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A boost in European productivity requires ‘desperately needed’ R&D tax subsidies, according to Torben Schubert

2020-09-23

Torben Schubert, Associate Professor at CIRCLE, Lund University.

An interview with Torben Schubert, Deputy Department head at Fraunhofer ISI and Associate Professor at CIRCLE, Lund University.

European productivity has been a concern among economists for months as nations try to combat the effects of the Coronavirus pandemic. Previous economic crises, such as the financial crash of 2008, have made it clear that firms cut costs on investment to save money during times of uncertainty. How should business owners then boost their productivity when they are pressured to save money? In this interview, the prepaid card solution provider Soldo speaks with leading European economist Torben Schubert, to find a solution. Read the original article at soldo.com.

How important is productivity growth in driving economic growth?

Despite substantial progress in economic theory, it is still widely understood that long-term economic growth is based upon 1950s models. These models indicate that productivity is the only source of economic growth. What these early models did not do was make clear that productivity growth is a consequence of investments into human capital, innovation and R&D. In my opinion, there is no other source of economic growth other than productivity growth - so it’s incredibly important!

So, do you believe that investments into human capital, innovation and R&D are crucial for increasing productivity within firms?

Yes, absolutely. Today we know that simply growing your population does not increase a country’s levels of productivity. For example, more people in your economy will not lead to per capita growth in the long run. So the question then stands - where does productivity growth come from? Over the years it has become clear that it has a lot to do with investments into human capital and technological opportunities. To put it in simple terms, technological progress is the source of productivity growth.

A lot of economists say that investment into technology is really important in increasing productivity, but what does that actually mean for business owners? Can you clarify?

Of course. It very often means investments into R&D, but we mustn’t forget that not all sectors are R&D intensive. There are many firms for example, in low tech sectors, which still progress their way of producing or providing services or goods without doing any research and development. There are also other ways of achieving progress which are sometimes forgotten - such as inventing something or having an employee set a little office time aside to improve a process within a firm. This may not be R&D but it may move forward the production opportunities within that company.

Would you say that governments have a responsibility to subsidise R&D within companies?

That’s a difficult question. It depends greatly on the sectoral composition of the country and their economy. Let’s take Germany for example. In this country we’ve been talking about the introduction of tax-subsidies for R&D in companies for over 20 years but it never happened, although I believe that it is desperately needed. What we do have, however, is project funding. Businesses can therefore come up with project proposals and ask the government to subsidise a certain aspect of it. The problem with this model is that it makes it very difficult for those firms who are just starting out to get any kind of funding. These firms have to pitch against companies who have been doing it for years - decreasing their chances of ever seeing any kind of financial help.

There is a widely accepted belief that the financial crisis of 2008 was what killed productivity growth across Europe, and we’ve never been able to recover since. What are your thoughts on the long-term implications of the financial crisis?

I think that problems with productivity happened in Europe long before the financial crisis. It of course has been worsened by the events of 2008, but productivity growth has really been notoriously low in Europe since the early 2000s, with the introduction of the Euro. Since then, the gap between Europe and the US has been widening.

One way in which the 2008 crisis had a large impact on productivity growth was that firms who were badly hit were no longer able to fund internal R&D projects and withdrew from innovation activities altogether. This has had a lasting impact. For example, in Germany, the share of firms who were innovating in the end of the 1990ies used to be something like 55% but had dropped by almost 20 percentage points 15 years later. Yet, it is true that still we know very little about the causes of the productivity stagnation observable in most Western economies, European ones in particular. That is where our work in the H2020-project BIGPROD comes in. Our research offers for the first time the chance of analyzing a wide variety of innovation-related explanations for the productivity slowdown using Big Data.

Coming on to COVID-19. What do you think will be the outcome of this on European levels of productivity?

Typically, when firms are hit by a severe crisis, the first thing that they do is to get rid of outgoings that appear not to be absolutely vital. Unfortunately, innovation is something that keeps firms alive in the long-run, but often appears dispensable in the short-run. If you cut down on R&D budgets and innovation-related budgets of course that is going to have a negative impact on your productivity growth in the long-run.

Firms who have managed to obtain their human capital throughout the crisis (schemes in the UK such as the furlough scheme have enabled this) will be able to scale up their production again very quickly when the crisis is over. It means that they don’t have to go to the labour market to find newly qualified employees - this saves time and money. Overall keeping your staff employed will have a positive impact on firms’ productivity and rate of recovery after the Covid-19 fallout.

 

 


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