In Monday’s posting on OECD’s recent report on intellectual property there was a discussion on the role of patents in the diffusion of knowledge. Another recent OECD report from their Future of Productivity project shows just how the process of knowledge flows and technological diffusion is for the economy. The report, its accompanying policy note and the presentation make clear that diffusion is the key productivity issues of today:
Productivity growth of the globally most productive firms remained robust in the 21st century but the gap between those high productivity firms and the rest has been increasing over time. This rising gap raises questions about why seemingly accessible knowledge and technologies do not diffuse to all firms.
Three policy areas appear to be of key importance to sustain productivity growth: i) foster innovation at the global frontier and facilitate the diffusion of new technologies to firms at the national frontier; ii) create a market environment where the most productive firms are allowed to thrive, thereby facilitating the more widespread penetration of available technologies; and iii) reduce resource misallocation, particularly skill mismatches.
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Policies to sustain productivity growth include:
• Improvements in public funding and the organisation of basic research, which provide the right incentives for researchers, are crucial for pushing out the global frontier and to compensate for inherent underinvestment in basic research.
• Rising international connectedness and the key role of multi-national enterprises in driving frontier R&D imply a greater need for global mechanisms to co-ordinate investment in basic research and related policies, such as R&D tax incentives, corporate taxation and IPR regimes.
• Productivity growth via the diffusion of innovations at the global frontier to national frontier firms is facilitated by trade openness, participation in global value chains (GVCs) and the international mobility of skilled workers. Rising GVC participation magnifies the benefits from lifting barriers to international trade and from easing services regulation.
• Well-functioning product, labour and risk capital markets as well as policies that do not trap resources in inefficient firms – including efficient judicial systems and bankruptcy laws that do not excessively penalize failure – help firms at the national frontier to achieve a sufficient scale, enter global markets and benefit from innovations at the global frontier.
• A competitive and open business environment that favours the adoption of superior managerial practices and does not give incentives for maintaining inefficient business structures (e.g. via inheritance tax exemptions that may prolong the existence of poorly managed family-owned firms) facilitates within-firm productivity improvements. Stronger competition also enables the diffusion of existing technologies to laggards, which underpins their catch-up to the national frontier.
• Innovation policies, including R&D fiscal incentives, collaboration between firms and universities and IPR protection, should be designed to ensure that they do not excessively favour applied vs basic research and incumbents vs young firms.
• Framework policies that reduce barriers to firm entry and exit and improve the efficiency of matching in labour markets can improve productivity performance by reducing skill mismatch.
• Reforms to policies that restrict worker mobility and amplify skill mismatch – e.g. high transaction costs on buying property and stringent planning regulations – and funding for lifelong learning will become increasingly necessary, to combat slowing growth and rising inequality.
This report builds on OECD’s earlier work on knowledge-based capital (KBC, aka intangible assets). As such, the report highlights the importance of investments in KBCs. But it is not just what companies spend on intangibles that is important. The report notes that “it is likely that the competitive advantage of GF [Global Frontier] firms arises not only from their investments in KBC, but how they tacitly combine different types of intangibles – e.g. computerized information; innovative property and economic competencies – in the production process.” The key role that tacit knowledge plays makes the task of knowledge diffusion that much more difficult.
A number of the policy recommendations explicitly attempt to foster the flow of tacit knowledge. Openness of the economy is one such policy. As the report notes, “Exposure to trade and FDI entails exposure to knowledge and know-how of the “best” foreign and domestic firms.” Another such facet of openness is the flow of people, especially brain circulation, “which might stimulate knowledge flows, collaboration and ultimately high impact research.”
The report ends with an outline for future research. One project will look at “the sources of the cross-country differences in aggregate productivity.” In that regard, it would be useful to look more carefully at what specific investment in which specific intangible assets make the most difference. As I’ve noted in an earlier posting, data shows that the countries differ greatly in the productivity growth they get from their investments in intangibles. Work by Carol Corrado, Jonathan Haskel, Cecilia Jona-Lasinio and Massimiliano Iommi, “Intangible Capital and Growth in Advanced Economies: Measurement Methods and Comparative Results” shows Finland, Ireland and even Slovenia get greater productivity growth from their investments in intangible capital than the U.S.
I hope the new OECD research effort will take a closer look at this phenomenon.