[ 1 ]

Improving EU productivityThe role of ICT, human capital and intangible assets

Matilde MasUniversitat de València and Ivie

I Workshop KIISKnowledge, Innovation and Internalization Strategies

Facultad d´Economia, Universitat de ValenciaValencia, 19th-20th November

This project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement No. 612774

[ 2 ]

Labour Productivity growth is key for per capita income growth“Productivity isn’t everything, but in the long run it is almost everything”.- Paul Krugman

y = 1,01x + 0,21R² = 0,90

‐1

0

1

2

3

4

5

6

‐1 0 1 2 3 4 5 6Per c

apita

 income grow

th (pe

rcen

tage

), 19

50‐201

4

Labour productivity  growth (percentage), 1950‐2014

Figure 1. Labour productivity and per capita income, 1950-2014

Source: Total Economy Database, May 2015 (TCB)

[ 3 ]

Objetive To revise the behaviour followed by EU productivity

From an international perspective, comparing the EU with 12 leading

economies of the world

With a high level of industry disaggregation

Focusing on the most recent period 2006-2013

Making use of the highly disaggregated PREDICT database

Searching for potential factors explaining its poor performance:

The importance of the ICT industries Intangible investment R&D Human Capital Other intangibles (Organizational Capital and Training)

[ 4 ]

PREDICT and DICTA ProjectsPREDICT:Period: 2006-2012Variables: GVA; Employment (nº of Workers); Labour Productivity; BERD; R&D Personnel; R&D ResearchersCountries: EU-28, US, Norway, Switzerland, Japan, China, India, Korea, Taiwan, Australia, Canada, Russia and BrazilLevel of Disaggregation (for details see below)

Focused on: ICT industries (OECD (2007) Definition)Non-ICT Industries but R&D Intensive

Two ICT industries definition: Comprehensive and Operational (excludes Trade)

DICTA:Period: 1995-2015Variables: same than PREDICT but including also the variable hours workedCountries: same than PREDICTLevel of Disaggregation (for details see below)

Same than PREDICT but:Much higher level of ICT service industries disaggregationIt also Includs: Media and Content industries

Retail sale via mail order hours or via InternetTwo ICT industries definition: Comprehensive and Operational (excludes Trade)

[ 5 ]

Industry Disaggregation. PREDICT 2015NACE Rev.2. Description

a) ICT sector (comprehensive definition)261‐264, 268, 465, 582, 61, 62, 631, 951 A. ICT Total   [A=B+C]261‐264, 268    B. ICT manufacturing industries   [B=1 to 5]261         [1] Manufacture of electronic components and boards262         [2] Manufacture of computers and peripheral equipment263         [3] Manufacture of communication equipment264         [4] Manufacture of consumer electronics268         [5] Manufacture of magnetic and optical media465, 582, 61, 62, 631, 951    C. ICT total services   [C=C1+C2]465    C.1. ICT trade industries   [C1=6+7]4651         [6] Wholesale of computers, computer peripheral equipment and software4652         [7] Wholesale of electronic and telecommunications equipment and parts582, 61, 62, 631, 951    C.2. ICT services industries   [C2=8 to 12]582         [8] Software publishing61         [9] Telecommunications62         [10] Computer programming, consultancy and related activities631         [11] Data processing, hosting and related activities; web portals951         [12] Repair of computers and communication equipmentTOT D. Total (ICT and non‐ICT)b) ICT sector (operational definition)261‐264, 61, 582, 62, 631, 951 A'. ICT Total (operational)   [A'=B'+C']261‐264    B'. ICT manufacturing industries (operational)   [B'=1 to 4]261         [1] Manufacture of electronic components and boards262         [2] Manufacture of computers and peripheral equipment263         [3] Manufacture of communication equipment264         [4] Manufacture of consumer electronics582, 61, 62, 631, 951    C'. ICT services industries (operational)   [C'=9+13]61         [9] Telecommunications582, 62, 631, 951         [13] Computer and related activities   [13=8+10+11+12]c) Additional sectors10‐33 Manufacturing20‐21 Manufacture of chemicals and chemical products; Manufacture of pharmaceuticals, medicinal chemical and botanical products20    Manufacture of chemicals and chemical products21    Manufacture of pharmaceuticals, medicinal chemical and botanical products27‐28 Manufacture of machinery and equipment29‐30 Manufacture of transport equipment29    Manufacture of motor vehicles, trailers and semi‐trailers30    Manufacture of other transport equipment303       Manufacture of air and spacecraft and related machinery45‐47 Wholesale and retail trade, repair of motor vehicles and motorcycles45    Wholesale and retail trade and repair of motor vehicles and motorcycles49‐99 Services, except trade49‐53 Transportation and storage58‐63 Information and communication64‐66 Financial and insurance activities69‐82 Professional, scientific, technical, administration and support service activities69‐75    Professional, scientific and technical activities85 Education86‐88 Human health and social work activities

[ 6 ]

Industry Disaggregation. DICTA 2015

NACE Rev.2. Descriptiona) ICT sector (comprehensive definition)261‐264, 268, 465, 582, 61, 62, 631, 951 A. ICT Total   [A=B+C]261‐264, 268    B. ICT manufacturing industries   [B=1 to 5]261         [1] Manufacture of electronic components and boards2611         [1.1] Manufacture of electronic components2612         [1.2] Manufacture of loaded electronic boards262         [2] Manufacture of computers and peripheral equipment263         [3] Manufacture of communication equipment264         [4] Manufacture of consumer electronics268         [5] Manufacture of magnetic and optical media465, 582, 61, 62, 631, 951    C. ICT total services   [C=C1+C2]465    C.1. ICT trade industries   [C1=6+7]4651         [6] Wholesale of computers, computer peripheral equipment and software4652         [7] Wholesale of electronic and telecommunications equipment and parts582, 61, 62, 631, 951    C.2. ICT services industries   [C2=8 to 12]582         [8] Software publishing5821         [8.1] Publishing of computer games5829         [8.2] Other software publishing61         [9] Telecommunications611         [9.1] Wired telecommunications activities612         [9.2] Wireless telecommunications activities613         [9.3] Satellite telecommunications activities619         [9.4] Other telecommunications activities62         [10] Computer programming, consultancy and related activities6201         [10.1] Computer programming activities6202‐6203         [10.2] Computer consultancy and computer facilities management activities6202         [10.2.1] Computer consultancy activities6203         [10.2.2] Computer facilities management activities6209         [10.3] Other information technology and computer service activities631         [11] Data processing, hosting and related activities; web portals6311         [11.1] Data processing, hosting and related activities6312         [11.2] Web portals951         [12] Repair of computers and communication equipment9511         [12.1] Repair of computers and peripheral equipment9512         [12.2] Repair of communication equipmentTOT D. Total (ICT and non‐ICT)b) ICT sector (operational definition)261‐264, 61, 582, 62, 631, 951 A'. ICT Total (operational)   [A'=B'+C']261‐264    B'. ICT manufacturing industries (operational)   [B'=1 to 4]261         [1] Manufacture of electronic components and boards262         [2] Manufacture of computers and peripheral equipment263         [3] Manufacture of communication equipment264         [4] Manufacture of consumer electronics582, 61, 62, 631, 951    C'. ICT services industries (operational)   [C'=9+13]61         [9] Telecommunications582, 62, 631, 951         [13] Computer and related activities   [13=8+10+11+12]

[ 7 ]

Industry Disaggregation. DICTA 2015 (Cont.)

NACE Rev.2. Descriptionc) Retail sale via mail order houses or via Internet4791 Retail sale via mail order houses or via Internetd) Media and Content sector581, 59, 60, 639 A. MC sector [A=B+C+D]581 [B] Publishing of books, periodicals and other publishing activities   [B=1 to 4]5811 [1] Book publishing5812 [2] Publishing of directories and mailing lists5813‐5814 [3] Publishing of newspapers, journals and periodicals5813 [3.1] Publishing of newspapers5814 [3.2] Publishing of journals and periodicals5819 [4] Other publishing activities59‐60 [C] Audiovisual and broadcasting activities [C=5 to 6]59 [5] Motion picture, video and television programme production, sound recording and music publishing activities591 [5.1] Motion picture, video and television programme activities5911 [5.1.1] Motion picture, video and television programme production activities5912 [5.1.2] Motion picture, video and television programme post‐production activities5913 [5.1.3] Motion picture, video and television programme distribution activities5914 [5.1.4] Motion picture projection activities592 [5.2] Sound recording and music publishing activities60 [6] Programming and broadcasting activities601 [6.1] Radio broadcasting602 [6.2] Television programming and broadcasting activities639 [D] Other information service activities [D=7 to 8]6391 [7] News agency activities6399 [8] Other information service activities n.e.c.e) Additional sectors10‐33 Manufacturing20‐21 Manufacture of chemicals and chemical products; Manufacture of pharmaceuticals, medicinal chemical and botanical products20    Manufacture of chemicals and chemical products21    Manufacture of pharmaceuticals, medicinal chemical and botanical products27‐28 Manufacture of machinery and equipment29‐30 Manufacture of transport equipment29    Manufacture of motor vehicles, trailers and semi‐trailers30    Manufacture of other transport equipment303       Manufacture of air and spacecraft and related machinery45‐47 Wholesale and retail trade, repair of motor vehicles and motorcycles49‐99 Services, except trade49‐53 Transportation and storage58‐63 Information and communication64‐66 Financial and insurance activities69‐82 Professional, scientific, technical, administration and support service activities69‐75    Professional, scientific and technical activities85 Education86‐88 Human health and social work activities

[ 8 ]

The EU should aim at improving its Labour Productivity

Figure 2. Labour productivity, average 2006-2013(Thousands of 2010 EUR PPP)

Source: DICTA 2015 database elaborated by Ivie and JRC-IPTS

85.277.0

66.3 64.2 62.960.2 56.9

52.246.9

29.3

21.111.9

8.4

0

10

20

30

40

50

60

70

80

90Norway US

Switzerland

Australia

Taiwan

Cana

da EU

Japan

Korea

Russia

Brazil

China

India

Average 25.7

[ 9 ]

The rate of growth of labour productivity (LP) in the EU hasbeen…modest

Figure 3. Labour productivity growth. EU and Non-EU countries, 1995-2014(annual rates in percentages)

Source: Total Economy Database, May 2015 (TCB)

8.19

4.68

3.17 2.98 2.72

1.67 1.26 1.02 0.96 0.96 0.86 0.85 0.75

0123456789

10Ch

ina

India

Korea

Taiw

an

Russia US

Australia EU

Cana

da

Japa

n

Brazil

Switzerla

nd

Norway

Average = 2.3%

[ 10 ]

The leadership of the US in LP with respect to the EU has widened during the2006-2012 period in all industries but two

ICT industries

1 Manufacture of electronic components and boards [261]

2 Manufacture of computers and peripheral equipment [262]

3 Manufacture of communication equipment [263]

4 Manufacture of consumer electronics [264]5 Telecommunications [61]6 Computer and related activities   [5820, 62, 

631, 951]Non‐ICT industries

7 Manufacture of chemicals and chemical products [20]

8 Manufacture of pharmaceuticals, medicinal chemical and botanical products [21]

9 Manufacture of machinery and equipment [27‐28]

10 Manufacture of motor vehicles, trailers and semi‐trailers [29]

11 Manufacture of other transport equipment [30]

12 Transportation and storage [49‐53]13 Information and communication [58‐63, 

except Computer and related activities]14 Financial and insurance activities [64‐63]15 Professional, scientific and technical 

activities [69‐75]16 Administration and support service 

activities [76‐82]17 Education [85]18 Human health and social work activities [86‐

88]

Figure 6. ICT sector Productivity. Dynamics of US-EU differences by industry. 2006 and 2013(Thousands of 2010 euros PPS)

[ 11 ]

We will concentrate on some of the most relevant ones (though not all) with theobjetive of checking how EU performs:

1. The role of ICT industries and ICT R&D

2. Intangible Assets2.1 R&D,

2.2 Human capital,

2.3 Other Intangible Assets: Organizational Capital and Training

What might be the sources of EU disappointing performance

[ 12 ]

1.The role of ICT• Traditionally, the manufacturing sector has experienced higher rates of LP growth than

services.

• Since the ICT revolution this classical view has been challenged, basically due to thecontribution of ICT to: • i) economic globalization; • ii) vertical disintegration of the production process; • iii) organizational changes within firmsAnd, hence, to productivity growth.

• ICT can be viewed from the producing industries side or from the assets´ (software, hardware and communications) side. Software is both an ICT asset and an intangible asset.

• ICT impact on LP operates through three classical channels: i) labour quality; ii) technological progress embedded in capital assets; iii) MFP

• Plus the spillover effects generated by the difussion of technical progress from ICT producing to ICT using industries.

• And its complementarity with other, mainly intangible, assets.

[ 13 ]Source: PREDICT Report 2015 database elaborated by Ivie and JRC-IPTS

EU

NO

CH

AU

BR

CA

CNIN

JP

KO

RU

TW

US

y = 0,59x + 3,16R² = 0,76

0

10

20

30

40

50

60

70

80

90

100

0 50 100 150 200

Labo

ur produ

ctivity

 (in thou

sand

s 200

5 EU

R PP

S), ave

rage

 2006‐

2012

ICT Labour productivity (in thousands 2005 EUR PPS)average 2006‐2012

There is a positive and significant correlation between LP growth in the ICT sector and aggregated LP growth.Figure 4. Total labour productivity and ICT labour productivity. EU and Non-EU countries, average 2006-2012

[ 14 ]

LP of ICT sector improved in all countries in relation to the EU

Figure 5. ICT sector Productivity. Dynamics of other economies’ differences vs. the EU average. 2006 and 2013 (Thousands of 2010 euros PPS)

[ 15 ]

3. Spillover effects of ICT. Intangibles and Growth• The impact of ICT technologies should not be considered in isolation from a

broader concept of investment, especially intangible assets.

• Tangible assets include machinery, buildings, as well as ICT assets such as hardware and communication. Only recently National Accounts recognize someintangible assets such as software (ICT) and R&D.

• ICT, intangible assets and productivity (both labour and MFP) are closely related

• Empirical evidence shows a strong correlation between intangibles and LP and MFP growth (Corrado, Haskel, Jona-Lasinio and Iommi (2013)).

• Corrado, Haskel and Jona-Lasinio (2014) also find:• i) a complementary relation between ICT and intangible capital• ii) significant spillovers of intangible capital.

[ 16 ]

The US, followed by the UK, have the highest share of intangible assets in totalGFCF. Greece, Portugal, Spain and Italy are on the lowest bound.

Figure 8. Share of GFCF on intangible assets over total GFCF. EU-15 and US. Average 2006-2010 (percentages)

Source: Eurostat, INTAN-Invest and own elaboration.

63.0

56.7

46.8 45.7 45.542.8 41.8 41.7 41.5 41.5 40.6

35.0 33.3

28.6 27.8 27.5

19.0

0

10

20

30

40

50

60

70

US

UK

Swed

en

Nethe

rland

s

Fran

ce

Ireland

Denm

ark

Belgium

Finlan

d

Germ

any

EU15

Luxembo

urg

Austria

Portug

al

Italy

Spain

Gree

ce

Average = 40.6%

[ 17 ]

3.1. R&D and growth

• R&D affects LP by: • i) improving the quality of goods and services produced• ii) reducing the average production costs• iii) widening the array of final goods or intermediate inputs available to

companies.

• R&D may also (and it usually does) produce positive spillover effects(knowledge spillovers)

• The return to R&D is not an invariant parameter, but the outcome of a complex interaction between firm strategy, competition strategy, and themacroeconomic environment which is basically unpredictable (Hall, Mairesse and Mohnen, 2010)

[ 18 ]

The advantage of the US in terms of LP is higher than the one it shouldhave according to its BERD intensity

Figure 9. BERD intensity and labour productivity, average 2006 and 2012

Source: PREDICT Report 2015 database elaborated by Ivie and JRC-IPTS

EU28

NO

CH

AU

BR

CA

CNIN

JP

KO

RU

TW

US

y = 13.98x + 25.01R² = 0.22

0

10

20

30

40

50

60

70

80

0 1 2 3

Labo

ur produ

ctivit

y (in

 thou

sand

s 200

5 EUR

 PPS), 

averag

e 200

6‐20

12

BERD intensity, average 2006‐2012

[ 19 ]

Figure 10. BERD intensity (BERD/GDP). EU and Non-EU countries, average 2006-2012 (Percentages)

BERD intensity in the EU ranks 7th out of 13 economies

Source: Eurostat and PREDICT Report 2015 database elaborated by Ivie and JRC-IPTS

2.752.61

2.14 2.01 1.95

1.27 1.23 1.220.99

0.850.70

0.490.26

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Korea

Japan

Switzeland

Taiwan US

Australia EU

China

Cana

da

Norway

Russia

Brazil

India

average = 1.5%

[ 20 ]

BERD intensity is much higher in the ICT sector in all countries contributing toits faster LP growth

Figure 6. BERD intensity (BERD/GDP). Whole economy and ICT sector. EU and Non-EU countries, average 2006-2012 (Percentages)

Source: PREDICT Report 2015 database elaborated by Ivie and JRC-IPTS

0

2

4

6

8

10

12

14

16

18

20

Korea

Japan

Taiwan US

Norway

Cana

da¹

EU

China

Australia

Brazil¹

India

Russia

Total ICT sector

[ 21 ]

3.2. Human Capital and Growth

• It is widely accepted the need to distinguish between the number of workers(labour quantity) and their qualification measured from different perspectives(labour quality).

• Dynamics is important for the impact of human capital on economic growth:• Programs to improve cognitive skills through schools take time to be implemented• The impact of improved skills will not be realized until the students with greater skills

move into the labour force.• The economy responds over time through the development and implementation of new

technologies

• A good indicator of Human Capital should combine education attainment withtype of ocuppation performed and level of competencies (PIAAC).

• ICT have a positive effect on these three elements

[ 22 ]

EU

NO

CH

AU

BR

CA

JP

KO

RU

TW

US

0

20

40

60

80

100

0 10 20 30 40 50 60

Labo

ur produ

ctivity

 (in thou

sand

s 200

5 EU

R PP

S), ave

rage

 2006‐

2012

Highly qualified employment/Total employment (%)average 2006‐2012

y=0,92x+18,6R²=0,24

The US uses its qualified workers in a more efficient way than the EU. The US LP is higher…

Figure 11. Labour productivity and highly qualified employment*. EU and Non-EU countries, average 2006-2012

* Employment in ISCO 1-3/total employmentSource: PREDICT Report 2015 database elaborated by Ivie and JRC-IPTS and ILO

[ 23 ]

Figure 12. Employment in ISCO 1-3/Total employment. EU and Non-EU countries, average2006-2013(Percentages)

…for a similar share of highly qualified employment

Note: for China and India data are not availableSource: Eurostat, ILO and own elaboration

47.944.5 43.1 42.6 41.5

38.9 36.833.2

24.121.6 19.9

0

10

20

30

40

50

60Sw

itzerland

Norway

Cana

da

Australia

Russia EU US

Taiwan

Japa

n

Korea

Brazil

Average = 35,8%

[ 24 ]

UK and Netherlands have a larger share of OC investment than the US, and Denmark a larger share in Training. Spain and Greece appear in thelowest bound.

Figure 14. Share of GFCF on intangible assets over total GFCF. EU-15 and US. Average 2006-2010 (percentages)

Source: Eurostat, INTAN-Invest and own elaboration.

a) Organisational capital b) Training

19.6

14.4 14.412.9

12.1 11.510.4 10.2 9.6

8.6 8.4 8.2

6.3 6.15.1

4.2

2.1

0

5

10

15

20

25

UK

Netherland

s

US

Belgium

Fran

ce

Ireland

EU15

Swed

en

Portug

al

Germ

any

Finlan

d

Austria

Italy

Luxembo

urg

Denm

ark

Spain

Gree

ce

Average = 10.4%

7.2 6.9 6.66.1 5.9 5.7 5.6

4.9 4.94.1

3.7 3.53.1 2.9

2.6 2.4

0.9

0

1

2

3

4

5

6

7

8

9

10

Denm

ark

US UK

Germ

any

Ireland

Fran

ce

Netherland

s

Luxembo

urg

EU15

Austria

Swed

en

Italy

Finlan

d

Belgium

Portug

al

Spain

Gree

ce

Average = 4.9%

[ 25 ]

Facts: The EU has a LP problem as shown by:• A lower LP level than the US, Swiztzerland, Norway, Australia, Canada and Taiwan• An increasing gap with the US that has widened steadily since 1995, and worsened after 2009

What are the reasons underpinning this EU disappointing achievement

1. The role of ICT industries and ICT R&D. LP in the EU ICT sector has shown during 2006-2013:• Worse performance than the other 12 economies considered• Lower BERD intensity than Norway, Canada, Japan, Korea, Taiwan and the US

It should be highlighted that the EU LP productivity gap affects not only the ICT sector but (almost) all sectorsof the economy. Thus, the EU has not fully taken advantage of the efficiency gains enabled by the ICT revolution. Something else is missing

2. Intangible Assets. Their impact is positively affected by ICT through spillover and complementarity effectswhich also reinforce the positive effects of ICT.

• The EU needs increasing the share of GFCF in intangibles approaching that of the US• Specially BERD intensity (both total and ICT BERD) which is much lower• As well as in organisational capital, on-the-job training, design and branding• However, the EU also needs to improve the statistical information in these last forms of intangible capital

Last Warning: The EU is conformed by very different countries/regions. The present situation is much more unfavourable for Southern and Eastern countries/regions. Regional Policies (as well as information at theregional level) are needed .

Concluding Remarks