It isn’t clear how we solve the productivity puzzle, so let’s experiment

By James Phipps on Monday, 11 June 2018.

As you are reading this, I would expect that there is a policymaker somewhere in the world preparing a paper on how their organisation can help raise productivity. A decade since the global financial crisis and productivity growth remains sluggish for many advanced and developing economies. For example, the UK’s productivity performance over the last ten years is perhaps the worst since the late 18th Century. With productivity a key determinant of GDP per capita, identifying policies that work is vital for raising living standards.

We know that investment in cutting-edge innovation is vital to increasing productivity. There are concerns about the potential impact of new innovations and the need to prepare ourselves for a future where growth rates are lower than experienced in the past. But many others have a much more optimistic view, identifying the huge potential from technologies such as Artificial Intelligence, whose full benefits are yet to be realised. Whatever one’s belief in the productivity potential of new innovations, future growth will certainly be lower if we don’t invest in the discovery and development of new technologies and business practices.

What is becoming clear, however, is the need to also focus on how existing technologies and business practices are being diffused through the economy. The continued advance of firms at the global productivity frontier identified by the OECD suggests that there hasn’t been an absence of productivity enhancing innovations in recent years. Instead, the issue has been a slowing in the rate at which these innovations have spread through the economy.

Repairing the ‘diffusion machine‘ to spread proven innovations could yield huge benefits to nations and businesses. Also, if a country's economy is not supporting the spread of existing innovations then how can they realise the full benefits of new discoveries?

What can be done to encourage greater adoption of proven innovations? A recent report by economists at the World Bank has highlighted the missed opportunity for many developing economies to capitalise on the vast knowledge of ‘what has already been invented’. The authors refer to this as the innovation paradox - businesses and governments in developing nations invest little in adopting existing technologies despite the huge potential gains. Their report is full of great insights into the challenges and approaches to address these, which would be relevant for any policymaker.

In the UK, the CBI has talked about the need to move more businesses ‘From Ostriches to Magpies’- looking outside their businesses for proven innovations that they can bring back into their own firm to improve performance. The report identifies thirteen characteristics (e.g. external collaboration) that are associated with successful adopters. Of these, six are at least partly within the control of individual businesses. In contrast policymakers may have a role in influencing them all. If so, when and how can they do so effectively?

When it comes to deciding what approaches to implement policymakers face a large number of choices, for example:

  • Level of intervention: Should they remain at a high level shaping the business environment (e.g. competition and immigration) or intervene at lower levels from institutions and infrastructure down to targeted support for the benefit of individual firms?

  • Nature of intervention: Will providing information on the available technologies be sufficient to encourage adoption? Or would it be more effective to provide intensive assistance that builds absorptive capacity and overcomes more ingrained barriers?

  • Thematic Areas: What types of technologies and business practices should be encouraged? Is it better to target the adoption of specific solutions (e.g. accountancy software whose productivity benefits could be promoted alongside reforms to the tax system) or instead to encourage adoption across a whole range of areas?

  • Target group: Where on the ‘adoption curve’ should policymakers seek to intervene? Will the economic return to interventions be greater from trying to lift businesses up from the very bottom or is it more profitable to concentrate on nudging those falling just short a little short of the productivity frontier?

There is evidence from experiments that can inform these decisions. For example, in this new IGL blog we talk about what are we learning from policy experiments to increase innovation and entrepreneurship. This includes evidence from trials showing the potential impact that can be achieved from interventions that provide management consultancy, participation in business networks and using experimentation with their management practices.

It is a shame, however, that we can’t learn more from past interventions. Concerns that some SMEs can be slow to adopt the latest tools and practices are not new. Governments across the world have run initiatives with the intention of encouraging SMEs to make better use of new technologies or to improve their management and leadership practices, but there is a lack of systematic evidence about what works. Without good evidence, it is impossible to allocate resources to the programmes that can have the greatest impact.

If the policymaker I imagined at the start of this blog is real, they will no doubt have noted the lack of robust evidence to inform their paper.  I hope that rather than just lamenting this and wishing for others to fix it, they recognise the key role they can play. With a realisation that good evidence can and should come out of policy and not just feed in, they now could go back and add an extra paragraph, making recommendations of how their organisation can experiment in their approach and conduct robust evaluations. That way the benefits of their actions will not only come from the businesses they support, but also through the diffusion of valuable evidence on what policy approaches do or do not work.

At IGL2018 in Boston (12-14 June at HBS and MIT), we will be exploring the causes of the productivity slowdown in advanced countries and developing economies alike, and what can be done to address it.

We hope to see you there, but if you cannot make it, don’t forget to sign up to the IGL newsletter to find out the results of these trials, and others to come.