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Professor Geraint Johnes
Professor of Economics at Lancaster University
T 020 7976 3516
Professor Geraint Johnes

March Director's report

Authors: Professor Geraint Johnes

17 March 2015

Much of the recent media commentary on technological progress foments fear. Barely a week passes without a new story about robots stealing our jobs. These scaremongering stories miss the point that the nature of the work that we do has always evolved over time - our jobs will not be stolen, but they will inevitably morph. For sure, our education and HR development systems need to be fleet of foot in order to react to the changing needs of the labour market. But we should remember that, where they are adopted, new technologies will, generally speaking, come to the fore because they improve things for us. After all, technological developments are human constructions; we have a choice.

Indeed, far from being a threat, the problem with technology in recent years - in the UK at least - has been that it has advanced far too slowly.

Between 2006 and 2011, the number of UK patent applications fell by some 15%. Over the same period, business enterprise investment in research and development rose 9% from £16.4 billion to £17.8 billion (in 2012 prices); this followed a 3% real increase over the preceeding 5 years. While patent numbers are a crude guide to the value of innovation, these data suggest something of a decline in the returns to investment in R&D. There is, of course, a long literature, including the work of Zvi Griliches, Bronwyn Hall and others, pointing to a long term fall in the return to investment in R&D in the US, and more recent studies have addressed similar issues in the UK, albeit for the period before the Great Recession. For the period since, some evidence comes from NESTA's innovation index- which sums the percentage changes in all forms of private intangible capital and total factor productivity. After a long period of growth, this fell by 2.0% in 2008 and by 6.8% in 2009, and has barely been positive since.

Business investment more generally has been identified by some observers as a key factor explaining the sluggishness of productivity. This is indeed likely to be an important factor; from its peak in the second quarter of 2008, real terms business investment fell by almost 20% over the course of seven quarters, and a subsequent partial recovery stalled in 2012. In late 2013 and early 2014 it recovered again, at one point rising at an annual rate of more than 10%. But business investment has slid back over the last couple of quarters. The median forecast for business investment growth in 2015 now stands at 5.6% - down from the 2014 figure of 8.1%.

Measures designed to provide a healthy framework in which investment, and particularly successful investment in R&D, is encouraged include the strengthening of patent protection and fostering of product market competition. Ensuring that firms with strong capacity to innovate have access to finance is key, and promoting this is likely to require new instruments and methods for evaluating companies' stocks of intangibles.

While the productivity puzzle remains a conundrum largely because there is in truth a plethora of underlying causes, ensuring that the policy framework is one that encourages successful innovation is likely to reap a high dividend in this arena. It is reassuring to note that this has come to be high on the political agenda. For the longer term, as well as for fixing the short term issue, this will need to be a priority for the next government.