Scale matters for productivity growth
ESRI economist Iulia Siedschlag outlined how to boost productivity in small economies, based on Irish and European experiences.
Foreign direct investment is a key driver for productivity growth as inward investors tend to be larger and more outward-looking. This is one of the findings from research by Iulia Siedschlag, who leads the Centre for Internationalisation and Competitiveness at the Dublin-based Economic and Social Research Institute.
Siedschlag affirmed that productivity growth is a “key factor” for long-term economic growth and raising living standards. In her view, a “policy mix” is more important than an individual policy. A good framework would incentivise investment in knowledge and innovation, be open to trade and investment, be flexible enough to re-allocate resources and have efficient access to finance. A highly performing education system and high quality infrastructure are also needed.
The Republic’s productivity is one of the highest in Europe but this is very much related to foreign direct investment. GVA per person is €171,387 per employee in foreign investors’ workplaces, compared to €39,328 in other workplaces.
“They are much larger,” she added. “The average size of foreign-owned firms is, for example, 83 persons engaged or employed while the average size of Irish-owned firms is about six persons engaged, so scale really matters for productivity and also for innovation.”
Over the last four years, the ESRI research has found a positive link between innovation and productivity. New and/or improved goods and services lead to higher demand. This “product innovation” link is strongest in foreign-owned firms. Process and organisational changes result in improved efficiency and this “organisational innovation” link is strongest in Irish-owned enterprises.
Innovation policies should take into account the potential of enterprises to grow, export and co-operate with others. The role of government is to improve framework conditions (better competition and regulation), deal with market failures and systemic failures (e.g. poor networking with universities), and also avoid the failure of government intervention.
Siedschlag’s has just published a research paper on the factors that attract multi-national R&D activity, based on EU-wide data. The most important factors, she concluded, were proximity to other foreign R&D activities, human capital availability, proximity to centres of research excellence, and research and innovation capacity.
North American multi-nationals tended to value innovation capacity and proximity to centres of research excellence. Government R&D intensity was relatively more important to European multi-nationals. Her paper, entitled ‘What Determines the Location Choice of R&D Activities by Multinational Firms?’ is available at www.esri.ie
Scale of challenge
Statistics analysed by agendaNi indicate that Northern Ireland’s productivity is similar to the position in the EU’s recent accession states. Each year, the European Commission publishes a productivity index which measures countries against an EU-wide average of 100. In 2011, the Republic of Ireland’s productivity stood at 130.8 per cent. The Northern Ireland figure, calculated by using UK GVA statistics, equated to 91.8. This performance, in national terms, is closest to Slovenia (85.3) and Cyprus (81.2). Regional economic policy has traditionally focused on closing the productivity gap with Great Britain and the EU figures indicate that a much more radical approach is needed to reach that goal.
