Investment in R&D, productivity, and technology policies

Cristina de Haro. Professor. IE Business School

25 February 2014

The incipient economic recovery we are now seeing could be derailed if deflation raises its ugly head. One way to stop this from happening is to invest in R&D to raise productivity levels.

Recently the OECD published early estimates of its indicators, which point to the economy being on the road to recovery. The indicators show that the growth that started in the US and Japan in the first quarter of last year is set to continue and that the Economic and Monetary Union (EMU) has managed to consolidate its economic position, which began to improve some six months ago. There is also good news for Spain, which has managed to increase its indicator by 2.9% over the last year to 102.4. The fact that this figure is over 100 means that Spain is also growing at above trending rates.

Sustaining this favorable situation in the long term depends on one main factor: the capacity to increase competitiveness.
For the moment, the ability to leverage productive capacity or competitiveness (which amounts to the same thing) is being helped by a low rate of inflation. This makes exports more attractive in terms of international trade.

Moreover, lower prices make it possible to maintain salaries, which in turn increases levels of competitiveness and stimulates growth while ensuring that consumers, including the unemployed, do not lose purchasing power. Nevertheless, just as Christine Lagarde, Director of the IMF, warned, this situation should only be maintained for the time it takes to improve the labor market. If the low prices that currently abound in all the major world economies were to get worse over time, it could give rise to deflation. This would weaken internal demand even more, and would wipe out the modest advancements made toward recovery over the last few months.

How can we prepare for an increase in inflation? By remembering that competitiveness has another basic component, namely productivity.

The innovations that came out of the Third Industrial Revolution have the capacity to change production systems, increasing their efficiency and thereby making them more productive. However, the latest figures from the Conference Board show how the rate of growth of world productivity has fallen over the last year down to 1.7%, while three years earlier in 2010 it stood at 3.9%.

Why is this happening? How is it possible that technological advancement is not producing better results? One possible answer to these questions lies in a lower level of spending on R&D. Innovation is vital for technological change, but is not enough in itself. Hence, it is necessary to increase investment in R&D in order to put inventions into practice and make it possible to create new ones which generate future increases in productivity.

There is a need for technology policies that permit full leverage of scientific potential, and now is the time to implement them. It is precisely now when the first signs of recovery in industry are appearing, a sector that needs R&D to gather momentum.

Industrial production was 3% higher in November of last year than in the previous year, both in the EMU and in the US. Furthermore, both regions are using only 79% of available production capacity, which would appear to indicate that there is room for further increases. However, in order for industry to serve as a support platform for economic growth it has to be immersed in a process of continuous improvement, and in order for that to happen there has to be investment in R&D.

Economies that increase their technological capacity will have a major competitive advantage because they will have strengthened their industrial base. This is how they will fuel increases in productivity which will make them more competitive and will guide them along the path to economic recovery.

Via@IEBusiness, EL PAÍS


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