have recorded modest steady growth over the last 20 years, disrupted only by the economic downswings from 2000 to 2002 and from 2007 to 2010.

Figure 1. Trends in manufacturing value added per capita (SDG 9.2.1)
(US$ in constant 2015 prices)

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Dropping industrial output after the outbreak of COVID-19

The outbreak of COVID-19 led to considerable disruptions of those long-term trends in manufacturing all over the world. According to ILO -—
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, manufacturing was among the economic sectors worst hit by the pandemic, alongside retail trade, accommodation, food services and other sectors. The impact by industry depended on the effects of the containment measures introduced on supply and demand. Some sectors were hit mainly from the demand side, for example due to restrictions concerning modes of consumption and the distribution of goods, and others more from the supply side, for example due to disrupted supply chains. It seems that certain sectors have also benefited from an increased demand for their products as a direct or indirect consequence of the pandemic. Some businesses have managed to make a digital leap to recover some lost revenue, enable new ways of working, such as telework and digital trade, and apply new methods to quickly adjust production according to rapidly changing demand and supply conditions. Accordingly, medium and high-tech industries have recovered faster from the crisis than lower-technology industries -—
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Manufacturing was hit by the COVID-19 pandemic at different times across the world (see figure 2). China came first, experiencing a sharp drop in the PMI of the manufacturing sector in February 2020 (seasonally adjusted), showing how the economic outlook deteriorated, as Wuhan and other regions were locked down. Already in late February, Chinese manufacturing started to recover, with PMI levels returning to above 50 already in March 2020.

In the Eurozone and the United States of America, manufacturing output started falling in March 2020. This fall was most pronounced in the Eurozone, where many countries introduced full or partial lockdowns by the middle of the month. During March and April, production in manufacturing, as measured by the IIP, dropped in the Eurozone by 30 per cent in and in the United States by 20 per cent, after a longer period of stability. In both economies, the index returned to 5 per cent below pre-crisis levels by July, and it took until November in the Eurozone and until January 2021 in the United States for it to fully recover. The PMI of February and March 2021 lies well above 50 in both economies, heralding further growth of manufacturing output in the coming months, if conditions do not change.
Developments in Brazil resembled that of the Eurozone, showing an equally strong contraction during February and March. However, unlike in the Eurozone, by the end of the year, the IIP returned to a level 8 per cent higher than before the outbreak of the pandemic.

In South Africa and the Russian Federation the downturn in manufacturing began two months later than in the Eurozone and the United States. In the Russian Federation, the IIP for manufacturing remained unchanged until March, but declined by 12 per cent in April, although not as deep a fall as in the Eurozone and the United States. In South Africa, index indicated the sharpest contraction amongst the six economies compared in figure 2, losing almost half of its value (44 per cent) within one month. However, the rebound was relatively quick and, by August 2020, the IIP already reached 96 per cent of its December 2019 level.

Figure 2. Industrial production (IIP) and purchasing manager’s expectations (PMI) in manufacturing

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Notes: Series are seasonally adjusted. PMIs refer to manufacturing except for South Africa where it refers to agriculture, mining, construction, wholesale, retail and services in addition to manufacturing. IIPs are re-scaled to December 2019.

Intermittent catching up of LDCs

In 2019, LDCs’ manufacturing sector produced on average US$137 per head, at 2015 prices, almost 40 times less than the average produced in the developed world. However, LDCs’ manufacturing value added per capita has steadily increased over the last 20 years, at a higher rate than in developing countries in general. The level in 2019 was already more than three times higher than the level of 1999 (see figure 1).

The manufacturing share in value added, the focus of SDG target 9.2 for LDCs, increased from 10.5 per cent in 2000 to 13.1 per cent in 2019. Most of that progress was made in the last five years; until 2010, the share had remained constant at just below 11 per cent (see figure 3). Extrapolating the trend into the future, the growth achieved after 2005 on average appears to be too slow to achieve the SDG target of doubling the manufacturing share in value added by 2030.1 From 2005 onwards, an average annual increase of 0.42 percentage points would have been required to reach the target. The actual annual average increase until 2019 was 0.19 percentage points. Since 2015, accruals comparable to the target path have indeed been recorded, but this accelerated growth has begun late too to be sufficient.

It is striking that the stagnation in the share of manufacturing in value added until 2014 was not reflected in a stagnation of the manufacturing share in employment. On the contrary, the employment share of manufacturing has seen a steady increase over the last 24 years, at a pace higher than required to reach by 2030 the SDG target 9.2.2 set up for employment. The findings above − in particular, the modest growth of manufacturing in value added compared to employment − suggest that new industrial innovations and policies are needed in LDCs to accelerate structural transformation.

Figure 3. Development of the manufacturing share of value added (SDG 9.2.1) and of employment (SDG 9.2.2) in LDCs compared to the target
(Percentage)

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Note: Target and target path set with reference to the base year 2005.1

Diverging regional trends in structural transformation

How has structural transformation changed the sectoral distribution of employment and value added? Between 2000 and 2019, the share of manufacturing in employment increased only in developing Asia and Oceania (from 11.1 to 13.6 per cent) and in Africa (from 6.0 to 7.9 per cent) (see figure 4). In developing Asia and Oceania, in contrast to Africa, this increase was combined with an increase of the manufacturing share in value added (from 19.8 to 23.9 per cent). This highlights a growing disparity in productivity growth between the regions, in line with the above diverging trends in manufacturing value added per capita (see figure 1). In LDCs, increases in manufacturing value added per capita, discussed above, were strongly employment driven. The share of manufacturing in employment almost tripled in that group of economies, from 3.3 per cent in 2000 to 9.7 per cent in 2019.

These figures suggest that during the last two decades, among the broad regions compared, only Asian and Oceanian developing economies have gone through a process of structural transformation as described in the literature. The LDCs as a group have also followed that path. Latin America and the Caribbean, like the developed economies, recorded shrinking proportions of manufacturing in both employment and value added. This development is not what is aspired to by the SDG target, which aims at significantly raising industry's share of employment and value added. Many of these counties may nevertheless have changed their economic structure towards higher value-added activities, by raising the share of services, in particular telecommunication and ICT services or by a structural transformation within manufacturing from lower-tech to higher-tech production. Below, the analysis is extended to investigate to what extent such digitalization and transformation to higher technologies is happening.

Figure 4. Share of manufacturing in value added (SDG 9.2.1) and employment (SDG 9.2.2)
(Percentage)

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Technology gap persists in manufacturing

The 2030 Agenda promotes technological development through research and innovation, especially in developing economies. Progress towards the achievement of that target is measured by the proportion of medium and high-tech industry value added in total manufacturing value added (SDG indicator 9.b.1). This indicator shows a shift from lower to higher technology value added, raising the average value added per worker. R&D and innovation play a crucial role in this transformation by providing the grounds for the use of new and more efficient technologies.

In the developed world, medium and high-tech industry accounts for higher shares of manufacturing value added than in developing (see figure 5). When looking at weighted regional averages, almost half of developed economies' manufacturing output is obtained in medium and high-tech industries. Among developing countries, the weighted rate varies considerably across regions. In developing Asia and Oceania, it was 43 per cent in 2018, almost as high as in developed economies, while the rate reached 32 per cent in developing America and only 21 per cent in Africa.

From 2008 to 2018, the gap between developing and developed economies has widened slightly. While developed economies managed to increase the share of medium and high-tech manufacturing slightly (from 48 to 49 per cent), the rate fell slightly in developing Asia and Oceania (from 44 to 43 per cent) and remained constant in developing America and Africa. Developed countries have cemented their lead, while developing economies have not managed to increase the share of higher technologies in manufacturing in the last 10 to 15 years, and some are shifting towards lower-technology sectors.

Figure 5 highlights the considerable variation across individual economies, especially in Asia. This region encompasses, on one hand, the two economies with the world's most innovative manufacturing sectors, namely, Singapore (80 per cent in 2018) and Taiwan, Province of China (69 per cent); on the other hand, it includes several countries, primarily LDCs and SIDS, in which the share of medium and high-tech industries in value added has persistently remained below three per cent, such as Macao, SAR of China, Cambodia, Yemen, Maldives, Tajikistan and Kyrgyzstan.

Figure 5. Proportion of medium and high-tech industry in manufacturing value added (SDG 9.b.1), by development status and region
(Percentage)

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Notes: A violin plot shows the distribution of individual countries’ medium and high-tech industry shares in manufacturing value added within each country group and year. The coloured areas depict the distribution of countries’ rates smoothed by kernel density estimation, a non-parametric way to estimate the probability density function of a variable. The wider the violin shape, the higher the possibility to find an observation, in this case a country, in that location. The dots within the shapes represent the weighted average of countries’ medium and high-tech industry shares in manufacturing value added.

Considerable spread in the medium and high-tech industry share of manufacturing value added is also found among developed economies. Some of them reach less than one third of the rates recorded by the developed countries at the highest ranks, such as, Switzerland (65 per cent) and Germany (62 per cent).

Many LDCs and SIDS are characterized by low shares of medium and high-tech manufacturing. However, this is changing. Noteworthy exceptions among SIDS include Trinidad and Tobago and Barbados, where the medium and high-tech share in manufacturing value added was at 40 and 38 per cent in 2018, respectively -—
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Developing economies’ medium and high-tech exports increasing

Looking at international trade, the share of medium and high-tech products in manufacturing exports has been increasing in developing countries recently, while it has remained almost constant in the developed world (see figure 6). In developing America and developing Asia and Oceania, the share of medium and high-tech exports reached almost 60 per cent in 2018, whereas in developed economies it stood at 62 per cent. Africa has increased its medium and high-tech export share from 34 to 39 per cent from 2008 to 2018. As a result, the region has been catching up in the structural transformation of manufactured exports, and the overall gap between the developing and developed world has narrowed.

Figure 6. Share of medium and high-tech manufactured exports in total manufacturing exports
(Percentage)

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R&D investment and international cooperation are vital for fighting the COVID-19 pandemic

When it comes to R&D, the COVID-19 pandemic allotted unequivocal priority to biomedicine. The ICT sector benefitted from innovation investment as well. 2020 saw a strong and rapid international mobilization to develop treatment for COVID-19. Governments, the scientific community, and the private sector allocated resources to focus research on the global task of mitigating the effects of the pandemic and protecting populations. The OECD estimated that over US$7 billion of new or redirected funds were unlocked for COVID-19 related R&D during the first nine months of 2020. Despite some hitches, developing and distributing vaccines, tests, and treatments to millions of persons within 12 months has been a notable achievement. It would not have been possible without strengthened international coordination and improved transparency, including in R&D -—
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. International cooperation and solidarity need to be reinforced for the treatment and vaccines to reach all countries and all vulnerable.

The extent of R&D investment in fighting COVID-19 is still difficult to gauge. Estimates from the -—
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suggest significant cuts in non-COVID-related research in 2020. Moreover, the lockdown measures disrupted R&D where access to laboratories, tools, and field work were necessary. As the social and economic consequences of the pandemic continue to unfold, further decline in research budgets can be expected, particularly from public funds -—
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In 2018 and 2019, most industrial R&D targeted ICT hardware and electronic equipment, pharmaceuticals and biotechnology, automobiles, as well as software and ICT services. Which development can we expect in the post COVID-19 years? The -—
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suggest that ICT software, biomedicine, and alternative energy represent the three sectors that should not face difficulties in attracting innovation funding in the near future. They further estimate that the United States of America and China will see their R&D rebound more rapidly than other states, owing to: i) the fact that these two countries host some of the world’s largest science and technology clusters (e.g. the Beijing cluster, or the San Jose - San Francisco cluster), and ii) recent government policies adopted to mitigate the shortage of R&D capital. In 2020, the EU has also promulgated additional programmes to financially support innovation and start-ups -—
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Various international organizations have emphasized the importance of reinforcing public support for sustainable research targeting socially beneficial projects with wide spill-over effects. They also reiterated the significance of global cooperation and inter-disciplinary connections in science and innovation, aimed to build more resilient societies and avert future threats. Moreover, supporting innovation should facilitate progress towards achieving the SDGs -—
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Governments are encouraged to increase spending on R&D in the context of the 2030 Agenda. In 2018, the latest year with globally comparable innovation statistics, the world invested US$2.2 trillion in R&D, PPP-adjusted. Over the five-year period from 2013 to 2018, absolute R&D spending increased by 5.4 per cent each year on average. Not surprisingly, investment was highly concentrated in a few economies. In 2018, some 75 per cent of R&D investment was made by only 10 countries.

In PPP-adjusted value terms, the leaders in R&D spending were the United States of America (US$582 billion), China (US$465 billion), Japan (US$171 billion) and Germany (US$141 billion). Remarkably, the United States and China accounted for almost half of global R&D investment (see figure 7 and table 1). Among developing economies, relatively high growth in R&D spending was recorded for Iran (the Islamic Republic of), Indonesia, Macao, SAR of China, El Salvador, and Panama: above 25 per cent average annual increase -—
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Figure 7. Dominance in global R&D spending, 2018 and growth from 2013-2018
(Spending in PPP US$ billions and average annual growth percentage)

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Despite the growth of world R&D investment in absolute terms, global R&D intensity – SDG indicator 9.5.1 – remained at 1.7 per cent of GDP from 2013 to 2018 (see figure 8). Israel (4.9 per cent) and the Republic of Korea (4.5 per cent) were the most prominent R&D investors relative to GDP, followed by Switzerland (3.4 per cent) and Sweden (3.3 per cent). The United States of America invested 2.8 per cent of its GDP in innovation, and China 2.1 per cent. Only a few developing economies have managed to develop into ‘R&D powerhouses’, such as China and the Republic of Korea. For some of these countries, that process took around two decades. Participation in global value chains and R&D networks is essential for moving-up the innovation ladder.

Looking at regional averages, Northern America invested most in R&D in proportion to GDP. However, Eastern, South-Eastern and Western Asia were the regions in which R&D spending relative to GDP grew fastest from 2013 to 2018. The Cornel University et al. -—
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estimated that – besides China – most significant progress in R&D was achieved by India, the Philippines and Vietnam. Europe recorded only a slight increase in R&D funding. At 1.9 per cent of GDP in 2018, R&D intensity remained well below the three-per-cent goal set by the EU -—
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. Only Austria, Denmark, Germany and Sweden reached or surpassed this target, as well as Switzerland (not an EU-member). The AU has also established an R&D intensity objective for its member states, set at one per cent -—
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. According to available statistics, among AU member countries, only South Africa was close to that target, recording an R&D intensity of 0.8 per cent in 2018. Egypt and Tunisia registered R&D intensity of 0.7 and 0.6 per cent, respectively. Other African states remained below 0.5 per cent.

Table 1. Leading investors in R&D, ranked by PPP US$, 2018 (SDG 9.5.1)
(Ranked by GERD in PPP US$)
InvestorsPPP US$ billions Annual average growth ,
2013-2018 b
Percentage of GDPPercentage of world total
United States5825.02.826.0
China4657.32.120.8
Japan1710.23.37.7
Germany1416.73.16.3
Republic of Korea987.54.54.4
Top 10 developing countries, excl. China and the Republic of Korea
India595.10.72.6
Brazil36-2.41.21.6
Turkey229.91.01.0
Iran (Islamic Republic of)1224.51.00.6
Thailand103.01.90.5
Malaysiaa10...0.80.5
Mexicoa95.51.00.4
Singaporea810.81.30.4
Indonesia85.10.70.4
Egypt8-2.60.30.4

Source: UNCTAD calculations based on -—
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Notes:
 a refers to 2017.
 b Growth is estimated for Malaysia, Singapore, Thailand, Turkey, United Arab Emirates

The developing economies of America spent on average 0.6 per cent of their GDP on innovation in 2018. At 1.2 per cent, Brazil’s R&D intensity was more than two times higher than that of any other country in the region. In Oceania, R&D spending stood at 1.8 per cent of GDP, dropping from two per cent observed five years earlier. SIDS2 allocated on average one per cent and LDCs some 0.2 per cent of GDP to R&D.

Figure 8. R&D expenditure as a proportion of GDP (SDG 9.5.1)
(Percentage of GDP)

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Note: Based on UNESCO country classification

SDG indicator 9.5.2 looks at the number of persons directly employed in R&D, as FTE, per million inhabitants. According to this measure, the topmost performers come from Europe, led by Denmark and followed by Switzerland, Iceland and Luxembourg. Among non-European states, the Republic of Korea, Singapore, and New Zealand rank at the top. In 2018, Denmark reported over 11 000 per million employed on R&D, while the Republic of Korea and Switzerland recorded figures close to 10 000. These statistics include not only researchers, but also R&D technical and supporting staff. Between 2013 and 2018, stronger rise in R&D employment was observed in developing economies than in the developed world. Macao, SAR of China, Kuwait, and Iran recorded highest R&D job growth. According to figures available for 50 countries, on average 40 per cent of the R&D workforce were women. Interestingly, developing economies registered higher percentages of female R&D staff than developed economies -—
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R&D services in international trade

Innovation is increasingly traded internationally. Global R&D services exports expanded by an estimated 6.6 per cent annually, between 2013 and 2018, outpacing the average growth of total trade in services (3.5 per cent). In 2018, countries exported about US$192 billion worth of R&D services. Again, innovation exports and imports were concentrated in a small group of economies. The top-ten R&D exporters accounted for 74 per cent of the total. The United States of America was the main R&D services supplier on the international markets, followed by Germany and France (see table 2). Seven out of ten leading R&D services exporters also belonged to the top-ten R&D services importers. They were also part of the world leading recipients of charges for the use of intellectual property. Among developing economies, prominent exporters of R&D services include China, India, the Republic of Korea, Singapore, Brazil and Malaysia.

Table 2. Leading ten R&D services exporters, 2018
(Countries ranked by exports value)
CountryExports
US$ billions
Annual average growth of exports, percentage, 2013-2018Imports
US$ billions
Ranking in GERD,
PPP US$
United States479.6351
Germany264.5244
France153.0156
United Kingdom146.3108
Netherlands86.0816
Israel87.5219
Japan79.9203
Canada50.7212
Belgium54.5620
Sweden519.1718

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Note: China belongs to leading R&D services exporters, according to estimates available for previous years. 2018 figures were not available.

Notes

  1. In this report, progress in target 9.2 is measured with reference to the base year 2005. This is in line with the practice applied in the monitoring of the Millennium Development Goals, where the baseline was set to the year 1990, thus ten years before the adoption of the Millennium Development Declaration (United Nations, 2005). The 2030 Agenda for Sustainable Development does not specify any base year for target 9.2.
  2. SIDS based on the UNESCO country classification: http://www.unesco.org/new/en/natural-sciences/priority-areas/sids/resources/sids-list/

References

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