Innovation, Technology and Productivity

1. Innovation, Technology and Productivity Luc Soete University 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.

2. 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”

3. 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

4. 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?

5. ICT network effects?

6. Adding network effects to growth accounting Traditional: New:

7. 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

8. Network society effects?

9. 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

10. 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

11. 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

14. US-EU BERD gap by sector

15. 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

16. 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

17. 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?

18. 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

19. SOCIAL & HUMAN CAPITAL A virtuous cycle ABSORTION CAPACITY (incl ICT use) RESEARCH CAPACITY TECH. & INNOVAT. PERFORMANCE

20. SOCIAL & HUMAN CAPITAL RESEARCH CAPACITY ABSORPTION CAPACITY TECH. & INNOVAT. PERFORMANCE

21. 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

22. Innovation Scoreboard

23. 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

24. 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