Productivity, structural change and business dynamism

• Author: Ana Correia, Roberto Martino and Julien Ravet
• Pages: 93-197

CHAPTER 3

PRODUCTIVITY

PUZZLE AND

INNOVATION

DIFFUSION

KEY FIGURES

1.0 %

the rate of

productivity growth

in Europe between

2010 and 2018

65.7 %

the contribution of R&I to

total productivity growth in

a sample of EU countries

0.5 %

the annual growth

rate of Total Factor

Productivity in the

EU aer the crisis

12 %

the gap in real labour

productivity between

the EU and the United States

in 2018

94

What can we learn?

 R&I are at the core of the productivity

and competitiveness of our economy.

 Productivity growth and sustainability

can reinforce each other. Productivity

can help overcome the trade-of‌f between

environmental policy and long-term growth.

 Despite the rise in digital technologies in the

past decade promising large productivity

gains, productivity growth has been

sluggish, holding back more robust

economic growth in Europe and other

advanced economies.

 The gap in productivity performance

between highly productive economies and

f‌irms at the frontier and the rest points,

among other factors, to a lack of innovation

dif‌fusion in Europe.

What does it mean for policy?

 R&I policy that aims to enhance

productivity will reinforce companies’

ability to be competitive at the global level,

benef‌itting jobs and creating value.

 R&I policy plays an important role for

catching-up of laggard companies and

regions by improving the conditions to

speed up knowledge creation and dif‌fusion

(investment, regulation, science-business

links, framework conditions, and capacity

and quality of national R&I systems).

95

CHAPTER 3

1. Productivity, competitiveness and innovation are

closely related

Higher productivity means stronger

competitiveness, which is crucial for EU

companies in a globalised economy. This is

even more true as the EU risks gradually losing

its competitiveness, with slow innovation,

adoption of technologies and productivity

growth in a context where technology is

changing fast and new global players are

emerging rapidly (European Investment

Bank, 2019). Higher productivity will also be

essential in the future in the light of ageing

societies to compensate for a declining share

of the workforce in the population. In this

context, productivity will be a key determinant

of Europe’s future prosperity.

Competitiveness, productivity and innov-

ation are separate concepts but are very

closely interrelated. In the global context,

it would be a mistake to ignore the fact that

innovation can drive the EU’s competitiveness

through productivity growth. Spurring innovation

has a direct ef‌fect on what is produced, making

goods better and cheaper whilst also ensuring

that the production process is ef‌f‌icient. This

improvement in the ratio of production output

to input is referred to as productivity. Hence,

it is a measure of ef‌f‌iciency. Enterprises are

competitive when their productivity grows

consistently and enables them to reduce

the unit costs of their outputs. In turn, if this

happens in traded sectors it can allow EU

companies to compete on global markets

without relying on government support.

Productivity growth and sustainability

can reinforce each other. Productivity can

also help overcome the trade-of‌f between

environmental policy and long-term growth

when coupled with appropriate action, such

as investment in pollution abatement (Basu

and Jamasb, 2019). Boosting productivity

growth needs refocusing the use of available

resources and investments on more ef‌f‌icient

production activities and systems, which

must also be environmentally friendly in

order to ensure a sustainable growth path

(Kalf‌f et al., 2019). Hence, increasing the

ef‌f‌iciency of the production process can be

compatible with sustainable production and

support the sustainable transition. This raises

the issue of ensuring a proper decoupling

between economic activity and the negative

externalities related to the production process.

R&I can play a key role here. Productivity gains,

and the related economic benef‌its in terms

of value added and jobs, can also be directly

generated by more competitive sustainable

activities. For example, in Europe, the value

added and employment of the environmental

sector has increased rapidly compared to the

rest of the economy, together with a steady

increase in labour productivity (Box 3.1-1).

The International Labour Organization (2018)

shows an overall positive employment impact

from the action taken in the energy transport

and construction sectors to limit global warming

to 2 °C. By 2030, the estimated job creation,

driven by the high demand for labour from

renewable energy sources, is around 18 million

jobs globally. Under the same logic, it can be

shown that the stringency of environmental

policies is accompanied by higher levels of

eco-innovation and economic competitiveness

(European Environment Agency, 2020).