Innovation, Technology and Productivity

Luc SoeteUniversity of Maastricht

“The Network Society and the Knowledge Economy: Portugal in the global context”, A Seminar promoted by His Excellency the President of the Portuguese Republic, Dr. Jorge Sampaio, March 4th and 5th, 2005, Lisbon, Centro Cultural de Belém.

Outline• US-EU growth and productivity gap

– Follow-up on Jorgenson paper– Relationship with ICT investment (see e.g.

EIU-report) complex and unclear

• Focus on knowledge investments– US-EU investment gap at the centre of

Lisbon and…– Poor EU growth performance (Sapir, Kok)

• Policy proposal: “Activating knowledge”

1. Productivity Growth and the Network Society• Growth Accounting

– Assumptions:• Homogeneous Production Function• Competitive Markets (output and input)• Optimizing firm behaviour

– Contribution of each factor of input to output growth and productivity growth

– Per Sector: contribution of ICT sector to macro (productivity) growth

– Remainder (residual): Total Factor Productivity

Spillovers?• Growth accounting -> just direct effects• Investment in and use of ICT -> network effects

– Direct: increase of the value of the network due to increased number of users

– Indirect or virtual: market mediated effect• Network externalities• Likelihood of important time lags: importance of

organisational structural changes• If network effects exist, they are captured by

TFP (the residual) in the traditional accounting framework

• Quid about other network effects more associated with notion of network society?

ICT network effects?

TFP Growth and ICT Capital (1995-2000)

ITA

BEL

GER

SWE

FIN

NLD

IRL

FRA

US

UK

DEN

0

0.01

0.02

0.03

0.04

0.05

0.1 0.12 0.14 0.16 0.18 0.2 0.22

ICT Capital as % of value Added

TF

P G

row

th R

ate

Adding network effects to growth accounting

Traditional:

ln ln ln lnkj j hj

Y A v K v H

ln ln ' ln ln lnj j kj j hj j

Y A K v K v H NewNew::

ln ln ' lnj jj

A A K

Results (Meijers 2004)• ICT is clearly different from other

capital– Software shows additional contribution of

about 8 and 11%– Telcom between 0 and 6%– Hardware shows negative contribution

between 0 and -6%– In total roughly half to equal to the direct

effect

• Considerable time lags involved

Culture and the Info-state

Sweden

NorwayDenmark

Netherlands

FinlandUK

BelgiumGermany

Ireland

FrancePortugal

Spain

Italy

Greece

Principal of culture

Info

sta

teNetwork society effects?

ICT use and culture • On the horizontal axis, a principal

component measure of 13 different aspects of leisure activities is plotted (a principal of culture indicates the differences/closeness of cultural indicators, from left to right does not mean better, it just indicates that countries are different in a cultural sense)

• On the vertical axis the Info-state as measured by George Sciadas(2003 Ed.) http://www.orbicom.uqam.ca/index_en.html.

• Need for further investigation, just a start

2. Knowledge investments “It’s growth stupid”

• Lisbon anno 2004: lack of internal growth dynamics in Europe since Lisbon striking– macro-economic sound policies but…– little growth incentives with respect to enhancing

structural reform– holds for common agricultural policy, regional social

cohesion policy but also RTD support policies• Without growth enhancing policies, the “non-active”

nature of knowledge activities is exacerbated: – emigration of S&E– outsourcing of private knowledge activities

• Remember: the EU has 70,000 PhDs a year, the US 40,000

An emerging knowledge gap• From a long term perspective: lagging behind

in private R&D in post-war Europe, but 60’s till 90-’s characterized by catching up

• EU-US Business Enterprise R&D gap has suddenly grown rapidly over 90’s, declined since 2000 because of reduction in US BERD

• Gap most significant in ICT sectors and life sciences; in traditional sectors, gap non-existent

• Gap also in government funding, foreign funding biased in favour of EU because of inclusion of intra-European R&D flows

Gap in EU25 - US R&D spending

-90000

-80000

-70000

-60000

-50000

-40000

-30000

-20000

-10000

0

10000

20000

1995 1996 1997 1998 1999 2000 2001 2002 2003*

Mill

ion

200

0 P

PP

do

llars Industry

(BERD)

Government(GOVERD)

Universities(HERD)

Other (PNP)

Source: OECD-MSTI. 2003*: MERIT estimate.

Gap in EU25 - US R&D financing

-90000

-80000

-70000

-60000

-50000

-40000

-30000

-20000

-10000

0

10000

20000

1995 1996 1997 1998 1999 2000 2001 2002* 2003

Mill

ion

200

0 P

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do

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Industry

Government

Foreign

Other national

Source: OECD-MSTI. 2002*: MERIT estimate. 2003: not available.

US-EU BERD gap by sector

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United States European Union Japan GAP

Diagnosis• Fragmented RD in the 70’s across the various EU

countries, strongly linked to national champions efforts• Emerging specialisation across the EU of business RD

during 80’s/90’s. Impact of 1992 Single Market on rationalisation of R&D of large MNC’s

• “Attraction” of US in the late 90’s a new phenomenon: concentration of R&D worldwide. – Efficiency of outside links of R&D activities as important as

internal one’s. Hence interest of firms to locate their R&D labs in best local conditions

• Emerging interest in Asia: outsourcing of certain R&D activities (Manuel Godinho’s paper)

• Reduction in BERD in the US reducing the gap, importance in Europe of foreign EU spending, likely to grow further with off-shoring to new member countries

3. “Activating” policies• “Activating” labour market policies in the 80’s and 90’s

as a general, now broadly accepted policy framework (Luxembourg process)

• Today need for “activating knowledge” policies:– Recognition of existing strengths, of unused or

unexploited knowledge which needs to be activated (“Backing winners”, key areas, selection of excellence)

– Covers full spectrum of knowledge creation and use– Includes both public sector and private sector

• Chimney growth effects:– importance of linkages: getting a virtuous growth circle off

the ground

A systemic policy view• Need to link supply (functioning higher education,

public and private research) and demand elements (functioning of markets, consumers preferences, clustering effects) with respect to the knowledge economy

• Focus on “systemic” aspects of the knowledge system: link to the external environment, upstream and downstream linkages, institutional set-up (national, regional, European), availability and use of ICT infrastructure

• Complexity of policy conclusions: policies shifting from specific issues towards more “systemic” aspects: from best to worse practice?

Knowledge system

• Four concepts emerge as particularly relevant for a country’s international competitiveness and virtuous growth cycle of its knowledge system :– renewal and sustainability of its social and human

capital– quality and performance of public research institutions– technological and organisational innovative

performance and renewal of its firms– absorptive capacity of local firms and citizens, closely

linked to ICT use

• Linkages between these concepts is ultimately what matters for a virtuous growth cycle

TECH. & INNOVAT. PERFORMANCE

AB

SOR

TIO

N C

AP

AC

ITY

(incl ICT

use)

SOCIAL & HUMAN CAPITAL

RE

SEA

RC

H C

APA

CIT

Y

A virtuous cycle

SOCIAL & HUMAN CAPITAL

TECH. & INNOVAT. PERFORMANCE

RE

SE

AR

CH

CA

PA

CIT

Y

AB

SO

RP

TIO

N C

AP

AC

ITY

AUTBEL

DEU

DNK

ESP

FIN

FRAGRC

IRL

ITA

NDL

PRT

SWE

UK

AUTBEL

DEU

DNK

ESP

FIN

FRA

GRC

IRLITA

NDL

PRT

SWE

UK

AUT

AUTBEL

DEUDNK

ESP

FIN

FRA

GRC

IRL ITA

NDL

PRT

SWE

UK

BEL

DEU

DNK

ESP

FIN

FRA

GRC

IRL

ITA

NLD

PRT

SWE

UK

100

100 100

100

0

Diagnosis• Supply side part (left side of the previous

picture) contrasts sharply with the demand side (right side of the picture)

• At the EU level a virtuous growth cycle did not take off

• History of emergence of Europe’s knowledge/innovation system very much one of individual member countries: – Sweden, Finland at one extreme– Italy, Portugal, Greece at the other extreme– Catching up Ireland, new member countries

Innovation Scoreboard

ESLUIT

EL

CZSK

PT

LVCY

SIEE

IE

UK

DE DK

FISE

AT

HU

BENL

FR

PL

CH

NO

TR

RO

BG

0,00

0,10

0,20

0,30

0,40

0,50

0,60

0,70

0,80

0,90

0 2 4 6 8 10 12 14 16 18 20

Average change in trend indicators (%)

Su

mm

ary

Inn

ova

tio

n In

de

x

2. Losingmomentum

1. Moving ahead

4 Fallingfurther behind 3. Catching up

Diagnosis (ctd) • EU’s S&E human capital potential underexploited:

– Little intersectoral mobility between public and private S&E– Little international mobility:

• Low immigration levels of S&E except for the UK • High emigration levels in those countries with low levels

of private BERD • Phenomenon of “Dutch knowledge disease”: a dual

phenomenon of “crowding out” – Crowding out of fundamental research in private sector– Crowding out of applied research in public sector – European (global) knowledge specialisation in private sector – National oriented improvements in quality in public sector.

• Growing national and European mismatch between private and public research activities despite EU funds and programmes for networking

Conclusions• Need for a policy of “activating” knowledge addressing:

– At human capital level (“activate” unused potential of S&E, PhDs, etc.)

– At research level (“activate” budget using the public 1% Barcelona target)

– At private R&D and innovation level – At entrepreneurial, financial and technology transfer level

• Essence of the activation policy challenge: crowding in– of fundamental research, of SMEs, in private research,

notion of “open” innovation– of private research within university walls, notion of

entrepreneurial excellence – of intersectoral mobility: scientific entrepreneurship in

universities and professional schools