Press Release - Moving to the Frontier: Promoting the Diffusion of Innovation - Welcome address by Mario Draghi, President of the ECB, at the joint conference by the ECB and the MIT Lab for Innovation Science and Policy “Fostering Innovation and Entrepreneurship in the Euro area”, Frankfurt am Main, 13 March 2017
It is my pleasure to welcome you to this joint ECB-MIT conference on fostering innovation and entrepreneurship in the euro area.
This might at first glance seem an unusual topic for a central bank conference, since monetary policy principally operates through the demand side of the economy. But the long-term supply picture evidently also affects our ability to deliver on our mandate.
Much of the debate today about the true level of the real equilibrium interest rate, for example, is a debate about the outlook for productivity growth, which of course depends in large part on innovation and entrepreneurship. Higher productivity growth is also vital to safeguard Europe’s economic model of high wages and social protection, and hence to counter the sense of economic insecurity that is currently prevalent in several advanced economies.
But aggregate productivity growth is more than just the development and application of innovation and new technologies which enhance or even revolutionise production processes. New technologies invented elsewhere need to be adapted by firms into their own production processes to make them more efficient. In short, productivity growth depends not only on the creation of new ideas, but also on and their diffusion.
To raise productivity growth, which has slowed in the euro area and in many other economies in recent years, we need to focus on both areas.
Innovation
There is a lively debate underway as to whether the rate of innovation has slowed or not. Some argue that the great innovations of the past – electricity, railways, etc. – will not be matched in the future,[1] or that we have exhausted the gains from the Information and Communication Technology (ICT) revolution.[2] Others remain more optimistic that the current slowdown in productivity reflects a transition to a knowledge-based economy, and that general purpose technologies such as ICT improve over time and generate complementary innovations.[3]
My view on the topic is that we should not be overly gloomy about the global prospects for innovation, for two reasons.
The first is that we clearly have potential to boost innovative capacity in the euro area. Consider, for example, the persistent gap between R&D spending in Europe and other major advanced economies. According to the World Economic Forum’s Global Competitiveness Indicator, only three euro area countries are in the world top ten for innovation.
So if, as the world’s second largest economic area, we were to dismantle barriers to innovative activity in the euro area, it would clearly give a boost to global innovation. I will not go into detail here about what policies this might entail, but clearly government support for innovation matters: in Europe differences in innovative capacity between countries are closely related to public spending on R&D, particularly in basic research.[4]
The second reason why I am reasonably optimistic is that there is no clear evidence yet of a slowdown in innovation. The available data in terms of global R&D spending, and the ongoing historically high rate of high-tech patent registrations, seem to challenge this perception.
Moreover, despite the global slowdown in aggregate productivity, firms at the global productivity frontier have continued to post strong productivity gains over the past decade. The performance of euro area businesses at the global frontier is on a par with businesses in other developed economies, particularly in manufacturing. It is the performance of firms away from the frontier that has been lagging (Charts 1 and 2). Although this is a common feature for all OECD countries, it is particularly the case for euro area services, where productivity growth for the laggard firms has stagnated.
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