Theme 2: Project 1 – Skills, Innovation, and Economic Growth

What the project did

This project focussed on intangible economic assets such as skills, innovation capacity, designs, software and ‘organisational capital’ (e.g., business practices and processes) which are increasingly seen as the ‘missing input’ in efforts to measure and understand productivity and growth performance. The key aims of the project were to explore:

1. How much do firm-specific intangible capital assets contribute to the differential productivity performance of firms, both as individual factors of production and in combination with other factors?

2. To what extent do intangible capital assets help generate innovation and raise the economic performance of firms and industries?

3. To what extent do cross-country differences in skills affect economic performance through innovation-related mechanisms such as the development of ‘absorptive capacity’, that is, the ability to identify and make effective use of knowledge, ideas and technologies that become available through spill-overs?

To investigate these questions we constructed a dataset of UK firms from 2002-2015 which includes measures of a broad set of capitalised intangible investments. Our aim was to improve on previous micro-analysis of intangibles which has been ad hoc in nature, typically relying on indicator variables and capturing limited aspects of intangible capital. In addition we made extensive use of firm-level Community Innovation (CIS) data for the UK, Germany and Ireland and assembled a new cross-country industry-level dataset, including output, physical capital, skills and innovation data, which covered the US and six Continental European countries as well as the UK.

Main findings

1. In analysis of the UK firm-level dataset for 2002-15 we found a clear role for intangible capital in explaining firms’ productivity performance. Firms at the top of the labour productivity distribution in the UK market sector, i.e. at the productivity frontier, are much more likely than other firms to invest in both tangible and intangible assets, are more likely to be foreign owned, and hire more skilled workers. Over time the dispersion in productivity between frontier and other firms has widened, and this has coincided with an increased dispersion across firms in investment in intangible assets such as software and R&D. The difference in productivity between frontier and other firms is particularly significant in high skilled service industries. Workers in frontier firms are paid a premium, over and above any returns associated with detailed occupations and other worker characteristics (Riley and Rosazza Bondibene, 2019).

2. Comparative analysis of the Community Innovation Surveys across Germany, Ireland and the UK suggest that in addition to expenditure on innovation-related activities, internationalisation characteristics are associated with successful innovation in service sector firms.  Cooperation around innovation with both suppliers and customers is also important in generating innovation outputs. Product, process and organisational innovations are positively associated with productivity in service sector firms in the UK and Germany. Marketing innovations appear to have the highest productivity returns for service sector firms in all three countries. For service sector firms in the UK and Ireland, foreign ownership and exporting are particularly important predictors of productivity in service sector firms (Peters, Riley et al., 2018).

3. Making use of our cross-country industry-level dataset for manufacturing industries, we found important roles for both high-level skills and upper intermediate (technician-level) skills in developing absorptive capacity, in particular, the ability to convert the knowledge sourcing opportunities provided by openness to foreign trade and investment into innovative outputs (such as ideas for new products and processes). Productivity growth is enhanced not just by high-level skills and upper intermediate skills but also by workforce skills as a whole. Compared to other leading industrialised countries, the UK is well-equipped in terms of high-level skills but less so in terms of technician-level and other intermediate skills (Mason, Rincon-Aznar and Venturini, 2017). 

Impact

These and other findings were written up in a series of publications and also presented to policy-makers, productivity and innovation specialists and other audiences. For example, research dissemination workshops organised by LLAKES – involving a mix of LLAKES and external speakers – attracted policy analysts, economists and other representatives from a range of government departments, industry associations and other organisations, including HM Treasury, Department for Business Energy and Industrial Strategy (BEIS), Office for National Statistics, Institute of Grocery Distribution, Home Office, Chemical Industries Association, Digicatapult, Centre for Cities, Greater London Authority, Office for Budget Responsibility, Centre for Cities, Bank of England, NESTA (National Endowment for Science, Technology and the Arts), Engineering Employers Federation, UK Commission for Employment and Skills, Intellectual Property Office, InnovateUK (formerly Technology Strategy Board), Confederation of British Industry and the British Business Bank.

The main findings from this project were also presented at internal workshops in the Department for Business, Energy and Industrial Strategy (BEIS) and policy workshops organised by House of Commons Select Committees, as well as at an OECD workshop at HM Treasury. These workshops attracted considerable interest among government officials and contributed to policy discussion and formation within government. In addition, Rebecca Riley is working with the productivity team at the Office for National Statistics to incorporate some of the data developed during this project within the Annual Respondents Database (a firm-level dataset available to researchers through the UKDS secure service and the ONS Secure Research Service). Geoff Mason served as a member of the Strategy Board for the  Q-Step Initiative in Social Science Quantitative Methods Teaching (funded by the Nuffield Foundation, Economic and Social Research Council and Higher Education Funding Council for England).

Selected Publications

Riley, R. and Rosazza Bondibene, C. (2019), Winners and Losers in the Knowledge Economy: Evidence from Linked Employer-employee Data, LLAKES Research Paper (forthcoming), LLAKES Research Centre, London: UCL Institute of Education.

Mason, G., O’Mahony, M. and Riley, R. (2018), What is Holding back UK Productivity? Lessons from Decades of Measurement,’ National Institute Economic Review, 246: R24-R35.

Peters, B., Riley, R., Siedschlag, I., Vahter, P. and McQuinn, J. (2018) ‘Innovation and Productivity in Services: Evidence from Germany, Ireland and the United Kingdom, Review of World Economics, August, Volume 154, Issue 3, pp. 585-615.

Mason, G., Rincon Aznar, A. and Venturini, F. (2017) Which Skills Contribute most to Absorptive Capacity, Innovation and Productivity Performance? Evidence from the US and Western Europe, Research Paper 60, LLAKES Research Centre, London: UCL Institute of Education.

Mason, G., Robinson, C. and Rosazza Bondibene, C. (2016) ‘Sources of Labour Productivity Growth at Sector Level in Britain, 1998-2007: a Firm-level Analysis,  Review of Economics and Institutions, 7(2): pp. 1-43.

Rincon-Aznar, A., Forth, J., Mason, G., O’Mahony, M. and Bernini, M. (2015), UK Skills and Productivity in an International Context, Research Paper 262, London: Department for Business, Innovation and Skills (BIS).

Mason, G. and Rincon-Aznar, A.  (2015), Education, Skills and Productivity: Commissioned Research, First Joint Special Report of the Business, Innovation and Skills and Education Committees, House of Commons, Session 2015-15, London: The Stationery Office Ltd.

Green, F. and Mason, G. (2015) ‘Skills and Training for a More Innovation-Intensive Economy, in D. Bailey, K. Cowling and P. Tomlinson (eds), New Perspectives on Industrial Policy for a Modern Britain, Oxford University Press.