The Bank of England highlighted the decline of British productivity during the financial crisis as a major concern and the new report, co-authored by Professor Emanuele Giovannetti from Anglia Ruskin University and Professor Claudio Piga from Keele University, looks at possible causes of this decline and appropriate policy responses.
The report examines exactly how investment in intangible assets such as skills, R&D and innovation can benefit not only businesses making these investments, but also other firms in the same geographical area, industry sector or supply chain.
Professor Giovannetti, of the Institute of International Management Practice at Anglia Ruskin University, said: “Using original estimation methods, our findings show that innovations are positively influenced by network effects or R&D ‘spillovers’.
“We considered three main types of innovations: product, process and organisational. The positive effect of process innovations on productivity has an immediate interpretation: firms decide to introduce such innovations to reduce costs and increase efficiencies, leading to a direct increase in productivity.
“This is perhaps no surprise, but our research also discovered a positive association between productivity and organisational innovations as these may provide a ‘defensive business strategy’, and are adopted by firms to reduce costs when revenues are threatened by adverse macroeconomic conditions.
“Finally, the research showed that product innovations also improve productivity. However, instead of leading to increased immediate production efficiency, or static efficiency, product innovations are more likely to boost future efficiency and economic growth.
“In other words, such innovations allow businesses to extract greater surplus from buyers due to their greater willingness to pay for the improved goods and services.
“We can be left with no doubt that productivity is positively and significantly related to innovations and R&D, and these results highlight the importance of assessing the role played by investment in intangible assets and innovation spillovers.
“The relevance of these spillovers effects indicates a clear role for policy intervention in incentivising R&D whenever private incentives are insufficient. It is necessary to identify the key sectors, the most central within the supply chain exchanges, where subsidies and incentives for R&D would maximise the wider spillover effects.”
The report also shows that cooperation between firms along the supply chain contributes to the introduction of innovations and productivity while cooperation among rival firms in the output markets is not favourable to innovations, showing that competition has a positive effect on innovation.
It also highlights that R&D activity is geographically concentrated and persistent over time. The same areas that were responsible for the greatest proportion of R&D between 2002-2006 were also investing more heavily than other areas between 2007-2011.
Professor Giovannetti added: “In addition to the need to identify the key sectors – the ones at the heart of the supply chain – where subsidies and incentives for R&D maximise the effects of spillovers, geographic proximity to innovators helps local productivity. Therefore a careful assessment of the geographic distribution of R&D incentives is necessary.”
To download the full report, visit https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/384344/bis-14-1269-estimating-innovation-spillovers-an-international-sectoral-and-uk-enterprise-study.pdf
About the Institute of International Management Practice
The Institute of International Management Practice, based within Anglia Ruskin University’s Lord Ashcroft International Business School, focuses its research on enterprise and innovation, which is key to the future prosperity, sustainability and wellbeing of the UK and wider global economy. Its core focus is to develop knowledge that bridges the gap between professional practitioners and academia.
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