1. 1 Advancing Knowledge and the Knowledge Economy Washington DC, January 2005 Advancing Knowledge and the Knowledge Economy Washington DC, January 2005 Assessing innovation capacity: fitting strategy, indicators and policy to the right framework Prof. Dr. Reinhilde Veugelers Economic Advisor EC-DGEcFin, Katholieke Universiteit Leuven & CEPR.

2. DG ECFIN 2 Assessing Innovative Capacity Overview of the presentation 1. Diagnosing the problem: relative productivity performance and innovative capacity 2. Policy Reaction: the need for a systemic policy approach 3. Implementing the Lisbon strategy: targets and indicators 4. Evaluating the Lisbon strategy as a systemic approach

3. DG ECFIN 3 The break in Hourly Labour Productivity Trend Source: EU Commission, AMECO database EU-15 vs US (=100)

4. DG ECFIN 4 Diagnosing the problem: relative productivity performance and innovative capacity To what extent is the EU’s relatively poor performance linked with its difficulty in re- orientating its economy towards the newer, higher productivity, growth sectors such as ICT ? –What is the contribution of ICT towards explaining the productivity trends, both as a high-tech, high- productivity-growth sector and in its role as a General Purpose Technology increasing the productivity growth in other sectors? –What is the specific role to be played by the production and absorption of new technologies in general?

5. DG ECFIN 5 Contribution of ICT producing Manufacturing and ICT using Services: specialization - productivity differentials Hourly Labour Productivity (Average % Change) Value Added ShareContribution to Total Change in Hourly Labour Productivity 1991-19951996-20001991-19951996-20001991-19951996-2000 1(a) ICT-Producing Manufacturing Industries EU(9.6)(17.1)0.020.01(0.2) US(16.4)(26.0)0.03 (0.4)(0.7) 2(b) Intensive ICT-Using Service Industries EU(1.8)(2.1)0.200.21(0.4) US(1.6)(5.3)0.230.25(0.4)(1.3) Source : GGDC and ECFIN calculations

6. 6 Conclusions on the contribution of ICT to explaining the US-EU productivity growth gap ICT production : – US more specialized in IT producing sectors – US has better productivity performance in IT producing sectors (related to differences in innovation capacity) ICT diffusion: – No difference in specialisation in intensive IT using sectors – But difference in productivity performance in IT using sectors EU lagging behind (but catching up) in IT-capital deepening investments EU lower IT induced TFP growth (related to differences in innovation capacity)

7. DG ECFIN 7 EU-US Gap in R&D Spending EU-US Gap in Specializsation EU-US Gap in Productivity Growth Rates 1991- 1995 1996- 1999 1991- 1995 1996- 2000 1991- 1995 1996- 2000 Total High Technology Manufacturing 0.850.810.8250.8260.480.41 (ICT) 0.590.490.450.420.230.27 (Non-ICT) 1.021.050.981.011.152.81 Source : ECFIN, Annual Review 2004 Comparison of EU-US difference in R&D spending and Productivity Growth (US=1)

8. DG ECFIN 8 Linking R&D intensity and Productivity Growth US lead and intra-EU divergence bt member states in productivity growth can be related to –Better growth performance in R&D sectors –Larger weight of R&D intensive sectors –Higher R&D intensity in most sectors US and “better EU-Members“ growth is more linked to R&D than the average EU member

9. DG ECFIN 9 What explains cross country differences in R&D and its efficiency? National Innovation Capacity: ability of a country to produce and commercialize a flow of innovative technology over the long term –What determines the flow of new ideas in an economy: availability of researchers, stock of knowledge –Will firms respond to technological opportunities and innovate ? supply and demand forces in country-specific industrial clusters –National Innovation Systems: Institutions and policy environment linking actors

10. DG ECFIN 10 knowledge diffusion, capacity EU seems to display a poor performance in its knowledge creation, but particularly in its knowledge diffusion, capacity Beyond stimulating R&D investments Improving Technology Transfer/Diffusion ( Eg ISL mechanisms, absorptive capacity of users, investment in complementary assets) Networking Among Actors on a Global Scale: research, firms, finance, policy makers,… Framework conditions, especially –clear IPR regimes and standards; –flexibility in product markets (easy of entry), labour markets (labour mobility),venture capital markets This requires a Systemic Policy Approach

11. DG ECFIN 11 The Lisbon strategy Too make the European Union into the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion by 2010. By implementing a comprehensive strategy of structural reform Emphasis on structural reforms A comprehensive reform agenda Better tools to monitor progress (structural indicators) Streamlining of EU economic policy coordination : medium term orientation, better synchronisation

12. DG ECFIN 12 Lisbon is a process of a comprehensive set of structural reforms to stimulate growth –Product Market Reforms: Improve the functioning of the Internal Market for goods & services Liberalisation of network industries Opening up of markets (entry regulation..) Improve the business environment (reduce regulatory burden, esp for start-ups –Financial Market Reforms : Promote EU financial integration FSAP, RCAP, enhancing comparability of companies financial statements, … –Investments in knowledge-based economy Invest in education and training Invest in R&D and innovation Encourage production and use of ICT –Labour market and social reforms Improve incentives to participate and remain in the labour marke;Increase labour market flexibility; modernisation of social protection systems,Improve working conditions and skill levels –Environmental policy reforms

13. DG ECFIN 13 Implementing the Lisbon strategy Structural reforms touch on sensitive areas of national competence The « open method of co-ordination »: Agreements on targets with timetables Translation of these targets into national policies Use of indicators and benchmarks Periodic evaluation of progress made

14. DG ECFIN 14 Lisbon targets (oct 2004 for EU-15) Employment rate of 70% in 2010: 64.4% Halving the number of early school leavers by 2010 : reduced by 6.7% Increase the transposition rate of Internal Market directives to 98.5% : 97.8% Opening up of energy markets for business in 2004: electricity: 76%, gas 82% Increase R&D spending to approach 3% of GDP by 2010 : 1.99% Reduction in greenhouse gas emissions

15. DG ECFIN 15 Targets for the European Knowledge Area (oct 2004) Increase R&D spending with the aim of approaching 3% of GDP by 2010: 1.99%. The proportion financed by business should rise to two thirds of that total by 2010: 56% 100% of schools to be connected to the internet by 2002 : 93% 100% of teachers to have training in digital skills by 2003: 57% Internet penetration in households reach 30% by 2002: 40% Basic governmental services 100% online by 2002: 57%

16. DG ECFIN 16 Structural Indicators to be monitored for the Lisbon strategy GDP per capita Labour productivity per person employed Employment rate Employment rate of females Employment rate of older workers Educational attainment (20-24) R&D expenditures (% of GDP) Business Investment (as % of GDP) Comparative price levels At-risk-of poverty rate Long-term unemployment rate Dispersion of regional employment rates Greenhouse gas emissions Energy intensity of the economy Volume of transport.

17. DG ECFIN 17 Innovation Indicators to be monitored for the Lisbon Strategy (European Innovation Scoreboard & 3% Action Plan) 1. Human resources S&E graduates, Population with tertiary education, Participation in life-long learning, Employment in medium-high and high-tech manufacturing, Employment in high-tech services ) Participation in life-long learning, Employment in medium-high and high-tech manufacturing, Employment in high-tech services ) 2. Knowledge creation Public R&D expenditures (GERD - BERD) (% of GDP)Public R&D expenditures (GERD - BERD) (% of GDP) BERD) (% of GDP (by source of funding), EPO&USPTO patent applications EPO&USPTO high-tech patent applications;BERD) (% of GDP (by source of funding), EPO&USPTO patent applications EPO&USPTO high-tech patent applications; 3. Transmission and application of knowledge Innovation expenditures, SMEs innovating in-house, SMEs involved in innovation co-operation,SMEs innovating in-house, 4. Innovation finance, output and markets Share of high-tech venture capital investment,Share of high-tech venture capital investment, Share of early stage venture capital in GDP, volatility-rates of SMEs, Internet access/use, ICT expenditures, SMEs sales of 'new to market' products, SMEs sales of 'new to the firm but not new to the market' products, share of manufacturing value-added in high- tech sectors, TBP, High tech imports-exportsShare of early stage venture capital in GDP, olatility-rates of SMEsInternet access/use, ICT expenditures, SMEs sales of 'new to market' products, SMEs sales of 'new to the firm but not new to the market' products, hare of manufacturing value-added in high- tech sectors

18. DG ECFIN 18 Selection of Main STI Indicators

19. DG ECFIN 19 Mid-term diagnosis on indicators for European Knowledge Area: not much progress EU is more or less comparable with US in scientific knowledge creation, but deficient in technological knowledge creation and creation of technology intensive economic growth Reflecting EU’s deficiency in knowledge diffusion and absorption capacity

20. DG ECFIN 20 Conclusions from the Mid- Term Review : diagnosis the Lisbon strategy has not delivered yet; particularly wrt European Knowledge Area the major weakness of the strategy has been the poor implementation of reforms by the Member States; there is a sense of urgency to proceed with the reform agenda in view of the challenges of ageing, enlargement and globalisation.

21. DG ECFIN 21 Effectiveness of the Lisbon strategy? Too many priorities and targets : focus on productivity growth Wide set of reforms/action plans : need to identify complementarities but also trade offs between the areas (exploit ‘systemic’) Deficiencies in economic governance (how to incentivate member states, how to enforce compliance) A poor communication about the benefits of reforms

22. DG ECFIN 22 Evaluation of indicators & targets Wide set of structural indicators and targets to link knowledge area to productivity and employment as well as to product markets, financial markets, labour markets Wide set of indicators for the knowledge area (combination of creative, diffusion and absorptive capacity) –Areas of indicators which are important and relatively well covered human & social capital ICT diffusion/production Financing of innovation –Areas of indicators which are important and not well covered ISL High level of aggregation of indicators –Sectoral dimension –Regional dimension Evaluate indicators & targets as a system –Note: this is not what current composite indicators are doing

23. DG ECFIN 23 Implications for STI policies : towards a truly systemic approach Enhancing horizontal policy coordination among policy areas Enhancing vertical policy coordination (EU-Member States-Regions) Improving the management of the policy framework