The Next Production Revolution ImPlIcaTIoNs foR GoveRNmeNTs aNd BusINess T h e N e x t P r o d u c t io n R e v o lu t io n Im P l Ic a T Io N s f o R G o v e R N m e N T s a N d B u s IN e s s The Next Production Revolution IMPLICATIONS FOR GOVERNMENTS AND BUSINESS This report, except Chapters 2 and 5, was declassified by the OECD Committee for Scientific and Technological Policy (CSTP) on 17 April 2017 by written procedure. Chapter 2 was declassified by the Committee for Digital Economy Policy on 12 February 2017 by written procedure. Chapter 5 was declassified by the Environment Policy Committee on 30 January 2017. The report was prepared for publication by the OECD Secretariat. The opinions expressed and arguments employed herein do not necessarily reflect the official views of OECD member countries. This document, as well as any data and any map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Please cite this publication as: OECD (2017), The Next Production Revolution: Implications for Governments and Business, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264271036-en ISBN 978-92-64-27099-2 (print) ISBN 978-92-64-27103-6 (PDF) ISBN 978-92-64-27115-9 (ePub) Revised version, May 2017. Details of revisions available at: www.oecd.org/about/publishing/Corrigendum-TheNextProductionRevolution.pdf. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. 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PREFACE Preface O nanalmostdailybasis,wehearoftechnologicalbreakthroughsrangingfromartificial intelligence and 3D printing, to self-driving vehicles.We are entering a world of “digital manufacturing”and“thefourthindustrialrevolution”.Itisapleasure,therefore,topresent The Next Production Revolution: Implications for Governments and Business, an in-depth OECD assessmentofthemedium-termeconomicandpolicyimplicationsofnewandemerging productiontechnologies. How production might evolve has far-reaching consequences for productivity, employment, skills, income distribution, trade, well-being and the environment.And the policyimplicationsofthenextproductionrevolutionarefar-reaching.Indeed,itisdifficult tomentionamajorareaofpolicythatwillbeunaffected.Fromresearchandeducation,to datasecurityandinfrastructure,thefutureofproductioniscentraltomanyaspectsofthe OECD’swork. New production technologies are reshaping the availability and nature of work. It is therefore important that strategies for inclusion understand this process. In fact, new production technologies tie together the critically important themes of productivity and inclusiveness, one of the key concerns of the OECD. As challenges related to population ageing multiply, OECD countries will need the productivity gains that these technologies candeliver.Mostimportantly,workersalsoneedtobeequippedtousethesetechnologies, and policies need to be designed so that economies and societies cope well with the adjustmentsthatthesetechnologiesentail. From this year onwards, the OECD is increasingly focusing upon the digital transformationoftheeconomyandsociety.Thisreportillustratesjusthowpervasiveand important digital technology is to production and how much more impact digital technologycouldhaveifitsdiffusionwasmorewidespread.Thisistrueeveninfieldsthat wedonotusuallythinkofasdigital,suchasindustrialbiotechnologyandnewmaterials. Newproductiontechnologieswillalsoaffecthowwedealwithclimatechangeandthe naturalenvironment.Positiveenvironmentaleffectscouldtakemanyexcitingforms,from industrial printing of products using bio-friendly materials, to writing genetic code that allows micro-organisms to make fuels, to drastically reducing waste in zero-defect factories. Thenextproductionrevolutionisalsorelevanttotheissueoftrustingovernment.Public resistance to new technologies is linked to diminished trust in scientific and regulatory authorities.When the economic or social implications of certain new technologies are disruptive, such trust is particularly important. In this regard, this report offers a sober reflectiononsomeofthehyperboleassociatedwithnewproductiontechnologies. A further highlight of this report is the extensive assessment of developments in China.The OECD has worked closely with China on the subject of the next production THENEXTPRODUCTIONREVOLUTION©OECD2017 3 PREFACE revolutionduringChina’sG20Presidency.WhileChinahasmanychallengestoovercome, itsachievementswillhaveglobalramifications. Lastly,inkeepingwiththeOECD’sworkonNewApproachestoEconomicChallenges (NAEC),multidisciplinarityremainsessentialingraspingtoday’sreal-worldcomplexities. This report, therefore, lays out the emerging features of production across many technologies,frommultiplepolicystandpointsandusingdifferenttypesofevidenceand analysis.The more governments understand about how production is developing, the betterpositionedtheywillbetotackleemergingchallengesandachieveeconomic,social andenvironmentalgoals. AngelGurría Secretary-GeneraloftheOECD 4 THENEXTPRODUCTIONREVOLUTION©OECD2017 FOREWORD Foreword A t the start of 2015 the OECD began work on a two-year project entitled Enabling the Next ProductionRevolution.Theworksetouttobetterunderstandtheeconomicandpolicyimplicationsof asetoftechnologiesthatarelikelytosignificantlyaffectproductionoverthemediumterm. This work commenced with financial support from the Secretary-General’s Central Priority Fund.TheprojectgreatlybenefittedfromvoluntarycontributionsfromthegovernmentsofAustralia and the United Kingdom. Particular thanks are due to the government of Norway, whose support helped to widen the project’s scope. Thanks are likewise due to the government of Sweden, particularlytheMinistryforEnterpriseandInnovationandthenationalinnovationagency,Vinnova, forco-organisingandhostingamajorconferenceonthethemesinthisreport,titledSmartIndustry: Enabling the Next Production Revolution. The conference, held in Stockholm in November 2016, helped to discuss and refine analyses and policy ideas with policymakers, practitioners and academics.Theconferencewasfilmed,andtheproceedingscanbeviewedatwww.vinnova.se/en/ misc/Smart_Industry_Conference/. Owingtothecross-cuttingcharacteroftheworkonthenextproductionrevolution,thechapters of this publication were discussed and declassified by various OECD Committees, including the CommitteeforScientificandTechnologicalPolicy(whichhadoversightresponsibilityfortheproject); the Committee for Industry, Innovation and Entrepreneurship, the Committee for Digital Economy PolicyandtheEnvironmentPolicyCommittee.Thecommentsandinputsformulatedbydelegatesto these OECD official bodies are gratefully acknowledged. Within the OECD Secretariat, the project wasledbytheOECD’sDirectorateforScience,TechnologyandInnovation.Aprojectinterimreport containing early policy messages was discussed by the OECD Executive Committee and OECD CouncilandwaspresentedattheOECD’sMinisterialCouncilMeetingofJune2016. As this report describes, much policy-relevant research on the changing nature of production remainstobedone.FurtherinformationonOECDworkonthissubjectwillbepostedathttp://oe.cd/ npr-industry.Anumberofissuesraisedinthisreportinconnectionwithdigitaltechnologieswillalso be examined during 2017 and 2018, with new data, in an OECD project titled Going Digital: Making theTransformationWork for Growth andWell-being. Updated information on this projectcanbefoundatwww.oecd.org/sti/goingdigital.htm. THENEXTPRODUCTIONREVOLUTION©OECD2017 5 ACKNOWLEDGEMENTS Acknowledgements T his publication was edited by Alistair Nolan from the OECD’s Directorate for Science Technology and Innovation. Alistair Nolan also wrote Chapter1 (“The next production revolution:Keyissuesandpolicyproposals”). ThanksareexpressedtoLuisAgostoAlcorta,AdotKillmeyer-OlecheandAyumiFujino from the United Nations Industrial Development Organisation (UNIDO), for inputs on developingcountriesforChapter1. Christian Reimsbach-Kounatze, from the OECD’s Directorate for ScienceTechnology andInnovation,wroteChapter2(“Benefitsandchallengesofdigitalisingproduction”). Thanks are expressed to Robert Cohen, of the Economic Strategy Institute, for case studymaterialprovidedforChapter2. Chapter3 (“Bioproduction and the bioeconomy”) was prepared by staff from the OECD’sDirectorateforScienceTechnologyandInnovation. SteffiFriedrichs,fromtheOECD’sDirectorateforScienceTechnologyandInnovation,wrote Chapter4(“Tappingnanotechnology’spotentialtoshapethenextproductionrevolution”). Chapter5 (“3D printing and its environmental implications”) was authored by Jeremy Faludi,Principal,FaludiDesign,UniversityofCalifornia,BerkeleyandMinneapolisCollegeof Art and Design, with Natasha Cline-Thomas and Shardul Agrawala from the OECD’s Environment Directorate.The authors of Chapter5 would also like to thank Peter Börkey, Andrew Prag, Matthias Kimmel and Elisabetta Cornago for their substantive and editorial contributionstothischapter. Chapter6 (“Revolutionising product design and performance with materials innovation”)waswrittenbyDavidL.McDowell,Regents’ProfessorandCarterN.Paden,Jr. Distinguished Chair in Metals Processing, and Executive Director, Institute for Materials, GeorgiaInstituteofTechnology. Chapter7 (“Thenextproductionrevolutionandinstitutionsfortechnologydiffusion”) was authored by Philip Shapira, Manchester Institute of Innovation Research, Alliance ManchesterBusinessSchool,UniversityofManchester,andJanYoutie,EnterpriseInnovation Institute,GeorgiaInstituteofTechnology. Chapter8(“Publicacceptanceandemergingproductiontechnologies”)waswrittenby DavidWinickofffromtheOECD’sDirectorateforScienceTechnologyandInnovation. Chapter9 (“The role of foresight in shaping the next production revolution”) was authored byAttila Havas, from the HungarianAcademy of Sciences, and MatthiasWeber, fromtheAustrianInstituteofTechnology.Extensiveinputtothischapterwasalsoprovided by Michael Keenan from the OECD’s Directorate for ScienceTechnology and Innovation. Duncan Cass-Beggs and Joshua Polchar, from the OECD’s Strategic Foresight Unit, kindly commentedonthischapter. 6 THENEXTPRODUCTIONREVOLUTION©OECD2017 ACKNOWLEDGEMENTS Chapter10 (“An international review of emerging manufacturing R&D priorities and policies for the next production revolution”) was authored by Dr Eoin O’Sullivan, Director, CentreforScience,Technology&InnovationPolicy(CSTI),InstituteforManufacturing(IfM), University of Cambridge, and Dr Carlos López-Gómez Head, Policy Links Unit, Institute for Manufacturing(IfM),EducationandConsultingServices,UniversityofCambridge. Chapter11 (“The rise ofadvanced manufacturing institutes in the United States”) was writtenbyWilliamB.Bonvillian,LectureratMIT,andtheformerDirectorofMIT’sWashington Office. Chapter12 (“China and the next production revolution”) was authored by Qian Dai, Programme Officer, Department of International Cooperation, Ministry of Science and TechnologyofChina,andConsultantwiththeOECD’sDirectorateforScience,Technology andInnovation. ThanksareexpressedforinputstoChapter12providedbyWeiJigang,aresearchfellow at China’s Development Research Center of the State Council (DRC). Dr ZhaoWenchang, Director-General of the DRC’s Industrial Economy Research Department, kindly provided comments on this chapter. Thanks are expressed to Sylvia Schwaag Serger, Adjunct Professor, and Executive Director, International Strategy and Networks, Vinnova, for observationsonChapter12.AntonioFanelliandFeiZheng,fromtheOECD’sGlobalRelations Service,alsoprovidedsubstantiveinputandstatisticalsupportforthischapter.Thanksare likewise due to Georg Stieler, of Stieler Enterprise Management Consulting (Shanghai) Co., Ltd.,forhisinsightsondataandindicatorsoftechnologyuseinChinesefirms. Commentsonthedevelopmentofintellectualpropertyrightswerekindlyprovidedby AlexandraNeri,Partner,IP/TMTDepartment,HerbertSmithFreehillsParisLLP,andBrian Kahin,SeniorFellowattheComputer&CommunicationsIndustryAssociationandDigital Economy Fellow, OECD Directorate for Science, Technology and Innovation. Robert D. Atkinson,President,InformationTechnologyandInnovationFoundation,kindlyprovided usefulmaterialsatvariouspointsduringtheproject. ManyOECDstaffcontributedtothiswork.AlistairNolanmanagedtheproject,under the guidance of Dominique Guellec, Head of the Science andTechnology Policy Division. DominiqueGuellecprovidedsubstantiveinputtoallchaptersinthisreportandauthored the box on intellectual property in Chapter1. AndrewWyckoff, Director, Directorate for Science,Technology and Innovation, and Dirk Pilat, Deputy-Director, provided comments andguidancethroughout.Thispublicationalsodrawsontheresearchandobservationsof otherOECDcolleagues,including(inalphabeticalorder):KoendeBacker,SarahBox,Stuart Elliott(nowwiththeUSNationalAcademyofSciences),StéphanieJamet,NickJohnstone, Carlo Menon and Mariagrazia Squicciarini. During an internship with the OECD, Nicolas Trauschprovidedexcellentsupportinreviewingresearchonautomationandemployment. Thanks are gratefully offered to the many counterparts in Sweden, particularly at the Ministry for Enterprise and Innovation and the national innovation agency,Vinnova, who co-organisedandgenerouslyhostedtheNovember2016conferenceSmartIndustry:Enablingthe NextProductionRevolution.Inalphabeticalorder,theseinclude:ErikFahlbeck,JohanHarvard, MarianneLöfgren,GöranMarklund,SylviaSchwaagSerger,JennieSölvingandKarinStridh. Catherine Rowles-Holm copy-edited the text and JanineTreves provided support with overallpresentation.BeatriceJeffriesgavesecretarialsupportthroughouttheproject.Angela Gosmann prepared the final manuscript for publication and assisted in copy-editing. BlandineServeandPeterHorvátprovidedstatisticalsupport. THENEXTPRODUCTIONREVOLUTION©OECD2017 7