THE FUTURE OF PRODUCTIVITY

ANDREW WYCKOFFDIRECTOR OF SCIENCE, TECHNOLOGY AND INNOVATION

BRUEGEL9 July 2015, Brussels

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1. Productivity: now more than ever

2. Mind the Gap: the Breakdown of the Diffusion Machine

3. Stimulating Diffusion– Engaging in Trade / Integrating into GVCs– Reallocating (misallocated) resources– Boosting Innovation (absorptive capacity)

Structure of the presentation

PRODUCTIVITY: NOW MORE THAN EVER

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Productivity (MFP) drives standards of living…

4

Decomposition of cross-country differences in GDP per capita into their determinants, 2005

(United States = 100)

GDP PPP per capita TFP Human capital Physical capital Employment

United States 100.0 100.0 100.0 100.0 100.0

Canada 83.5 72.0 103.3 105.8 106.0

Japan 72.6 52.6 100.4 130.7 105.1

China 9.8 13.6 57.3 105.2 119.5

India 5.2 12.7 47.7 98.3 87.1

Brazil 20.5 29.3 70.1 103.1 96.8

Russian Federation 28.6 31.5 84.9 97.4 99.3

EU27 + EFTA 64.7 67.8 91.2 114.1 91.3

Total World 22.8 27.9 64.2 104.2 95.8

Source: OECD.

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…and productivity growth has slowed across the OECD, even before the crisis.

Labour productivity growth since 1990GDP per hour worked (China and India refer to GDP per worker)

6

Business investment has been slack…

Business investment in different cyclesCyclical peak in OECD real business fixed investment=100

(date of peak indicated)

t 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 2880

90

100

110

120

130

140

150

80

90

100

110

120

130

140

150

t=1973Q4 t=1981Q4 t=2000Q3

t=2008Q1

Quarters since the peak

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…as has investment in KBC (intangibles)…

Source: Corrado et al. (2012)

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…leading to diverging views on the Future of Productivity.

http://blog.ted.com/the-future-of-work-and-innovation-robert-gordon-and-erik-brynjolfsson-debate-at-ted2013/

MIND THE GAP

2001 2002 2003 2004 2005 2006 2007 2008 2009

80

90

100

110

120

130

140

150

160

Most advanced firms(3.5% per annum)

All firms(1.7%)

Other firms(0.5% per annum)

Manufacturing Sector Services Sector

2001 2002 2003 2004 2005 2006 2007 2008 2009

80

90

100

110

120

130

140

150

160

Most advanced firms(5.0% per annum)

All firms(0.3% per annum)

Other firms(-0.1% per annum)

Productivity of Frontier Firms and the Rest

“Frontier firms” corresponds to the average labour productivity of the 100 globally most productive firms in each 2-digit sector. On a rolling basis. “Non-frontier firms” is the average of all other firms. “All firms” is the sector total. AAGR shown in parentheses. Source: Andrews, Criscuolo and Gal (2015), “Frontier firms, technology diffusion and public policy: micro evidence from OECD countries ” mimeo

The Global Frontier versus the Others

Note: “Frontier firms” corresponds to the average labour productivity of the 50 globally most productive firms in each 2 digit sector in ORBIS. “Non-frontier firms” is the average of all other firms.

The Ageing of the Frontier

STIMULATING DIFFUSION

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Diffusion is dictated by global connections, reallocation and KBC (absorptive capacity).

Estimated frontier spillover (% pa) associated with a 2% point increase in MFP growth at the global productivity frontier

Global connections Reallocation Knowledge-Based Capital

ENGAGING IN TRADE / INTEGRATING INTO GVCs

Participating in global value chains…..

Estimated gains to MFP growth associated with raising GVC participation

Source: Saia, A., D. Andrews and S. Albrizio (2015).

0

5

10

15

20

25

30

%

Gross exports of ICT goods and services Domestic value added of ICT goods and services in foreign final demand

0

1

2

3

4Magnified

Source: OECD (2015), Digital Economy Outlook 2015, forthcoming.

Trade in ICT goods and services – gross exports and value added, 2011

Percentage shares of the world total

... as distinct from trade per se is important because…

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…collaboration with suppliers and clients spurs innovation…

80

60

40

20

0

20

40

60

80

Suppliers Clients

Large firms

SMEs

As a percentage of product and/or process innovative firms (2008-2010)

SOURCE: OECD, based on Eurostat (CIS-2010) and national data sources, June 2013.

…and exposes services to competition.

Services content of gross exports for G20 countries, percent, 2011

Source: OECD-WTO Trade In Value Added Database, June 2015.

0%

10%

20%

30%

40%

50%

60%

70%

SA

U

IDN

ME

X

KO

R

AR

G

CH

N

RU

S

ZA

F

CA

N

AU

S

BR

A

JPN

TU

R

DE

U

ITA

US

A

IND

FR

A

GB

R

Domestic VA content Foreign VA content Gross service export share

REALLOCATE (MISALLOCATED)

RESOURCES

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Looking beyond the “mean” – to get resources where they do the most good…

Source: Adapted from Bartelsman et al., (2008).

…because the share of start-ups is declining in many OECD countries….

Share of start-ups among all firms

Note: As a percent of all firms in the total private business sector. Startups are firms aged from 0 to 2. Data for Japan refers to establishment in the manufacturing sector.

Source: Criscuolo, Gal and Menon (2015).

…and post-entry growth is a problem.

Source: Andrews, Criscuolo and Gal (2015).

How much higher would overall manufacturing sector labour productivity be if NF firms were as productive and large as GF firms?

NF firms in Italy have productivity levels close to the GF but they are relatively small

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The importance of removing barriers to growth so that firms can…

Post-entry growth - average size of young and old firms

Source: Criscuolo, Gal and Menon (2015).

…scale, and afford to adapt technology that enables integration into GVCs.

Use of enterprise resource planning (ERP) softwarePercentage of enterprises in each employment size class: 2010 &

2014

Effective framework policies encourage the growth of innovative firms…

Source: Andrews, Criscuolo and Menon (2014).

Additional capital attracted by an innovative firm (patent stock increase by 10%, 2002-10)

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…and make sure the workers find the businesses that need their skills….

Source: Adalet McGowan, M. and D. Andrews (2015b),

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…which is affected by a variety of policies.

The probability of skill mismatch and public policies

Entry and Exit Labour mobility Education

Source: Adalet McGowan, M. and D. Andrews (2015b),

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• Policies that promote efficient firm exit:– Bankruptcy legislation that does not excessively penalise

business failure and regulations which don’t favour incumbents

• Policies that make labour mobility easier:– Housing market policies that facilitate residential mobility.

– Employment protection legislation that does not impose too heavy or unpredictable costs on hiring and firing.

• But also policies to help workers adapt to technological change and cushion the costs of reallocation:– Promotion of adult and lifelong learning.

– Well-designed social safety nets.

– Portable health and pension benefits.

Policies to reallocate scarce resources to the most productive firms

KEEP THE INNOVATION MACHINE RUNNING

Investment in public research matters…

Public R&D expenditure by type of research systemHERD and GOVERD, as a percentage of GDP, 2012, and total HERD and GOVERD

in 2007

Source: OECD, Science, Technology and Industry Outlook 2014, based on OECD, MSTI Database, June 2014, www.oecd.org/sti/msti. http://dx.doi.org/10.1787/888933151601

0.0

0.2

0.4

0.6

0.8

1.0

1.2%

HERD GOVERD Total HERD and GOVERD, 2007

…as does the mix of policies to induce private investment...

Direct funding of business R&D and R&D tax incentives, as a percentage of GDP, 2012

Source: OECD R&D Tax Incentive Indicators, www.oecd.org/sti/rd-tax-stats.htm

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

% Direct funding (grants, loans, procurement)… Indirect funding (R&D tax incentives) Indirect funding (no cost estimate) Total financial support, 2007…

Business investment in KBC and tangible assets(as % of business sector value added, 2010)

Source: OECD calculations based on INTAN-Invest, Eurostat and multiple national sources.

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0

5

10

15

20

25

30

35

%Brand equity, firm-specific human capital, organisational capital R&D and other intellectual property products

Software and databases Non-residential physical assets

…but innovation is more than R&D.

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Policies to keep the innovation engine running

Est. frontier spillover (%per annum) associated with 2% point increase in MFP growth at the frontier

Higher and more efficient public investment in basic research.• Role for international co-operation?

Enhanced U/I collaboration: • funding, personnel, open science

Public investment to support private investment in infrastructure • Broadband, data

Innovation Investment bundles• Beyond R&D to KBC

Review Innovation Policy Portfolios• Too generous R&D tax credits?• 21st Century IPR

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• OECD (2015), “The Future of Productivity”. OECD, Paris• Adalet McGowan, M. and D. Andrews (2015a), “Labour

Market Mismatch and Labour Productivity: Evidence from PIAAC Data”, OECD Economics Department Working Papers, No. 1209.

• Adalet McGowan, M. and D. Andrews (2015b), “Skill Mismatch and Public Policy in OECD Countries”, OECD Economics Department Working Papers, No. 1210.

• Andrews, D., C. Criscuolo and P. Gal (2015), “Frontier Firms, Technology Diffusion and Public Policy: Micro Evidence from OECD Countries”, OECD Mimeo, forthcoming.

• Calvino, F., C. Criscuolo and C. Menon (2015), “Cross-country Evidence of Start-Up Dynamics”, OECD Science, Technology and Industry Working Paper.

• Criscuolo, C., P. Gal and C. Menon (2014), “The Dynamics of Employment Growth: New Evidence from 18 Countries”, OECD Science, Technology and Industry Policy Papers, No. 14.

• Saia, A., D. Andrews and S. Albrizio (2015), “Public Policy and Spillovers From the Global Productivity Frontier: Industry Level Evidence”, OECD Economics Department Working Papers, No. 1238.

The following reports provide detail on the results

Thank you

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Contact: Andrew.Wyckoff [at] oecd.org

Read more about our work

The Future of Productivity

http://www.oecd.org/sti/ind/global-dialogue-on-the-future-of-productivity.htm