The Two Disjointed Faces of R&D and the Productivity Gap in Europe

• Published date: 01 May 2022
• Author: Randolph Luca Bruno,Elodie Douarin,Julia Korosteleva,Slavo Radosevic
• Date: 01 May 2022
• DOI: http://doi.org/10.1111/jcms.13260

The Two Disjointed Faces of R&D and the Productivity Gap in

Europe

RANDOLPH LUCA BRUNO,

1

ELODIE DOUARIN,

2

JULIA KOROSTELEVA

2

and SLAVO RADOSEVIC

3

1

University College London, SSEES*, London, Rodolfo DeBenedetti Foundation, Milan and IZA, Bonn

2

University College London,

SSEES*, London

3

University College London, SSEES* London and National Research University Higher School of Economics, St

Petersburg

Abstract

This paper explores the determinants of productivity gaps within the European Union in comput-

ing, chemicals, basic metals and food manufacturing –four sectors that vary in terms of the inten-

sity of sectoral R&D. Our analysis reveals that the main causes of these productivity gaps are

intensity of unembodied or disembodied R&D activity and R&D embodied in purchased equip-

ment and machinery, and their interplay. While disembodied and embodied R&D are both associ-

ated positively to closing productivity gaps, the interaction between the two does not have the

same effect. There is no complementarity between these technology acquisition modes, despite

both disembodied and embodied technology are crucial for productivity catch up. In a policy con-

text, this suggests possible lack of coordination between R&D policy and technology transfer (that

is, foreign direct investment, trade and industrial policy). We show, also, that the productivity gap

between ‘peripheral’(southern and eastern) and ‘north’EU countries is widening.

Keywords: productivity; technology gap; multi-level analysis; European Union

Introduction

The World Bank once described the European Union (EU) as a ‘convergence machine’

(Gill and Raiser, 2012). However, especially since 2008, there has been a distinctive

and accelerated polarisation in the production structures of ‘core’EU countries (such as

Germany and Austria) and southern ‘peripheral’countries (Greece, Italy, Spain and

Portugal) (Gräbner et al., 2019a, 2019b; Landesmann, 2015; Landesmann et al., 2015;

Gräbner and Hafele, 2020), ref‌lected, in part, by the growing divergence in labour pro-

ductivity (Filippetti and Peyrache, 2013). Although the convergence machine seems still

to be operating in some parts of Central and Eastern Europe, it is important to understand

what is causing it to break down in other parts of the EU (Ridao-Cano and

Bodewig, 2018).

There are at least three main strands of literature that focus on the convergence process.

The f‌irst investigates ‘macroeconomic-cum-institutional’issues and the institutional

shortcomings of a European monetary union in the absence of a f‌iscal and political union

(for example De Grauwe, 2012; Boyer, 2014). The second emphasizes differences in the

structural reforms and supply-side policies among different EU macro-regions (south vs

north vs east) (for example Ridao-Cano and Bodewig, 2018). The third investigates what

we describe as ‘structuralist-cum-Schumpeterian’issues and the differences among EU

macro-regions in relation to their different capacity to generate technology. For example,

Gräbner et al. (2019a, 2019b) focus on industrial structure polarization, manifested in

JCMS 2022 Volume 60. Number 3. pp. 580–603DOI: 10.1111/jcms.13260

© 2021 The Authors. JCMS: Journal of Common Market Studies published by University Association for Contemporary European Studies and John Wile y&Sons

Ltd.

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium,

provided the original work is properly cited.

differences in technological capabilities, and the emergence of export-driven growth in

the core regions and debt-driven growth in the periphery. Similarly, the technology gap

approach to growth posits that differences in levels of development, ultimately, are rooted

in different levels of technological development (Fagerberg and Verspagen, 2014).

The ‘structuralist-cum-Schumpeterian’approach takes as a starting point the close link

between changes in the production structure and the absorption of technology. As sug-

gested by the literature review presented by Cimoli and Porcile (2016), this makes it

the most relevant for understanding the determinants of the productivity gap. Also, ab-

sorption of technology takes place in f‌irms through learning processes which are local-

ized, tacit and path dependent. This makes it essential to recognize f‌irms and their

features as the key determinants of productivity where innovation and the diffusion of

technology take place as closely linked processes (Cimoli and Porcile, 2016).

Our empirical model belongs to this theoretical stream. Specif‌ically, we test a new

technology gap model, based on two cumulative capacity-building mechanisms: acquisi-

tion and mastery of technology through Machinery and Equipment (M&E henceforth) –

whether purchased locally or imported from abroad, and investment in R&D. We refer to

these mechanisms as embodied and disembodied R&D respectively.

First, we conduct a f‌irm-level analysis of the productivity growth in the EU and pro-

pose a single common EU-wide productivity ‘frontier’to enable cross-country compari-

son. Second, we conduct an empirical analysis controlling for sector- and country-

specif‌ic factors. This allows us to identify the relative prominence of different factors at

different aggregation levels by discussing how contextual issues affect productivity and,

more importantly, to account for possible effects of clustering of f‌irms within sectors

and countries. Third, we investigate the interplay between sectoral disembodied R&D

and sectoral embodied R&D processes which extends our understanding of the

Schumpeterian growth process.

Our results emphasize the signif‌icance of the technology gap variables. While, as ex-

pected, both embodied and disembodied R&D are positive factors (fostering catching-

up), the interaction between them is not positive. We f‌ind a signif‌icant negative interac-

tion between embodied and disembodied R&D in three of our four sectors (the exception

being chemicals). This suggests lack of complementarity between these two modes of

technology acquisition and mastery despite each being, on their own, essential precondi-

tions for productivity gap reductions. Our results are robust to specif‌ications accounting

for unobserved f‌irm heterogeneity (both f‌ixed effects and random intercepts) and different

sampling and country-per-industry clustered standard error weighting.

The paper is organized in f‌ive sections that are structured as follows: Section I provides

a brief review of the broader literature on the determinants of productivity and technology

gaps and explains our choice of empirical model; Section II describes the dataset and

some stylised facts relevant to our analyses; Section III presents the econometric results;

and f‌inally, we offer some conclusions and implications for policy in Section V.

I.Literature Review

The debate on convergence/divergence in Europe focuses heavily on the macroeconomic

and institutional differences involved. Although these differences are essential to under-

stand short term trends, Celi et al. (2017) argue persuasively that they contribute little

The Two Disjointed Faces of R&D and the Productivity Gap in Europe581

© 2021 The Authors. JCMS: Journal of Common Market Studies published by University Association for Contemporary European Studies and John Wile y&Sons

Ltd.