Case study
Trade in Information Technology and US Economic Growth
Entrepreneurial enterprises in the United States invented most of the information technology that we use today, including computer and communications hardware, software and services. In the 1960s and 1970s, companies like IBM and DEC, which developed the first mainframe and then midrange computers, led the information technology sector. In the 1980s, the locus of growth in the sector shifted to personal computers and the innovations of companies like Intel, Apple, IBM, Dell and Compaq, which helped develop the mass market for the product. Along the way, however, something happened to this uniquely American industry – it started to move the production of hardware offshore.

In the early 1980s production of “commodity components” for computers such as dynamic random access memory chips (DRAMs) migrated to low-cost producers in Japan, and then later to Taiwan and Korea. Soon hard disk drives, display screens, keyboards, computer mice and a host of other components were outsourced to foreign manufacturers. By the early 2000s, American factories were specialising in making only the highest value components, such as the microprocessors made by Intel and in final assemble (Dell, for example, assembles PCs in two North American facilities). Just about every other component was made overseas – because it cost less to do so. There was a lot of hand-wringing among politicians and journalists about the possible negative implication for the US economy of this trend. According to the critics, high-paying manufacturing jobs in the information technology sector were being exported to foreign producers.

Was this trend bad for the US economy, as the critics claimed? According to research, the globalisation of production made information technology hardware about 20% less expensive than it would otherwise have been.The price declines supported additional investments in information technology by businesses and households. Because they were getting cheaper, computers diffused throughout the United States faster. In turn, the rapid diffusion of information technology translated into faster productivity growth as businesses used computers to streamline process. Between 1995 and 2002 productivity grew by 2.8 % per annum in the United States, well above the historical norm. According to calculations of academic researchers, some 0.3% per annum of this growth could be attributed directly to the reduced prices of information technology hardware made possible by the move to offshore production. In turn, the 0.3% per annum gain in productivity over 1995 to 2002 resulted in an additional $230 billion in accumulated gross domestic product in the United States. In short, some argue that the American economy grew at a faster rate precisely because production of information technology hardware was shifted to foreigners.

There is also evidence that the reduced price for hardware made possible by international trade created a boom in jobs in two related industries – computer software and services. During the 1990s the number of information technology jobs in the United States grew by 22%, twice the rate of job creation in the economy as a whole, and this at a time when manufacturing information technology jobs were moving offshore. The growth could partly be attributed to robust demand for computer software and services within the United States, and partly due to demand for software and services from foreigners, including those same foreigners who were now making much of the hardware.In sum, some argue that buying computer hardware from foreigners, as opposed to making it in the United States, had a significant positive impact upon the US economy that outweighed any adverse effects from job losses in the manufacturing sector.

Q1 Illustrate the Product Life Cycle theory with the US personal computer industry as described in the case. (30%)
Q2 Why did the American information technology industry start moving the production of computer hardware to developing countries? How did it affect the US economy? (30%)
Q3 What is New Trade Theory? Illustrate the theory with the US information technology industry. (40%)

Case study Trade in Information Technology and US Economic Growth...