Recent research by economists at the OECD presents a new perspective on what drives national productivity growth. This presents a challenge to the emphasis of current UK policy on world-leading innovation.
The OECD start by recognising that in every world economy there are some ‘frontier firms’ which are internationally competitive and match global high standards in productivity. Most firms – perhaps 70-80 per cent – are not in this category. These are what OECD call ‘non-frontier firms’. Firms which may have a more domestic market orientation, and much lower average productivity.
The OECD evidence suggests that over the last decade productivity growth in frontier firms has been significantly more rapid than that in non-frontier firms leading to an increasing productivity gap. The figures below illustrate the trend over the last decade for the OECD countries. Productivity growth in the frontier firms has been around 3.5-5.0% pa compared to -0.1 to 0.5% in non-frontier firms.
Productivity growth in frontier and non-frontier firms: OECD countries
Source: ‘The Future of Productivity’, OECD, 2015, Figure 2.2.
As the OECD comment the ‘productivity slowdown is not so much a slowing of innovation by the world’s most globally advanced firms, but rather a slowing of the pace at which innovations spread through the economy: a breakdown of the diffusion machine … the gap between those high productivity firms and the rest has risen’.
The implication is that raising national productivity is not so much about the small group of frontier firms but instead about improving the take up of new innovations by the vast number of non-frontier firms. Think about our use of smart phones. The great gains came not from the first lead users but when there was widespread use.
This emphasises the spread of innovations throughout the economy and the importance of ‘me-too’ or ‘new-to-the-firm’ innovation. It is not only new-to-the-market innovation which matters for productivity.
Innovate UK recently published a new Delivery Plan which has a strong focus on supporting world-leading innovation. This will help to strengthen productivity in the UK’s frontier firms. To maximise the productivity gains we will also need to think again about how we can accelerate the diffusion of innovations to other non-frontier firms.
Please noted that the views expressed in this blog belong to the individual blogger and do not represent the official view of the Enterprise Research Centre, its Funders or Advisory Group.