MSc in International Management

«Global Scenarios: Module 1 (Macroeconomics)»

Lecture 4
Innovation and Growth: Evidence
 Introduction
olow, role of capital as factor of production
accumulation capital is relevant also for productivity growth whe capital units
are necessary or facilitate introducion new technology

• Accumulation of capital:
– Growth only during the transition dynamics
– No growth over the long-run: diminishing marginal
returns
– Explain different levels of per-capita GDP
• Productivity growth bility becoming more efficient in use factor production

– support long-run economic growth

we endogeneized creation new knowledge ideas

romer model: new ideas can be created by putting effort in RD, depends on how productive these resources are
once developed idea is non rival can be used by diff firms at same tim e
 Productivity growth

• Innovation (creation of new ideas)

develop new ideas, while other countries use others ideas
– Frontier countries & frontier firms who is investing ore in rd
who is developin more in innovation
when we derived our model we assumed
– Within firm vs. within industry 1 coubtry populated identical firms
but act there is a lot of heterogeneity

– Between vs. within industries

heterogeneity across countries but alo within countries, industries more innovative than others
and wihin inustu some firms are at frontier, other firms adotp others ideas
what is relevant is not just the amount of new ideas we are able to generaye , another is possibility of adopting
and diffusing new idea
main drivers that facilitate innovation

• Adoption/Diffusion
– Firms and countries not at the frontier
role of patents reading 3rd part imp determinant firm productivity (role of qualituy of management
its as relevant as rd and investment in determining firm productivity)
CREATION OF NEW IDEAS: EVIDENCE
1st problem to measure is definin phenonemnon , OECD definitions

Innovation: Definition
crucial for productivity growth

innovation OECD DEF

a new or improved product
by firm
or process that differs
significantly from the unit’s previous products or
processes and that has been made available to potential
users (product) or brought into use by the unit (process)
not just new idea per se but mimplementation new idea that generates innovation

• More than an idea … requires implementation

we try to measure this

Innovation activities
All developmental, financial and commercial activities
undertaken by a firm that are intended to result in an
innovation for the firm
drawback input: are we really measurin new ideas counting nb
employees bc we can put a lot of effort but we're not sure about result and
effort can have very different outcoems in diff environments
Measuring innovation
she studied with friend and they were diff in productivty (had diff outcomes even if spent same amount hours) so
another possib is to measure the outcome (output measure-patent /count innovations)

• Research and development (R&D):

– creative work carried out on a systematic basis to
increase the stock of knowledge of man, culture
and society, and the use of this knowledge to
devise new applications to get utility (increase productivity)
• easy
Input measures
to measure input vs. output measures
has adv its easy to calculate measure in amount expenditrue rd or nb of emoloyees employed in rd laboratories
– R&D expenditure or employment vs.
patents/innovation
outpout measures
counts
its difficult to count innovation to define what is innovation and what is not
diff get data that is comprable ecen patents are imprecise measure of wht
innovation is some ideas not available for patents piu ideas di quelle che conti
– Higher comparability of input measures patent may be bad measure of innovatio
2 persoective to measure innovation: 1) INPUT (effort , nb of
researchers we put in rd to discover new ideas) in line with romer framework+expenditure rd activities)
2) OUTPUT
OECD/Eurostat (2018), Oslo Manual 2018: Guidelines for Collecting, Reporting and Using Data on Innovation, 4th Edition, The
Measurement of Scientific, Technological and Innovation Activities, OECD Publishing, Paris/Eurostat, Luxembourg.
https://doi.org/10.1787/9789264304604-en
 Measuring innovation
expenditure in rd activity

• Input Measures: includes rd performed in couty but financed by foreign entities

– Gross domestic expenditure on research and

development (GERD) investments made initaly regardless of nationality of investor
• Includes R&D funded from abroad, but excludes
payments made abroad compare levels of exp rd cross time and countries , we can also normalize
value and divide it by gdp piu fair comparison --> rd intensity

– R&D intensity: GERD over GDP %

• Output Measures:
– Patents/Innovation counts

OECD/Eurostat (2018), Oslo Manual 2018: Guidelines for Collecting, Reporting and Using Data on Innovation, 4th Edition, The
Measurement of Scientific, Technological and Innovation Activities, OECD Publishing, Paris/Eurostat, Luxembourg.
https://doi.org/10.1787/9789264304604-en
 GERD % GDP, OECD
share of gdp spent in rd activities overall in the coutnries, u can compare evolution over time of intensitu
RD SOLID LINE O
ECD OVERALL stagnation last years smal increae mainly driven by south korea, us, europe by germany
israel and south korea invest more in rd with increase over 20 years

rd intensity can go up bc spend more in rd or gdp goes down that why we can look at exp in level
typicall when gdp goes down also rd expend goes down except in pandemic we have not seen decrease in rd

quite constant intensity in european union increase in last few years

driven by germaby, france
increase rd intensity in china not surprise , china was developing a lot becoming
one most imp coutnries also in term innovation

OECD (2021), “OECD Main Science and Technology Indicators . R&D Highlights in the March 2021 Publication”, OECED
Directorate for Science, Technology and Innovation. www.oecd.org/sti/msti2021.pdf
 R&D intensity - OECD

• R&D intensity growth: 2.4% in 2018; 2.5% in

2019
– United States, Germany and Korea account for
much of the increase
• Higher level: Israel (4.9%) and Korea (4.6%)
• China: growth from 2.1% to 2.2%
• EU27: a more modest increase to 2.1%

OECD (2021), “OECD Main Science and Technology Indicators . R&D Highlights in the March 2021 Publication”, OECED
Directorate for Science, Technology and Innovation. www.oecd.org/sti/msti2021.pdf
 R&D Intensity, 2019

same as before in 1 year

doesnt mean country with higher rd intensity is more innovative its input meadure so means put more
resorces invested in rd , more effort in rd activity

OECD (2021), “OECD Main Science and Technology Indicators . R&D Highlights in the March 2021 Publication”, OECED
Directorate for Science, Technology and Innovation. www.oecd.org/sti/msti2021.pdf
 we observe a lot of heteorgeneitu across coutnries and within coutnries even more heterogenity(frontier firms vs not so innovative firms)

Gross Expenditure on R&D, levels in PPP

taking ration gdp (intensity can hide some dynamics)
measured in constant prices clean impact from changes in prices-and in ppp( purchasing power parity recognizing one dollar in us
has not same purchasingpower as in italy)

in european union modest increase compared to evolution of usa (another mature economy) of course this is
due that in european union we have more heterogeneity across coutnries
2nd largest contribtion in level is china today

the gap with the us gets closer over time china grow not only bc extremely good accumulating capital, but also
bc creatin new ideas and increasing productivity of the countru

compare south korea -it was one of top playes in temrs intensity but of course its a small country so in terms of levels
smaller contribution
compare korea with uk (gbr) had same level of expenditure 2007-8 over time diff pattern

OECD (2021), “OECD Main Science and Technology Indicators . R&D Highlights in the March 2021 Publication”, OECED
Directorate for Science, Technology and Innovation. www.oecd.org/sti/msti2021.pdf
 Expenditure in R&D - Levels
• Largest R&D performers: United States, Japan, Germany,
Korea and France
• China:
– world's second largest R&D performers in the OECD area
– R&D expenditure: 80% of that of the US in 2019, up from 26%
in 2005
• Eu27:
– faster trajectory since 2016
– mostly driven by Germany

• Korea and the United Kingdom:

– identical levels of R&D expenditure in 2008
– Korea reported twice as much R&D as the United Kingdom just
one decade later

OECD (2021), “OECD Main Science and Technology Indicators . R&D Highlights in the March 2021 Publication”, OECED
Directorate for Science, Technology and Innovation. www.oecd.org/sti/msti2021.pdf
 Innovation by broad sector
we can differentiate the origin who is performing rd and who is financing rd

Performance of GERD by sector

2.5 who is doing rd, 71% done by private firms
then second share is for higher education (far smaller 16)
9.7

16.5 most imp performers of rd is firms

71.2 Financing of GERD by sector

7.5
5.2 bulk of financing comes from
Business enterprise Higher education Government Private Non-Profit
private sector

24.5

62.8

Business enterprise Higher education Government Rest of the world

priate
public university
or

OECD Main Science and Technology Indicators (MSTI) database, OECD

 not all firms within industry develop new ideas at same pace

Reported Nominal R&D exp growth, 2020

top players in some sectors -growth in rd expenditure in some firms % , typically druing recession we have negative growth rate
in rd exoenditre, but here we see a positive growth rate 6.21 % smaller than 2019 bc poandemic (this is nto ommon during recesion)

huge growth rd expend in facebook

why ? targeting metaverse

heterogeneity across firms

evident heterogwneity across sectors in somesetor increase with respect previous rate
iCT, SOFTWARE AND pharmaceuticals

OECD (2021), “OECD Main Science and Technology Indicators . R&D Highlights in the March 2021 Publication”, OECED
Directorate for Science, Technology and Innovation. www.oecd.org/sti/msti2021.pdf
 Reported Nominal R&D exp growth, 2020

• Data based on quarterly reports and accounts

for selected large R&D business investors
• Business R&D investment continued to grow in
2020, but a lower rate than in 2019
• Differences across industries
– Robust growth in ICT and life sciences industries
– Fall in Transport equipment
 Innovation
performed and financed

• Most R&D spending is undertaken privately by

firms
Why?
• Profits many factors on which profit and so incentives to innofate depend

depends

– Size of the market in which it can sell the product

– Size of the advantage obtained (appropriability?)
of returns if evelop innovstion are u abel to take

– Length of the advantage full adv of profit or is there risk compeitors

are able to adopt it

– Availability and cost of funds itsability costly u have to compare profits u exopect with ur
of collecting funds u need and cost of performing rd

– Uncertainty higher profit u expect higher incentive to invest

put effort but no sure about result

– …
 Factors facilitating innovation
why do we have heteorgenity

• Why do some countries innovate more?

• Which factors may facilitate innovation?

what makes our effort in rd more productive

factors to improve innovation we can design policies that allow firmsto innvote nd grow more (increas eporudctivtu at
country leel)

• What affects researchers’ productivity, 𝑧?

 Factors facilitating innovation
INTERNAL drivers innovation at firm level

• Individual and firm characteristics innovate more

availability of finds is crucial, firms stornger from financial pv with cash available to finance rd
– Internal finance → efficiency of financial markets
ur not forced to use own funds u can also get fundin from foreign firms
– Size/Sales larger firms tend to ability of iancnia market to give resources to more innvoative firms crucial
to determine firm sucess
be more innovative (dimension relvant is amount sale, if able to sell more easier to finance rd
have more cash)
– Culture/Management practices
quality of mgmg -this more difficult to measure (sales , int finance easier

• Competition
EXTERNAL
to manage) mgmt is as important as technology for product growth

factors determine whether firm has incentive to innovate

– Less rents to extract → lower incentive

– Defend firm’s market share → higher incentive
– Empirical evidence: an inverted U-shape? (Aghion
political stability gov policies whether state supports innovations (incentives)
et al. 2005)
• Positive at low levels; negative at high levels
Bettina Becker, 2013. "The Determinants of R&D Investment: A Survey of the Empirical Research," Discussion Paper Series
2013_09, Department of Economics, Loughborough University, revised Sep 2013.
 Factors facilitating innovation

• Government R&D policies

can provide tax breaks, subsidies, can particupat with firms in effort rd
– Incentives directly
+ensuring political stability reducing uncertainty
– Protection of intellectual property
firms belonging same industry located same place to increase
exchane ideas across firms increasing cretivivty ability innovae

• Location (Knowledge spillovers) silicon valley

may facilitatte cooperation private firm

and higer education istitution and research labs
– Geographic proximity to universities
– Membership of research joint ventures
– Cooperation with research centers
– Availability of highly qualified human capital
higher uman capital skills u need

Bettina Becker, 2013. "The Determinants of R&D Investment: A Survey of the Empirical Research," Discussion Paper Series
2013_09, Department of Economics, Loughborough University, revised Sep 2013.
DIFFUSION AND PROTECTION
 Transfer of technology
once i have an idea we can all use it without reducing the vaue of idea
however firm investsms money if it can get profit from that and if all competiroes can use it advantage would be quite smal

• Technology (ideas) is non-rival

• Is technology excludable?
• Excludability
– degree to which an owner of something can prevent
others from using it without permission
innovato can deicde to license innovarion to other firms

• Patents some are excludable we can prevent others from using it , we can file documetn through legal system
provides innovator with ecvlusive use of innovation for limited time period innovator is monoolits

– temporary exclusive right to the inventor to make,

use, and sell that invention for a set period of time
this is not only possib for exlucing others-i have perfect recipe for carobonara i can keep sevret of innovation
for some things, some ideas we can introduce mechanism to exclude othersùso
some ideas nto exlucablex, if ex i itrnoudce a new way of managing human resources diffic to use others , maybe u work for firm then u
go home chat with a friend and the friends firm starts uisng msame approach , same organiation al method
 Transfer of technology
one one hand want that innovator appropriates resources of invention cause
want to provide him with incentives, otherwise wont invest money on rd
but if protects the innovator the other firms cannot use same idea so we are blocking diffusion

• Ideas sometimes are non-excludable

– hard to prevent someone else from using them

• In other cases, they are excludable (at least

partially)
 Patents and IPR (Intellectual Property Rights)

• Patent:
– A grant made by a government that confers on the
creator of an invention the sole right to make, use,
and sell that invention for a set period of time
– Monopoly!
 Transfer of technology

the traditional economic theory says in order to provide incentives to innovators we have to
ensure that they get a profit from their new idea, on other hand we know this reduces
diffusion so this is bad for society
how do we solve this we give parwnt to innovator for limited time
period teh innovator can get profit for suitable time period , and when expire society can
benefit all can use same knowledge ad prosuce new ideas

Debate: are patents a good incentive?

and then increase in oproductivity

•“A question of utility”, The Economist, August 8,

2015
 Problems with pure competition
monopolies are considered as inefficient (patent) , the efficient market structure in temrs of alloation of resources is perfect
competition as long as there are no market failures

• Adam Smith’s invisible hand:

– Perfectly competitive markets lead to the best of all
possible worlds
– This is true if there are no market failures!
if there are externalities as in case innovation
èerfect competiion not best structure
mi copiano idea

Unregulated markets underprovide ideas

innovation is costly and if there is perfect competition i cannot get the advantages from my effort in innovation

thats why we have to grant monopoly power for limited time period

• Non-excludability reduces the incentive to create

new technologies in the first place
 Patents and IPR (Intellectual Property Rights)

Patents increase in nb of patens not corresponding to real increase in innovation

• Issues: in empirical rvidene many patents registered are not actually use as if firms patent sthg to protect the firm
not using , implementing idea -proliferation of patents

– Is the invention really a novelty? Am I breaking any

patent? problem cause if u have new idea then have (since too many patents) to use it have spend time to check
all patent all rrady out there to make sure not infringing any property rights -this reduces incentive to
innovation and makes innovation more costly
– Verification of underlying science: a cost!!!
• Patent trolls this pehnomonon of proliferation of patents to block other firms, prevent legal problems is
called patent trolls - they want block others not really using innovation

– Which inventor deserves protection?

if my idea is protected by patent u cannot use it for commercial use, cannot get prpfits, this reduces
ur ability to innovat insteas on building onknoeledge already existing u have to develop
new stuff just because u cannot use my idea , patents may however help in diffusion of techology
bc when u patent process, u have to explain the process, if have to protect recipe for carbonara
Alternative protection
-getting patent not best strategy secret is better
if have to file for patent, i have to disclose process
– Industrial secrets
to protect ideas
– First-mover advantage
open source software -can get advantage if theyre first
what blocked other countries fropm producing vsccine was techno know how than patent itself, even if removed patent producign
complex vacine requires speicif techno something not easy to build in few months
 IPR: pros and cons
scarce evidence showing patents are useful for innovation
they are under debate scarc evidence they can improve productivitu

• Monopoly power → profits → incentives to R&D

• Monopoly power → inefficiency
• Monopoly power → exclusive use → slower
progress of competitors

maybe removing patent too extreme, maybe we should revise syset

For a recent comment on the role of patents:

John Thornhill, “Battles over patents can be productive”, Financial Times, October 14,
2021
MANAGEMENT PRACTICES AND
PRODUCTIVITYfirms characteristics and individual charact (managers =) as important as techno
for productivity
 Measuring Management
if manager better than average ur firm will outperform competirs

• Management and Organizational Practices

paper published in 2019 started measuring qulity manaemt 20 years ago
Survey (MOPS) they survey managers asking some questions
response rate is very low 20% if no incentives also quality of reply low

– 16 management questions in three main sections:

monitoring, targets, and incentives
– over 35,000 manufacturing plants in the U.S., 2010
and 2015 surveyed twice in 2010 2015
– Evolution of the World Management Survey (open
questions vs. closed questions) quite comolicated selecting 3 areas
intefvire direcly managers by phone with questionnaire was peculiar open question, was more a discussion
interv middle-manager not top manager (wanted soemone aware what was going on in plant) collected info
about diff managemtn practices and procedurees problem respons rate+quality info was very high
but have to train nterviewer needs now how ask questio --> dig deaper +time consuming (cost was too much) to do it in many
contries, many furs so decided to move to common survey with close question but linking it to official census in us
(working jointly with institute of statistics, this shoul dincrease response rate..+quality of data by containing hosts
MOPS survey 16 questins originally as world management survey
 Measuring management quality
– monitoring:
• how well does the firm track what goes on inside its
plant(s) and use this for continuous improvement?
– goal setting:
• does the firm set appropriate targets, track closely
aligned outcomes, and take appropriate action if the
two are inconsistent? structured or uses informal tools

– incentives/people management:
• does the firm promote and reward employees based on
performance, and systematically try to hire and retain
the best employees?
 NOT ONLY AT country level differences in managemrn prctices can account for hteroenwity of performance and
productivity also when we compar

Good Management

What is ‘good management’?

asked consultant what in their opinion were best management practices they selected the ones on whoch tere was consensu

Consensus of many consultants and industry experts

on what core factors were important in the efficiency
of a good or service that a firm was delivering
 Good Management
not a perfect measure but its best measure, its perfectible hog

structured management
– unweighted average of scores in the 16 questions

• 0 = lowest score (little structure around

performance monitoring, targets, and incentives)
on all 16 dimensions
• 1 = highest score (an explicit structured focus
on performance monitoring, detailed targets, and
strong performance incentives) on all 16
dimensions
Management Score - Heterogeneity in terms managemtn practices

bulk is arround 0.7

fat left tail
Management Practices and Performance:
positive correlation
corelated with easures measuirn performance
hroziotnal management score divided firm in deciles
bottom 10 pecent firms in terms management scoree

decile 10 represent
top 10 % firms in terms
management practices

positive correlation
labor productivy
managemt level and
firm score

eems firms with superior mansgemtn practices show better performance, more patent, more reseach
Management Practices and Productivity

What is the impact of MP on productivity?

• Comparison with other recognized factors:
other drivers of firm productivty
– R&D (expenditure per worker)
– ICT investment (spending on ICT hardware and
software per worker)
– Human capital (share of employees with a college
degree)
 difference in quality of managemtn expolains same percentage of diff in productiviy aming firms

Management Practices and Productivity

mgm practices are as important as innovation rd in explaining productivity differenced across us manufacturing plants

no causation this is corrlation labor productivity = value added/empliyee more limited comare to total
factor productivity
but easier to comute (labor

quality mgmg is really important more imp than human capital

it serves further analysis we should ty meadure it t understand what
good management is
corrlation
st deviation

all coeff are positive andstatistically different than 0

rd ict
human capital

consider gap in productivity between top 10 % (90% percentile) and

bottom 10 % champiosn and laggards compared consider ratio
Spread in labor productivity explained what is the shre of theis diff in productiity explained by managemt prqctives
rd,...for mgm score 0.216
22% of gap in prodcitivy bet top and bottom is explined in diff quality of mangemtn

Nicholas Bloom & Erik Brynjolfsson & Lucia Foster & Ron Jarmin & Megha Patnaik & Itay Saporta-Eksten & John Van Reenen, 2019. "What
Drives Differences in Management Practices?," American Economic Review, American Economic Association, vol. 109(5), pages 1648-1683,
May.
 NOT ONLY AT country level differences in managemrn prctices can account for hteroenwity of performance and
productivity before used firms in one country US **

Management Quality and TFP: comparison

theyre trying to do it at international elvel extend analysis at internatioal level

contribution of differences in mgm qualit in epling diff in TFP (total factor non just labor)
producitvtyy growth between coutnries and US

grey bar is tfp level wrt to us below 100 for all countries

oragbe= contributuion of differences in managetpractices in explainign gap of TFP

** even when we comapre countries mmg practices can be relevan

 Drivers of Management Practices

Why heterogeneity in management practices???

wy in some firms maagemt practices superior others

• Business Environment
– Regulation
– Competition
– Education relaed to chatracteristic manager bakcrounds, ability solving problems their openmindendess
innovation and managemtn practices important to determine product
growth

• Learning Spillovers in last decades obsrevd slow down productivity grwoth in developign
especially and emergin as well (diff find new ideas)
 Summary

• Evidence on the creation of new ideas

• The debate over protection of ideas

• Management practices and productivity

 Lecture 5 Discussion

Are ideas getting harder to find?

Izabella Kaminska, “It’s not about the low hanging fruit,

it’s about the ideas”, Financial Times, Sept 13, 2017