Manufacturing and Services BERD, 2003-2011 11 Figure 8: BERD by firm size, 2003-2011 11 Figure 9:
Services firms by R&d expenditure ranges, 2003-2011 27 4. Types of Research and development 28 Figure 35:
Aggregate levels of BERD (2011) Enterprises across all business sectors in Ireland spent €1. 86 billion on in-house research and development (R&d) activities in 2011, a 1. 3 per cent
Enterprises active in R&d in 2011 estimated an R&d spend of 1. 96 billion in 2012, an increase of 5. 5 per cent.
Foreign owned enterprises accounted for 71 per cent of the total business R&d spend in 2011.
61 per cent of BERD was generated in the services sector in 2011. Medium and large enterprises (more than 50 employees) accounted for almost threequarters of BERD in 2011.89 per cent of BERD funding was from company funds in 2011, down from 92 per cent in 2009.
Human resources in R&d (2011) There were over 19,000 research personnel in the business sector, a 21 per cent increase since 2009 and more than 14,000 full time equivalents (FTES.
The majority of R&d personnel (63 per cent) were employed in the services sector. Medium to large companies employed two thirds of all research personnel.
58 per cent were in the services sector and 42 per cent in manufacturing. Small firms with less than 50 employees accounted for 69 per cent of all R&d active firms.
More than 72 per cent of all R&d performing enterprises spent less than €500k on R&d activities
and one in ten enterprises were engaged in large scale R&d activities (spending in excess of €2 million) Half of foreign-owned firms engaged in mid to large scale R&d (in excess of 500k) compared with 19
per cent of Irish firms Almost half of medium to large sized firms engaged in mid to large scale R&d activities compared with 18 per cent of small firms In both the manufacturing and services sectors,
Nearly two-thirds of Irish enterprises were engaged in experimental development compared to three-quarters of foreign owned companies.
Small enterprises were more likely to engage in applied research (28 per cent) than medium and large enterprises (23 per cent.
when aggregating the subsectors up to total manufacturing and total services, pre 2007 Forfás included the following 2 sectors under manufacturing
whereas the CSO include them under services: Agriculture, Forestry, Fishing, Mining and Quarrying Electricity, gas supply, water supply, sewerage, waste management and remediation;
1 presents details of aggregate levels of R&d expenditure by enterprises in Ireland between 2003 and 2011 and an estimate for 2012,2010 is also an estimate as BERD is a biennial survey
Enterprises in Ireland spent €1. 86 billion on in-house research and development in 2011 and an estimated spend of €1. 96 billion in 2012,
CSO databank, Forfás BERD 2003 and 2005 surveys Figure 1 also details the BERD intensity or relative importance of BERD to the national economy between 2003 and 2012.
For Ireland, two measures of economic activity are employed, GNP and GDP. GDP for Ireland is inflated by the inclusion of profits of inter-firm activities of multinational firms
but GNP excludes these profits giving a truer measure of economic activity. BERD as a percentage of GNP has increased from 0. 93 per cent in 2003 to 1. 46 per cent in 2011
and is estimated to reach 1. 47 per cent in 2012. The increase in BERD intensity from 2009 to 2011 is entirely due to a fall in GNP as BERD remained unchanged during that period.
, 600 1, 800 2, 000 2003 2005 2007 2009 2010 (est) 2011 2012 (est) €ms Current costs Capital costs 10
2003 as shown in Figure 6. Capital BERD expenditure totalled €253 million in 2011 falling from a peak of €326 million in 2009
other service activities (I, O-U) 7. 9 9. 6 Information and communication services (J) 487.9 571.2 Financial and insurance activities (K) 157.5
R&d expenditure in the services sector increased by 15.9 million (1. 4 per cent) over 2009.
Information and communication services-€83. 3 million (17.1 per cent) Administrative and support service activities had increased an spend of €13 million,
Manufacturing and Services BERD, 2003-2011 Source: CSO databank, Forfás BERD 2003 and 2005 surveys Figure 7 highlights the shift from a manufacturing to service economy between 2003 and 2011 in expenditure on R&d.
Expenditure on R&d in services increased from €434 million in 2003 to €1. 14 billion in 2011, an increase of 163 per cent compared with a 7 per cent increase in manufacturing over the period.
Of total BERD in 2011,61 per cent was generated in the services sector, a complete reversal since 2003 when 61 per cent of BERD was generated in the manufacturing sector.
Also, when aggregating the subsectors up to total manufacturing and total services, pre 2007 Forfás included the following 2 sectors under manufacturing
whereas the CSO include them under services: Agriculture, Forestry, Fishing, Mining and Quarrying; and Electricity, gas supply, water supply, sewerage, waste management and remediation, construction.
2010 (est) 2011 2012 (est) €ms Manufacturing Services 265 320 278 300 326 495 519 840 1, 009 1, 325
As with R&d expenditure, the majority (63 per cent) of R&d personnel resides in the services sector in 2011,
2007 2009 2011 Manufacturing Services 4, 591 5, 125 3, 815 4, 443 6, 490 7, 442 8, 501 10,135
CSO databank, Forfás BERD 2003 and 2005 surveys Figure 22 shows Phd researchers are concentrated more in the services sector since 2009,
1, 000 1, 200 2003 2005 2007 2009 2011 Selected services Manufacturing industries FORFÁS BERD 2011/2012 ANALYSIS 21 sector.
This contrasts with the profile in 2003 when only 22 per cent of all Phd researchers were working in services.
In 2011,73 per cent of all enterprises spent less than €500, 000 on R&d activities compared with 77 per cent in 2003 accounting for an additional 305 firms in this expenditure range over the period.
€2m-€5m>€5m 24 in ten enterprises spent in excess of €2 million in 2011 up from 7 per cent of R&d-active firms in 2003,
In 2011, firms spending less than €500k on R&d activities accounted for 81 per cent of all enterprises down from an 85 per cent share in 2003.
€2m-€5m>€5m FORFÁS BERD 2011/2012 ANALYSIS 25 enterprises up from a 48 per cent share in
Enterprises investing between €500k and €2 million (mid-scale R&d activity) increased by 52 per cent from 80 firms in 2003 to 122 firms in 2011.
CSO databank, Forfás BERD 2003 and 2005 surveys Over 1, 600 enterprises were engaged in R&d activities in 2011,
of which 58 per cent were in the services sector and 42 per cent in manufacturing.
000 1, 500 2, 000 2003 2005 2007 2009 2011 Manufacturing Services FORFÁS BERD 2011/2012 ANALYSIS 27 Figure 33:
Services firms by R&d expenditure ranges, 2003-2011 Source: CSO databank, Forfás BERD 2003 and 2005 surveys Figure 34 shows the R&d spend categories for services firms between 2003 and 2011.
Services firms engaging in R&d have increased exponentially since 2003 from 294 firms to 926 firms in 2011.
In 2011,257 firms spent in excess of €500k on R&d activities compared with 91 firms in 2003.356 413 242 221 230 302 301 230 227 267 120 164
to installing new processes, systems and services, or to improving substantially those already produced or installed) R&d expenditure in the business sector in Ireland has been concentrated mostly in experimental development projects ranging from 50.5 per cent of total BERD in 2005 to 71.4 per cent in 2011.
CSO databank Figure 37 shows a strong focus on experimental development projects in the services sector making up almost three quarters of R&d expenditure.
The services sector now holds the majority share of total BERD, driving the increased focus overall on experimental development projects over the decade.
CSO databank, Forfás BERD 2003 and 2005 surveys Nearly two-thirds of Irish enterprises were engaged in experimental development (figure 38) compared to three-quarters of foreign owned companies (figure 39) in 2011.
CSO databank, Forfás BERD 2003 and 2005 surveys With the exception of 2005 small enterprises were more likely to engage in applied research than medium and large enterprises.
CSO databank Figure 45 shows the share of manufacturing and services firms engaged in joint R&d projects in 2011.
With the exception of collaborations with other firms in Ireland, services firms had higher collaboration rates with all other partners.
Overall, 36 per cent of services firms engaged in collaborative R&d compared with a third of manufacturing firms. 11%15%19%7%32%15%27%21%10%44
or other institutes in Ireland Higher education or other institutes outside Ireland Engaged in any collaboration Manufacturing Services 34 Forfás Board members Eoin O'Driscoll (Chairman) Chairman, Southwestern
, Forfás Mark Ferguson Director General, Science Foundation Ireland John Murphy Secretary general, Department of Jobs, Enterprise and Innovation Barry O'Leary Chief executive, IDA
Ireland Frank Ryan Chief executive officer, Enterprise Ireland Michael O'Leary Secretary to the Board, Forfás FORFÁS BERD 2011/2012 ANALYSIS 35 Recent Forfás
publications Social Enterprise in Ireland: Sectoral Opportunities and Policy Issues Forfás July 2013 Ireland's Construction Sector:
Outlook and Strategic Plan to 2015 Forfás July 2013 Annual Report 2012 Forfás July 2013 National Skills Bulletin 2013 EGFSN July 2013
Trends in Education and Training Outputs 2013 EGFSN July 2013 Annual Business Survey of Economic Impact 2011 Forfás July 2013 Global Entrepreneurship Monitor
2012 Global Entrepreneurship Monitor July 2013 Annual Employment Survey Forfás July 2013 Ireland's Competitiveness Performance 2013 Forfás May 2013 Making
Plan for Jobs 2013 Forfás, DJEI February 2013 A Review of the Equity Investment Landscape In Ireland Forfás January 2013 Regional Labour markets Bulletin 2012 EGFSN
January 2013 A Review and Audit of Licenses Across Key Sectors of The irish Economy Forfás December 2012 Global Entrepreneurship Monitor (GEM) 2011 Global Entrepreneurship Monitor
for Enterprise to Trade Internationally EGFSN June 2010 Sustainability of Research Centres Advisory Science Council June 2012 The publications of Forfás and the advisory groups to which it provides research support are available at www. forfas
commentary on Europe's economy focuses on its precarious financial system and anemic employment recovery since the Great Recession.
more ubiquitous adoption as distinct from production of information and communication technologies (ICTS) by all organizations (for-profit, nonprofit,
and government) throughout the European economy. Increasing productivity is the key way that countries can raise their per capita-income income.
Given the demographic challenges and increasing international competition that Europe faces in the coming decades
ICT is a general purpose technology (GPT) that has wide-ranging effects throughout an entire economy,
and a key factor in engineering such a turnaround will be supporting the widespread adoption of information and communication technologies by organizations.
These gains are primarily due to the efficiencies of ICT capital, as well as associated complementarities and spillovers.
The primary proximate cause is simply the lack of investment in ICT capital: European countries have lagged significantly behind the United states in ICT investment, both as percent of total investment and as a percent of GDP,
since the 1990s. And this is true not just of the ICT-producing sector itself. ICT-using sectors, primarily the service sector,
Productivity in European private-sector services grew only one-third as fast as it did in the United states between 1995 and 2007,
and land markets limits possible business models, raises the cost of ICT investment, and slows down market forces that can push firms to adopt more productive practices.
Corporate tax policies may play a role as well as depreciation rates for ICT capital investments are generally less generous than in the United states. A third reason is limited the ability of European businesses to reach more efficient economies of scale.
The continued fragmentation of European markets limits the potential size of demand for European products (particularly services),
which in turn makes it harder to achieve economies of scale from ICT investments. Moreover, Europe's much higher proportion of small firms makes it hard for firms to surmount the high fixed costs of many PAGE 3 THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION JUNE 2014 ICT investments.
In the latter case regulation has provided the significant bottleneck to firm growth, by favoring small firms at the expense of large ones.
Research has shown that getting the full potential from ICT investments requires organizational redesign, and that U s. firms are better at employing management techniques that can facilitate such transformation.
making productivity improvement the centerpiece of economic policy is crucial. While employment presents a formidable challenge in many European countries,
such as retail and professional services, by encouraging the adoption of ICT. Europe should focus primarily on ICT-using sectors
because ICT-producing sectors alone are unlikely to provide significant productivity increases to the economy without the adoption of ICT in other sectors.
Third, Europe can actively assist in the digital transformation of industries by creating the right conditions for ICT investment and adoption.
Fourth, tax and trade policy provide important levers that Europe can use to promote ICT investment.
By minimizing taxes on ICT investments policymakers encourage the productivity effects of ICT use. These tax incentives are particularly important
because while ICT investment provides large benefits for the broader economy, the nature of these benefits makes them hard for any single firm to capture;
Additionally, the Transatlantic Trade and Investment Partnership (TTIP) would better facilitate access to U s. markets.
but many other types of small firms are simply inefficient organizations that have been protected from competition.
The irish productivity gap with the U s. economy shrank from 35 percent in 1995 to 17 percent in 2013.2004-2013 Diverging Converging 1995-2004 Converging Finland Ireland Greece
Figure 5 illustrates the magnitude of convergence and divergence within the EU-13 as well as the relative sizes of the EU-13 economies. 2004-2013 Diverging Converging 1995-2004 Converging Bulgaria Czech-republic
is the sine qua non of economic growth. 18 To see why, consider that if the EU-15 nations had maintained the productivity growth rate they enjoyed from 1980 to 1995 through to 2013,
or services and input is typically an hour of labor, a single worker, or a combination of workers and physical capital.
Using hours of work or the amount of workers as the denominator yields labor productivity (the measure used in this report unless otherwise specified),
while using the combination of workers, physical capital, and other inputs as the denominator yields total factor productivity (TFP;
when using only workers and physical capital). Productivity is the main determinant of national income per person,
because over the long term a nation can consume only what it produces or is able to trade for.
when an economy shifts resources from less productive industries (e g.,, call centers) to more productive ones (e g.,
ICT can boost productivity by making older, less productive business models obsolete in favor of newer ones (e g.,
for such policies would reduce its terms of trade by requiring its residents to give up some of their income to foreign consumers and/or pay higher prices for foreign goods and services. 29 Policymakers,
Indeed, new growth economics accounting suggests that the lion's share of productivity stems from the use of more and better tools. 30 PAGE 10 THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION JUNE 2014 And in today's knowledge-based economy,
And its impact is pervasive as it is being used in virtually every sector, from farming to manufacturing to services to government.
In the United states, 48 percent of non-structures capital investment is in ICT, and the number would be even higher
what economists call a general purpose technology (GPT). GPTS have appeared historically at a rate of once every half century,
what economies produce; how they produce it; how production is organized and managed; the location of productive activity;
they increase in sophistication as they diffuse throughout the economy; they engender extensive spillovers in the forms of externalities and technological complementarities;
and enable downstream innovations in products, processes, business models, and business organization. By any of these measures, ICT ranks well against the most transformative technological breakthroughs in human history. 35 This is why ICT is such an important enabler of better tools to drive productivity.
greater investment in ICT is associated with greater productivity growth. 36 In fact, nearly all scholarly studies
since the mid-1990s through to 2014 have found positive and significant effects of ICT on productivity. 37 The beneficial effects of ICT on productivity have been found across different levels and sectors of economies, from firms to industries to entire economies,
and in both goods-and services-producing industries. 38 Firm level studies have shown also that PAGE 11 THE INFORMATION TECHNOLOGY
Studies in the early 2000s found that investment in ICT capital increased productivity by three to eight times more than investment in non-ICT capital. 43 Likewise,
Wilson finds that of all types of capital, only computers, communications equipment, and software are associated positively with multi-factor productivity. 44 Hitt
and Tambe find that the spillovers from IT nearly double the impact of IT investments. 45 Rincon, Vecchi,
other capital. First, in economies where ICT capital equipment innovations are new, they are able to pick off the low hanging fruit of relatively easy to improve efficiencies.
Second, ICT doesn't just automate tasks, it also has widespread complementary effects, including allowing companies to fundamentally reengineer processes.
what economists call network externalities, which are the spillovers from adding additional users to a network.
ICT capital contributed 0. 53 percentage points to the average annual GDP growth rate in the United states and 0. 56 percentage points in the United kingdom,
50 Figure 7 shows contributions in both the total economy and private sectors for the EU-15 and the United states. An OECD report finds that the ICT contribution to value-added total factor productivity
Corry et al. find that the contribution from the knowledge economy, which includes labor composition, ICT capital,
and TFP, increased in the UK from 2 percentage points to 2. 3 percentage points of overall growth after 1997.54 Goodridge et al. find sectors that contributed most to value-added growth in the UK between 2000 and 2009 invested most heavily in ICT
capital. 55 In Finland, Mairesse, Rouvinen, and Ylä-Anttila find that ICT contributed significantly to non-ICT-sector productivity growth between 1994 and 2007.56 On a firm level,
Johnston, Wade and Mcclean likewise find that e-business uptake increased revenues in small-and medium-sized enterprises by 9 percent. 58 In a large survey of German firms, Bertschek, Fryges,
and expanded employment over the past year. 61 Castiglione measures the impact of ICT investments in Italian manufacturing firms
and are the primary drivers 00.511.522. 53eu-15 totaleconomyeu-15marketsectorusa totaleconomyusa marketsectorother (residual) TFP (ICT-use) TFP (ICT-production) IT investment/hour PAGE 14
that ICT investment is associated strongly with productivity. 64 In Spain, Romero and Rodríguez find that e-buying had significant impacts on firm performance over the 2000-2005 period. 65 Ruiz-Mercader, Meroño-Cerdan,
3. 6 percent for manufacturing and services firms and 62 percent for ICT firms. 69 Belgian firms that used technology from foreign sources were found to have significantly higher productivity growth. 70 These studies confirm that ICT investment goes hand in hand with firm productivity growth,
and thus European productivity growth would have been even slower without investment in ICT. Moreover, ICT doesn't just increase firm productivity,
it enables firms to be more competitive and innovative. For example, van Leeuwen and van der Wiel find that Dutch firms that invested more in ICT not only enjoyed faster productivity growth
in both manufacturing and services. 73 Garcia-Muniz and Vicente look at the EU as a whole and find that ICT helps technologies spread
and find that ICT investment, broadband use, and e-commerce are all very important for innovation in the service sector,
and that ICT investment and broadband use are less but still important drivers of innovation in manufacturing as well. 75 ICT doesn't just increase firm productivity,
and economy-wide levels, why has failed Europe to gain from ICT the way the United states has?
Recently, several prominent economists have argued that productivity growth in the United states is slowing down significantly for the foreseeable future.
Robert Gordon at Northwestern university and Tyler Cowen at George Mason University put forth a number of arguments to support their claims,
economics does in fact have a good deal to say about how it develops and how policies can play a role in creating it.
Cowen and Gordon ascribe too much agency to broad historical forces and fundamental laws of economics, and not enough agency to policy.
Second, techno-pessimist accounts frequently conflate economic growth with productivity. The two are related but distinct, because growth can occur simply by adding more workers.
While demographic shifts are important for the absolute size of the economy, they do not affect productivity or income per capita.
the techno-pessimists stand in stark contrast to other economists arguing that technological change will soon be progressing too quickly.
PAGE 16 THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION JUNE 2014 Amount of ICT Investment firms in Europe do not invest as much in ICT as firms in the United states. Higher levels of ICT investment drive higher
in a recent survey of both micro and macro literature, Cardona et al. note that firm-level analyses provide solid evidence that over the last two decades an increase of ICT investment by 10%translated into higher output
growth of 0. 5 0. 6%regardless of the country studied. 82 Businesses in the United states have maintained a healthy lead in both ICT investment as a share of overall investment
and ICT investment as a share of GDP. 83 (Figures 8 and 9) And that lead has grown, not shrunk, since 2000:
the EU invested about 80 percent as much as the United states in ICT as a share of total capital investment in 2000,
even though European countries invested more overall in fixed capital than the United states. Figure 9) In other words, while Europe invests more overall,
and across individual countries confirm the U s. lead in ICT investment. ICT investment both as a percentage of GDP and as a percentage of total nonresidential investment peaked in the late 1990s for both the United states and the European union.
However, the United states has maintained much higher levels of investment in ICT as a share of fixed capital investment since the 1990s.86 (Figure 10) Moreover,
U s. ICT investment is significantly higher as a percentage of overall investment than in any other large European nation other than the UK. 87 Continuously higher levels of ICT investment by the United states mean that it has built up a larger stock
of ICT capital goods, even though these goods normally depreciate faster than other capital goods. From 1991 to 2007,
ICT capital stock the total accumulated ICT investment tripled in Germany, Italy, and Spain, reaching 6 percent of total capital stock.
however, it quintupled to 14 percent. 88 0%1%2%3%4%5%6%United Stateseuconsumerbusiness Over the last two decades an increase of ICT investment by 10 percent translated into higher
Gross fixed capital formation (investments) by type as a percentage of GDP (EUR-W is weighted average of major European countries) 89 Figure 10:
Shares of ICT investment as percent of nonresidential investment93 Economists see U s. ICT investment as a key reason the United states has maintained its place at the technological frontier as one of the most productive countries. 94 The effectiveness
of greater ICT capital investment in the United states suggests that additional ICT investment in Europe is likely to have significant benefits as well.
1991 to 2007, ICT capital stock the total accumulated ICT investment tripled in Germany, Italy, and Spain,
ICT assets as percentage gross fixed capital formation, 201196 ICT investment shows up in survey data on ICT use as well.
averaged over 2013 and 2014) 98 Limited Impacts in the Services Sector Drilling down into the lack of investment,
because services are such a large part of the European (and U s.)economy, substantially higher productivity growth in manufacturing would not be sufficient to remedy the productivity slowdown. 100 Mas argues that it is the services
and not the manufacturing industries that make the difference between the US and the EU while in the US TFP improvements in the ICT producers sectors spilled over to the other sectors of the economy (especially the ICT intensive users),
in the EU-15 its positive effects were restricted to only the ICT producers sectors. 101 Figure 13:
lowering its impact by 16 percent for each dollar invested. 105 The fact that companies in Europe can get less bang for their buck from their ICT investment means not only that productivity is lower,
but also that fewer projects meet investment hurdles and firms in Europe end up investing less than firms in the United states. One product market regulation that appears to have a negative effect on ICT-enabled productivity is privacy regulation.
reducing the revenue for websites that rely on ad-based business models. 106 This appears to be one reason the EU lags behind the United states in Internet companies.
PAGE 20 THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION JUNE 2014 Privacy regulations not only limit business models they also increase the cost of doing business for firms,
and competitiveness of EU ICT companies. 108 Christensen et al. show that these regulations are particularly costly for small-and medium-sized enterprises,
or 16 percent to 40 percent of IT budgets. 109 Other examples of costly regulations that limit the effectiveness of IT investment include the new law requiring websites to obtain explicit consent before placing web cookies,
As a result, consumers and businesses in Europe can rely on a less robust mobile communications infrastructure.
Labor market regulations have a large negative impact on ICT investment and the benefits firms can obtain from it.
such rules reduce the return on investment from ICT purchases, leading firms in Europe to invest less than firms in the United states. Given that so much of the ICT system is moving to the cloud,
and Taxes Companies make decisions about capital investment on the basis of return on investment.
including investment. However higher taxes on ICT consumption do discourage ICT use by consumers, making it more difficult for businesses to use ICT to adopt customer-facing productivity increases.
Europe's high consumption taxes may only affect business investment decisions indirectly, but corporate tax policies play a more direct role.
and Facebook. 125 Higher taxes on ICT-producing companies may raise the price of ICT goods and services for everyone else.
Another important channel through which tax policies influence investment is depreciation rates the rates at which corporations can write off capital investments for tax purposes. 126 Accelerated depreciation decreases tax revenues in the United states by 6. 6 percent,
and thus comprises a substantial incentive to invest in new equipment, including ICT equipment. 127 However,
which companies can depreciate ICT investments. 129 Over time, these rate differences could have significant effects on ICT investment and thus accumulated ICT capital stock.
Unfortunately this is not a well-developed body of research and further work is necessary to determine
whether ICT capital depreciation rates have a significant effect on investment. Scale Economies Two additional reasons European firms lag in their investment in ICT capital are related to scale.
The first scale problem is with firm size. The United states has a higher percentage of workers employed by large firms than all European countries.
ICT investments have high returns to scale because of their low marginal costs but higher fixed costs. 130 To be sure,
the increased provision of software through cloud-based services may change that somewhat, but scale benefits are not likely to disappear,
if for no other reason than most enterprise IT needs some customization which raises fixed costs.
Percentage of total workforce employed at enterprises by size, 2010131 Regulation that favors small firms has been a significant bottleneck for ICT investment in many European nations. 133 The firm-size problem ties into the regulatory issues above,
particularly because labor market regulation can limit the number of employees a firm chooses to have. 134 France,
While the EU economy is larger than that of the United states, in practice it is integrated much less.
Therefore, the market for a firm's products or services is limited more, often to only the nation it is based in. 136
there are larger potential returns to ICT investments for U s. firms, again because of the high fixed costs relative to marginal costs in many ICT capital investments.
Moreover, larger markets mean more competition, which in turn spurs firms to invest more in order to innovate and cut costs.
This is why Van Reenen et al. suggest promoting product market competition more integrated European markets, and openness to trade as potential ways to increase ICT-based productivity. 137 Management Differences
While regulations and taxes affect the return on ICT investments, in any given environment firms still have investment choices.
These choices are in part dependent on management practices which vary not only between firms but between nations.
and Hitt find that firms that embrace new economy management practices (e g.,, decentralized decision-making) and at the same time invest significantly in ICT,
and the authors attribute nearly half of the U s.-EU productivity differential over 1995-2005 to this organizational capital.
Rohman finds that the beneficial effects of the ICT sector for the broader European economy declined after the year 2000.149 Other recent evidence has shown that most of the productivity gains from ICT are due to ICT-using sectors.
like market and non-market services, make up a much larger part of developed-country economies than ICT-producing sectors,
so productivity gains in those sectors have a much larger effect on the whole economy. 150 There are many possible reasons why policymakers prioritize ICT industry growth over ICT usage.
and Samsung, it seems logical to try to replicate that success. A second reason appears to be an aversion to ICT adoption-based growth because of the fear that it will lead to disruption and perhaps job loss in individual enterprises.
For example, European officials look to the green economy for jobs, even though it will likely mean higher energy costs and lower productivity.
even though this view has been discredited thoroughly both by history and economics. 152 Figure 16: ICT use effect and ICT output effect on GDP (2000 to latest year, percentage points per annum) 153
As Europe emerges from the economic crisis, it faces continued challenges but also opportunities. With its financial system stabilized, Europe's central economic challenge over the next quarter century will be to raise productivity growth rates.
Faster productivity growth will ensure that Europe's production will be able to support a growing share of the population not in the labor force,
Its central opportunity will be to take advantage of the ICT engine to shift to a higher productivity path.
though, policymakers will have to make widespread adoption of ICT a policy priority across the entire EU economy.
S. A. ICT use effectict output effectpolicymakers will have to make widespread adoption of ICT a policy priority across the entire EU economy.
or in applying IT to other sectors of the economy, and PAGE 28 THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION JUNE 2014 whether promotion of the former through higher tariffs or other restrictions (like on cross-border data flows) will be detrimental to the latter.
and reduces ICT investment by firms and other organizations. As noted above, this is already a key problem in most European nations,
which has less investment in ICT than does the United states. There is compelling evidence that tariffs ON IT products will result in less ICT use in Europe.
Estimates for the price elasticity of demand for IT products find that that for every 1-percent drop in price in IT products
For example, a study of tariffs ON IT products in India found that they reduced domestic IT investment. 162 In a cross-national study of countries in the Asia-Pacific region,
which would depress demand for ICT. 163 As Kraemer notes, One of the best ways to promote IT use is to not create barriers to use.
and encouraging competition in distribution channels will help promote use as much as any specific efforts to encourage use. 164 It's not enough to make productivity growth in a few sectors an overriding priority:
any economy seeking success needs to prioritize across-the-board productivity growth strategies, rather than efforts to raise productivity by modestly expanding output in high-productivity sectors like ICT.
Economists have argued long that businesses under-invest in research, which is the rationale for governments instituting research grants
Economists have documented also significant market failures around IT investment, including network externalities and chicken-or-egg issues that slow digital transformation absent smart and supportive public policies. 165 Health care is a leading example.
Success for any individual health organization that embraces a digital business model depends on other health organizations,
procurement and regulation. 166 Use Tax and Trade policy to Spur ICT Investment It is only through investment in ICT that ICT innovation is diffused throughout the economy.
For this reason, public policies should focus on spurring additional investment by organizations in the latest-generation ICT.
if not eliminate, taxes on ICT investments, including broadband telecommunications, Internet usage, and data. They should allow companies to more rapidly depreciate ICT investments for tax purposes,
including allowing firms to expense them in the first year. Some economists might question such policies,
arguing that such tax incentives should only go to investments in areas like R&d where companies seldom capture all the benefits.
However, there is evidence that because ICT transforms organizations and leads to innovations within other organizations,
with high spillovers that may be taken advantage of by other organizations. 167 In such an environment,
the socially optimal amount of investment will lag behind actual investment. As such, it makes sense for the tax code to spur additional ICT investment,
or at least to avoid having the tax code penalize ICT investment. At the same time, the EU should continue to embrace the ITA agreement
in order to ensure low prices for European ICT users. The ITA has played a critical role in the spread of ICT products,
investment in ICT goods would decline, and productivity growth would slow. 169 Create Larger Markets for EU Firms ICTS benefit from economies of scale.
This means the larger the market, the easier it can be for an organization to recoup its ICT investments.
many professional services have national or sub-national barriers to entry based on ensuring quality of service.
they may also function as barriers to competition and are not always worth their costs in public welfare.
Finally, the Transatlantic Trade and Investment Partnership (TTIP) would significantly expand markets for many European firms by reducing non-tariff barriers in the United states
A recent report from Sweden estimates that European exports to the United states could increase by 20 percent to 40 percent under the TTIP. 172 These larger markets would increase the return on investment on more ICT projects for firms in the EU. Reduce Preferences for Small
to an even greater degree than the United states, overemphasizes the role of small firms in the economy in rhetoric and in policy. 173 For many policymakers,
small firms have come to represent everything good in the economy. Yet, on average large firms are more productive,
simply keep the share of the economy produced by small businesses larger than it otherwise would be. 179 The latter policies not only slow the growth of larger firms,
limiting productivity growth in this sector. 181 Do No Harm Putting spurring ICT adoption at the center of economic policy means not just supporting it,
One of the areas currently most at risk is digital Trade policies that lead to smaller firm size in an economy hurt productivity and income growth.
both the Norwegian and Danish Data protection Authorities have issued rulings to prevent the use of cloud computing services by municipalities
183 There has been talk as well by European leaders of building a European network for communication so that data never physically crosses the Atlantic. 184 By definition,
the result of these kinds of policies will be to raise the costs of ICT services for firms in these nations,
European firms should have free access to the best in breed and best value IT goods and services,
overly stringent privacy rules limit the ability of enterprises to obtain these gains. 185 For example,
and can cripple the growth of useful services. Another example is the right to be forgotten rule implemented by the European union. 186 The rule allows citizens to request that any information about them held by search engines be removed. 187 Such a rule might sound good in theory,
But the European economic crisis has kept Euro-area investment on the decline while preoccupying policymakers with other issues.
better management, higher levels of ICT investment (particularly in ICT-using sectors), lower taxes on ICT products,
Instead of seeing ICT adoption as a worldwide competition for the next new Silicon valley, Europe needs to focus on where ICT can make the most difference:
This is a path the United European firms should have free access to the best in breed and best value IT goods and services,
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Productivity and Economic growth in Europe. Assuming 2. 8 percent productivity growth. 20. The Conference Board, Total Economy Database.
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He is also author of the books Innovation Economics: The Race for Global Advantage (Yale, 2012) and The Past And Future Of America's Economy:
Long Waves Of Innovation That Power Cycles Of Growth (Edward Elgar, 2005), and the State New Economy Index series.
Dr. Atkinson received his Ph d. in City and Regional Planning from the University of north carolina at chapel hill in 1989.
Ben Miller is an economic growth policy analyst at the Information technology and Innovation Foundation. He has a Master's degree in International Development and Economics from Johns Hopkins School of Advanced International Studies.
ABOUT ITIF The Information technology and Innovation Foundation (ITIF) is a Washington, D c.-based think tank at the cutting edge of designing innovation strategies and technology policies to create economic opportunities
and improve quality of life in the United states and around the world. Founded in 2006 ITIF is a 501 (c) 3 nonprofit,
nonpartisan organization that documents the beneficial role technology plays in our lives and provides pragmatic ideas for improving technology-driven productivity,
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