Accounting for Progress: How to Measure Innovation and Entrepreneurship

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1 Lisbon Council Accounting for Progress: How to Measure Innovation and Entrepreneurship Enrico Giovannini President, Italian Statistical Institute Brussels, 2 October 2012

2 The world is changing 2

3 Growth and productivity in the last decade GDP growth in the last decade ( ) shows significant differences among Member States. EU27 grew by 16,5%, ranging between 4,2% in Italy and over 40% or even 60% in Eastern European countries. Hourly productivity shows a very similar pattern, with an average increase of 13,3% for EU27 and huge differences among countries. UE27: overall change of real GDP and of hourly labour productivity in (perchentage changes) Fonte: Eurostat ** Belgium, Malta, and UK: productivity * Romania e Lux productivity

4 Growth and productivity in the last decade (2) The crisis further strengthened the relationship ü R-squared increases including the crisis as a consequence of production restructuring GDP growth and starting point there s been bottom-up convergence Also in price levels 9 CRESCITA M.ANNUA R 2 = 0.93 R 2 = 0.73 R 2 = 0.84 R 2 = PIL PPA 2000 Crescita reale Crescita PPA prezzi correnti 4 4

5 Innovation is a key component of investment Investment in intangible assets may represent more than half of all investments, such as in USA, UK, Finland and Sweden Investment in fixed and intangible assets as a share of GDP, 2006 intangibles Source: OECD (2010), Measuring Innova1on: A New Perspec1ve, OECD, Paris based on COINVEST [ naeonal esemates by researchers, EU KLEMS database and OECD, Annual NaEonal Accounts Database. 5 5

6 Components of labor productivity (1) Decomposing labor productivity into tangible and intangible capital and Total Factor Productivity: Tangible capital is often just a minor driver of productivity growth, whose contribution is 5,8% in Finland, 15% in Austria, less than 20% in the Netherlands. Intangible capital can count up to 25% as in Denmark. TFP seems to be the component which really marks the difference in productivity growth: It can explain even 82% of growth as in the case of Finland Contributions to labor productivity growth Years

7 Components of labor productivity (2) After the burst of the crisis, Denmark and Finland are the economies with the highest absolute contribution of intangible capital to labor productivity growth (0,53% and 0,42% a year), in Italy is just 0,06% The impact of the crisis on labor productivity has been particularly strong in Finland and Sweden (-2,2% and -2,1% a year), while it has been more moderate in UK and Austria (-0,3% and -0,2% a year). Contributions to labor productivity growth- Years

8 Productivity and enterprise demography There is a positive correlation, even if moderate, among enterprise birthrate and productivity dynamics. Productivity and enterprise birthrate (percentage points) 8

9 TFP: interpretative elements Within the standard model of growth accounting TFP measures the rate of technical progress not incorporated by productive factors. In fact, due to limits in measurement and non applicability of the model hypothesis, TFP includes also other factors, in particular: ü Process innovations, ü Improvements in labor organization and management techniques, ü Improvements in education level and experience of labor force, ü Part of quality change of investment goods, ü Influence of the economic cycle, economies of scale, externalities, better allocation of factors of production, ü Possible measurement errors of product and of factors of production. Intangible capital and Total Factor Productivity are strongly affected by innovation strategies. 9

10 How to measure innovation for policy making: R&D and its limits Europe 2020 target: 3% of the EU's GDP to be invested in R&D. For most countries the target is still very far The business component is the one which more affects differences in Europe R&D is an input indicator, a necessary but not sufficient condition R&D expenditure, percentage of GDP,

11 High Level Panel on the Measurement of Innovation (1) The input R&D needs to be complemented by some additional outputoriented indicators. Characteristics: Simple and understandable. Sizable and direct. Objective. Presently computable. Stable. Internationally comparable. Decomposable. Low susceptibility to manipulation. Easy to handle technically. Sensitive to stakeholder's views. 11

12 High Level Panel on the Measurement of Innovation (2) Five indicators to be added 1 Hourly labour productivity 2 Patent applications weighted by GDP 3 - Percentage of employment in knowledge intensive activities 4 Share of fast growing (or young?) and innovative firms in the economy 5 Contribution of innovative-related trade in manufactured goods to the balance of trade of goods 12

13 Innovation Union Scoreboard (1) The IUS 2011 distinguishes betweeen 3 main types of indicators and 8 innovation dimensions, capturing in total 25 different indicators. 13

14 Innovation Union Scoreboard (2) Based on their average innovation performance, the Member States fall into four performance groups: 14

15 The OECD Innovation strategy. Measuring innovation (1) While R&D remains vitally important, many highly innovative firms do not engage in R&D at all. Increasingly, firms in services and manufacturing create value through a wide range of complementary technological and non-technological changes and innovations. Ministerial report on the OECD Innovation Strategy, May 2010 The OECD Innovation Strategy is built around five priorities for government action: empowering people to innovate; unleashing innovation in firms; creating and applying knowledge; applying innovation to address global and social challenges; improving the governance and measurement of policies for innovation. 15

16 The OECD Innovation strategy. Measuring innovation (2) A horizontal" approach: cutting across policy areas Educa@on & skills Environment Science and technology Industry and entrepreneurship Development Tax Compe@@on Investment Exploring innova@on from a wide range of policy perspec@ves Informa@on and communica@ons Sta@s@cs Public governance Trade Consumer policy 16 Territorial development 16

17 The OECD Innovation strategy. Measuring innovation (3) The OECD Innovation Strategy Report : Draw on traditional indicators and propose experimental ones to reflect the priorities for government action of the OECD Innovation Strategy Present more sophisticated or experimental indicators that go beyond simple pointers e.g.: empowering people to innovate Length of time students have been using a computer and mean PISA science score beside to Pisa indicator reading, mathematics and science proficiency at age 15 17

18 Social innovation Future challenge lies in the definition of some kind of indicator able to catch the spreading of social innovations. Social innovations are hardly defined: Those advantaging all citizens? Those realized by public sector or non-profit organizations? Those fostering the so-called social economy? According to Geoff Mulgan: Social innovation refers to innovative activities and services that are motivated by the goal of meeting a social need and that are predominantly diffused through organizations whose primary purposes are social. 18

19 Key domains for the Italian BES The individual sphere The context 19

20 Results of the online consultation Level of importance of the 12 domains 20

21 Creation of knowledge 1. Research intensity: Percentage of R&D expenditure on GDP 2. Patent propensity 3. Percentage of knowledge workers on total employment Application and diffusion of knowledge 4. Innovation rate of the national productive system 5. Percentage of product innovators 6. Productive specialization in high-tech and knowledge intensive sectors 7. Internet use 21

22 Creation of knowledge Research intensity Percentage of R&D expenditure on GDP Signals the competitive capacity of a socio-economic system within the knowledge economy. Pros Cons Availability of international and regional comparisons Availability of long term time series (1960s) Key indicator of Europe 2020 strategy Input indicator, does not tell us anything on effectiveness of the expenditure or on the quality of the research 22

23 Creation of knowledge Patent propensity Total number of filed patents to the EPO per million of inhabitants (or on GDP Million euros) Traditional indicator for measuring the technological capacity of a country or a sector. Pros Availability of international and regional comparisons Allows to measure the creative/innovative output produced by a socio-economic system as a whole (information available for enterprises, public institutions and non profit organizations) It is possible to have a further disaggregation for pharmaceutical/energeticenvironmental/health patents in order to grasp the social and environmental impact of research Cons Does not reflect sufficiently well the creative capacity of services Regional and international comparison strongly depend on the technological specialization of the local productive system Can capture only the most relevant and codified technological activities Patents do not always turn into commercial applications They provide only partial coverage of the alternative protections of creative/innovative activity 23

24 One- and two-year-old employer enterprises in manufacturing and in services, 2006 Patenting activity of young firms, Source: OECD 24

25 Creation of knowledge Percentage of knowledge workers on total employment Employees with tertiary education (ISCED 5-6) in Scientific and technological professions (ISCO 2-3) / total employees It measures the effect of innovation on the structure and the composition of employment (skill biased technical change) and the economic contribution of «cognitive work». Pros Cons Availability of international and regional comparisons, and by gender Important indicator in the analysis of the relationships among technological change, professional qualification and wage distribution May lead to paradoxes: for example, in Italy, rates for women are very high in Southern regions, where female employment rate are low and education is strongly discriminant for accessing the labor market 25

26 Application and diffusion of knowledge Innovation rate of the national productive system Enterprises with 10+ employees which introduces technological (product and/or process), organizational and marketing innovations in the last three years Measures enterprises propensity to innovate, allowing to evaluate and compare the relative position of a national or regional economy by its innovative capacity Pros Cons Allows national and regional comparisons Born to overcome the limits of traditional input and output indicators (RnD expenditure, patents) It measures the complexity of the innovative output Innovation is grasped only with respect to business strategies and dynamics. Public sector innovations and social innovation are not taken into account Risk of over/underestimation of the phenomenon due to multiple localization of enterprises 26

27 Innovation strategies 27

28 Application and diffusion of knowledge Percentage of product innovators Enterprises with 10+ employees which introduced product/service innovations in the last three years Measures the capacity of a productive system to answer to the evolution of demand and to create new employment Pros Cons Allows national and regional comparisons Similar to one of the indicators of the Innovation Union Scoreboard, but less sensible to subjective judgment Does not allow to understand whether and how demand-led innovation is answering to individual and social needs Market is not equally relevant in all industrial sectors Risk of over/underestimation of the phenomenon due to multiple localization of enterprises 28

29 Product innovation 29

30 Application and diffusion of knowledge Productive specialization in high-tech and knowledge intensive sectors Value added (and/or employees) in high technology manufacturing sectors and knowledge intensive services on total value added (or employees) Measures the weight which activities based on and guided by knowledge have in term of value added and employment Pros Cons Allows national and regional comparisons Output indicator employed also by the Innovation Union Scoreboard Weak availability of disaggregates time series Reduced ability to compare regions with different demographic dimension Relevant differences may emerge among countries because of their positioning along the value chain 30

31 Application and diffusion of knowledge Internet use People who used internet at least once a week in the previous 12 months. Recalls the relevance of the digital component in social inclusion processes. Its complement is a measure of digital divide Pros Cons Allows national and regional comparisons, also by gender and by age Identification of categories at higher risk of digital exclusion Can not distinguish between passive use of the net and active participation At regional level (at least in Italy) age and gender disaggregation are not available 31

32 Formal education 1. Participation in early childhood education 2. Percentage of people aged having completed at least upper secondary education 3. Percentage of people aged having completed tertiary education (ISCED 5 o 6) 4. Percentage of early leavers (aged 18-24) from education and training 5. Percentage of people aged not in education, employment, or training (NEET) Lifelong learning 6. Percentage of people aged participating in formal or nonformal education Skills 7. Level of literacy in the II classes of upper secondary education 8. Level of numeracy in the II classes of upper secondary education 9. Percentage of people aged 16 and over with high level of ICT competencies Cultural participation 10. Synthetic indicator of the level of cultural participation

33 The role of micro-data Beside the macro indicators we need to look at microdata Projects launched by the OECD and by the EC Lack of international comparisons due to severe difficulties in the access to microdata Establish an European microdata centre for the analysis of enterprises behaviour

34 Think differently: growth in the next decade Is growth necessary to the functioning of democratic capitalism as repression was to State socialism? Claus Offe