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No. 15: The Knowledge-Based Economy: Shifts in Industrial Output

by Surendra Gera, Industry Canada and Kurt Mang, Department of Finance, January 1997


Summary

The authors analyze Canada's industrial structure over the period from 1971 to 1991, using Statistics Canada's input/output model. Though largely based on previous work done by the Organisation for Economic Co-operation and Development (1992), this study employs more timely data and a finer industrial disaggregation (111 industries versus 33), and explores more closely the role played by the "new economy" industries – that is, those industries where innovation through the use of knowledge, technology and skills is the key to generating growth.

The study examines the extent and nature of changes in the Canadian industrial structure by addressing four policy-related questions:

  • What has been the extent of structural change in the Canadian economy? Which industries experienced growth? Which industries did not?
  • Has the pace of structural change been accelerating?
  • Is the Canadian economy becoming more innovative? Is it increasing its use of knowledge, technology, skills, etc.?
  • What are the key factors driving this structural change: final domestic demand, exports, imports, or technical change (measured by changes in input/output coefficients)?

Our analysis has led to the following conclusions.

Structural change is evident at the aggregate level and at the detailed industrial level.

The traditional sectors - primary resources, manufacturing, and construction – are losing a great deal of their importance in the economy relative to the service sector.

The "engines of growth" in the Canadian economy - computers and office equipment; communication equipment and semiconductors; communication services; real estate and business services; community, social, and personal services; pharmaceuticals; electricity, gas, and water; and finance and insurance – have led the way throughout the 1971–1991 period. There is surprisingly little movement among the growth leaders over time.

Contrary to widespread belief, the speed of change in the economy does not appear to be accelerating.

The Canadian industrial structure is becoming increasingly knowledge-based and technology-intensive, with competitive advantage being rooted in innovation and ideas – the foundations of the new economy.

Industrial structural change is occurring in parallel with increases in knowledge intensity. The economy is moving up the knowledge intensity scale. Moreover, this shift has been apparent since the early 1970s.

High-knowledge industries dominated growth rankings over the most recent period (1986–1991), with seven of the top ten growth industries belonging to the knowledge-intensive category.

Despite this superior performance, the Canadian business sector is still largely comprised of medium- and low-knowledge industries.

In the manufacturing, service, and resource sectors, those industries which require high-knowledge input consistently outperformed, on average, those with more modest knowledge requirements.

The Canadian manufacturing sector is becoming more innovative through the use of high-technology and more advanced labour skills.

Structural change in the manufacturing sector occurs in parallel with changes in technological intensity, in the skill intensity of output, and in wage levels.

From 1971 to 1991, high-technology industries in the manufacturing sector - those which spend a high proportion of their resources on research and development (R&D) – experienced higher growth rates than the sectoral average. During the same period, the relative importance of low-technology industries declined.

Industries in the manufacturing sector that use higher labour skills have, over the period, increased their relative importance as compared to lower-skill industries.

Over the period 1971–1991, industries in the manufacturing sector that pay higher wages have been higher-growth industries.

The service sector is also becoming more innovative.

The service sector has undergone much the same evolution, in terms of knowledge intensity, as has manufacturing: high-knowledge industries outpaced the growth of the service sector as a whole and of the overall business sector. So, too, have medium-knowledge services.

While in the past domestic demand was the dominant factor influencing the growth of industries, trade is now becoming much more important. High-knowledge industries in the tradable sector seem to have benefited the most from export performance; low-knowledge industries have seen their relative decline hastened by import competition.

Exports have been an increasingly important factor for change in high-technology manufacturing industries. Rising imports contributed to the loss of output share in low-technology industries. The same conclusion is reached in the case of those industries which tend to employ lower-skilled workers.

Within the manufacturing sector, high-wage industries are generally export-oriented. Changing trade patterns, at least during the 1980s, did not hurt those industries. However, import competition generally had net negative effects on medium- and low-wage industries.

For the service sector, the domestic market remains predominant. This is a reflection of the fact that services are not traded to the same extent as goods. Nonetheless, trade in services is growing in importance.

For both traditional and high-knowledge services, technical change has become more important.

Structural change is also evident in the natural resource sector.

While the natural resource sector seems to be in general decline, a closer examination of industry-level data reveals the above-average performance of several industries that comprise this sector – namely, fishing and trapping, a low-knowledge industry; and such medium-knowledge industries as metal and non-metal mining, and mineral fuels.

In the most successful resource industries, above-average performance is related to trade factors; most of these industries experienced strong growth despite low or even negative domestic-demand effects.

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