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Advancing Knowledge and the Advancing Knowledge and the Knowledge Economy Knowledge Economy

Washington DC, January 2005Washington DC, January 2005

Assessing innovation capacity: fitting strategy, indicators and policy

to the right framework

Prof. Dr. Reinhilde Veugelers

Economic Advisor EC-DGEcFin,

Katholieke Universiteit Leuven & CEPR.

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DG ECFINAssessing Innovative Capacity

Overview of the presentation

1. Diagnosing the problem: relative productivity performance and innovative capacity

2. Policy Reaction: the need for a systemic policy approach

3. Implementing the Lisbon strategy: targets and indicators

4. Evaluating the Lisbon strategy as a systemic approach

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1965 1970 1975 1980 1985 1990 1995 2000 2005*50

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100

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Labour Productivity per Hour

GDP per CapitaHours Worked

The break in Hourly Labour Productivity Trend

Source: EU Commission, AMECO database

EU-15 vs US (=100)

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DG ECFINDiagnosing the problem:

relative productivity performance and innovative capacity

To what extent is the EU’s relatively poor performance linked with its difficulty in re-

orientating its economy towards the newer, higher productivity, growth sectors

such as ICT ?

– What is the contribution of ICT towards explaining the productivity trends, both as a high-tech, high-productivity-growth sector and in its role as a General Purpose Technology increasing the productivity growth in other sectors?

– What is the specific role to be played by the production and absorption of new technologies in general?

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DG ECFINContribution of ICT producing

Manufacturing and ICT using Services: specialization - productivity differentials

Hourly Labour Productivity

(Average % Change)

Value Added Share Contribution to Total Change in Hourly Labour

Productivity

1991-1995 1996-2000 1991-1995 1996-2000 1991-1995 1996-2000

1(a) ICT-Producing Manufacturing Industries

EU (9.6) (17.1) 0.02 0.01 (0.2) (0.2)

US (16.4) (26.0) 0.03 0.03 (0.4) (0.7)

2(b) Intensive ICT-Using Service Industries

EU (1.8) (2.1) 0.20 0.21 (0.4) (0.4)

US (1.6) (5.3) 0.23 0.25 (0.4) (1.3)

Source : GGDC and ECFIN calculations

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Conclusions on the contribution of ICT to explaining the US-EU productivity growth gap

ICT production : – US more specialized in IT producing sectors– US has better productivity performance in IT producing sectors (related to differences in innovation capacity)

ICT diffusion: – No difference in specialisation in intensive IT using sectors – But difference in productivity performance in IT using sectors

EU lagging behind (but catching up) in IT-capital deepening investments EU lower IT induced TFP growth (related to differences in innovation capacity)

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EU-US Gap in R&D Spending

EU-US Gap in Specializsation

EU-US Gap in Productivity

Growth Rates

1991-1995

1996-1999

1991-1995

1996-2000

1991-1995

1996-2000

Total High Technology Manufacturi

ng

0.85 0.81 0.825 0.826 0.48 0.41

 

(ICT) 0.59 0.49 0.45 0.42 0.23 0.27  

(Non-ICT) 1.02 1.05 0.98 1.01 1.15 2.81  

Source : ECFIN, Annual Review 2004

Comparison of EU-US difference in R&D spending and Productivity Growth (US=1)

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Linking R&D intensity and Productivity Growth

US lead and intra-EU divergence bt member states in productivity growth can be related to– Better growth performance in R&D sectors– Larger weight of R&D intensive sectors– Higher R&D intensity in most sectors

US and “better EU-Members“ growth is more linked to R&D than the average EU member

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DG ECFINWhat explains cross country differences in

R&D and its efficiency?

National Innovation Capacity: ability of a country to produce and commercialize a flow of

innovative technology over the long term

– What determines the flow of new ideas in an economy: availability of researchers, stock of knowledge

– Will firms respond to technological opportunities and innovate ? supply and demand forces in country-specific industrial clusters

– National Innovation Systems: Institutions and policy environment linking actors

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DG ECFINEU seems to display a poor performance in its knowledge creation, but particularly

in its knowledge diffusion, capacityknowledge diffusion, capacity Beyond stimulating R&D investments

Improving Technology Transfer/Diffusion ( Eg ISL mechanisms, absorptive capacity of users, investment in complementary assets)

Networking Among Actors on a Global Scale: research, firms, finance, policy makers,…

Framework conditions, especially

– clear IPR regimes and standards; – flexibility in product markets (easy of entry), labour markets

(labour mobility),venture capital markets

This requires a Systemic Policy Approach

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The Lisbon strategyToo make the European Union into the most

competitive and dynamic knowledge-based economy in the world capable of sustainable

economic growth with more and better jobs and greater social cohesion by 2010.

By implementing a comprehensive strategy of structural reform

Emphasis on structural reforms A comprehensive reform agenda Better tools to monitor progress

(structural indicators) Streamlining of EU economic policy

coordination : medium term orientation, better synchronisation

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Lisbon is a process of a comprehensive set of

structural reforms to stimulate growth

– Product Market Reforms: Improve the functioning of the Internal Market for goods &

services Liberalisation of network industries Opening up of markets (entry regulation..) Improve the business environment (reduce regulatory

burden, esp for start-ups– Financial Market Reforms : Promote EU financial integration

FSAP, RCAP, enhancing comparability of companies financial statements, …

– Investments in knowledge-based economy Invest in education and training Invest in R&D and innovation Encourage production and use of ICT

– Labour market and social reforms Improve incentives to participate and remain in the labour marke;Increase

labour market flexibility; modernisation of social protection systems,Improve working conditions and skill levels

– Environmental policy reforms

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Implementing the Lisbon strategy

Structural reforms touch on sensitive areas of national competence

The « open method of co-ordination »: Agreements on targets with timetables

Translation of these targets into national policies

Use of indicators and benchmarks

Periodic evaluation of progress made

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Lisbon targets (oct 2004 for EU-15)

Employment rate of 70% in 2010: 64.4%

Halving the number of early school leavers by 2010 : reduced by 6.7%

Increase the transposition rate of Internal Market directives to 98.5% : 97.8%

Opening up of energy markets for business in 2004: electricity: 76%, gas 82%

Increase R&D spending to approach 3% of GDP by 2010 : 1.99%

Reduction in greenhouse gas emissions

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Targets for the European Knowledge Area

(oct 2004)

Increase R&D spending with the aim of approaching 3% of GDP by 2010: 1.99%.

The proportion financed by business should rise to two thirds of that total by 2010: 56%

100% of schools to be connected to the internet by 2002 : 93% 100% of teachers to have training in digital skills by 2003: 57% Internet penetration in households reach 30% by 2002: 40% Basic governmental services 100% online by 2002: 57%

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Structural Indicators to be monitored for the Lisbon strategy

GDP per capita Labour productivity per person employed Employment rate Employment rate of females Employment rate of older workers Educational attainment (20-24) R&D expenditures (% of GDP) Business Investment (as % of GDP) Comparative price levels At-risk-of poverty rate Long-term unemployment rate Dispersion of regional employment rates Greenhouse gas emissions Energy intensity of the economy Volume of transport.

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DG ECFINInnovation Indicators to be monitored for the Lisbon Strategy

(European Innovation Scoreboard & 3% Action Plan)

1. Human resourcesS&E graduates, Population with tertiary education,

Participation in life-long learning, Employment in medium-high and high-tech manufacturing, Employment in high-tech services )

2. Knowledge creationPublic R&D expenditures (GERD - BERD) (% of GDP)

BERD) (% of GDP (by source of funding), EPO&USPTO patent applications EPO&USPTO high-tech patent applications;

3. Transmission and application of knowledgeInnovation expenditures, SMEs innovating in-house, SMEs involved

in innovation co-operation,

4. Innovation finance, output and marketsShare of high-tech venture capital investment, Share of early stage

venture capital in GDP, volatility-rates of SMEs, Internet access/use, ICT expenditures, SMEs sales of 'new to market' products, SMEs sales of 'new to the firm but not new to the market' products, share of manufacturing value-added in high-tech sectors, TBP, High tech imports-exports

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DG ECFINSelection of Main STI Indicators

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Mid-term diagnosis on indicators for European

Knowledge Area: not much progress

EU is more or less comparable with US in scientific knowledge creation, but

deficient in technological knowledge creation and creation of technology

intensive economic growth

Reflecting EU’s deficiency in knowledge diffusion and absorption capacity

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Conclusions from the Mid-Term Review : diagnosis

the Lisbon strategy has not delivered yet; particularly wrt European Knowledge Area

the major weakness of the strategy has been the poor implementation of reforms by the Member States;

there is a sense of urgency to proceed with the reform agenda in view of the challenges of ageing, enlargement and globalisation.

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Effectiveness of the Lisbon strategy?

Too many priorities and targets : focus on productivity growth

Wide set of reforms/action plans : need to identify complementarities but also trade offs between the areas (exploit ‘systemic’)

Deficiencies in economic governance (how to incentivate member states, how to enforce compliance)

A poor communication about the benefits of reforms

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Evaluation of indicators & targets Wide set of structural indicators and targets to link knowledge

area to productivity and employment as well as to product markets, financial markets, labour markets

Wide set of indicators for the knowledge area (combination of creative, diffusion and absorptive capacity)– Areas of indicators which are important and relatively well covered

human & social capital ICT diffusion/production Financing of innovation

– Areas of indicators which are important and not well covered ISL

High level of aggregation of indicators– Sectoral dimension– Regional dimension

Evaluate indicators & targets as a system– Note: this is not what current composite indicators are doing

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Implications for STI policies : towards a truly systemic approach

Enhancing horizontal policy coordination among policy areas

Enhancing vertical policy coordination (EU-Member States-Regions)

Improving the management of the policy framework