Università Cattolica del Sacro Cuore
CENTRO DI RICERCHE IN ANALISI ECONOMICA
E SVILUPPO ECONOMICO INTERNAZIONALE
Investing in Knowledge:
Knowledge, Human Capital
and Institutions for the Long Run Growth
Daniele Schilirò
ISBN 978-88-343-1790-7
€ 3,00
Università Cattolica del Sacro Cuore
CENTRO DI RICERCHE IN ANALISI ECONOMICA
E SVILUPPO ECONOMICO INTERNAZIONALE
Investing in Knowledge:
Knowledge, Human Capital
and Institutions for the Long Run Growth
Daniele Schilirò
Novembre 2008
Daniele Schilirò, Dipartimento DESMAS ‘Vilfredo Pareto’,
Università degli Studi di Messina, [email protected]
[email protected]
www.vitaepensiero.it
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© 2008 Daniele Schilirò
ISBN 978-88-343-1790-7
Abstract
The essay aims at arguing that investing in knowledge is one of the
main cause of the deep transformations in the structure of modern
economies and also a strategic engine for the long run growth.
In the recent years a clear long-standing trend in the OECD area have
emerged, which is reflected in the expansion of knowledge-related
investments and activities, thus transforming the industrial
economies into knowledge-based economies.
This paper, which is sympathetic with a Schumpeterian view that
looks at the modern economic growth as a knowledge-driven
process, shows that long run growth is a complex process that cannot
be explained by one factor alone. Whereas in the Schumpeterian
economy technological progress is the driver of economic growth, so
goods are produced under conditions of substantial increasing returns
to scale, and innovation becomes the principle source of wealth, in
this work the former view is enriched with the idea that institutions
have an important role to play in the creation and diffusion of new
knowledge and in the process of growth, even if it is difficult to
establish ex ante the nature of these relations.
The topics of the paper concern scientific and technological
knowledge and its relationship with human capital, the issue of open
science and the necessary setting of appropriate institutions for
knowledge creation. Moreover, an examination of OECD data
related to investment in knowledge in OECD countries, with
particular attention to human capital, is carried out to evaluate their
economic performances. In such a context, the need of a long term
growth policy for the EU economies consistent with the Lisbon
Agenda is set forth; therefore the paper tries to suggest some
proposals for a long term growth policy of the EU economies in this
direction. Finally, conclusions end up the paper.
3
Abstract
Il saggio vuole dimostrare con una serie di argomentazioni teoriche e
con il supporto di alcuni dati OCSE che l’ investire in conoscenza è
una delle cause principali delle profonde trasformazioni nella
struttura delle economie moderne ed anche un motore formidabile
per la crescita di lungo periodo.
Negli anni recenti si è registrato un chiaro trend nell’area dei paesi
OCSE, riflesso nell’espansione degli investimenti e attività collegate
alla conoscenza, che ha trasformato le economie industriali in
economie basate sella conoscenza.
Questo lavoro, in sintonia con quella visone Schumpeteriana che
guarda alla moderna crescita economica come un processo governato
dalla conoscenza, mostra che la crescita di lungo periodo è in realtà
un processo assai complesso che non può certamente essere spiegato
da un unico fattore. In questo lavoro la visione Schumpeteriana
basata sul progresso tecnologico che costituisce l’elemento motore
della crescita economica, e
sull’innovazione che diventa la
principale fonte di ricchezza, viene arricchita con l’idea che le
istituzioni hanno un ruolo importante da svolgere nella creazione e
diffusione di nuove conoscenze e nel processo di crescita, anche se è
difficile stabilire ex ante la natura di queste relazioni.
Gli argomenti affrontati nel saggio riguardano la conoscenza
scientifica e tecnologica e la sua relazione con il capitale umano, la
questione della scienza come sistema aperto e la necessaria messa a
punto di istituzioni appropriate per la creazione di nuova conoscenza.
Inoltre,viene svolta un’analisi dei dati OCSE relativi all’investimento
in conoscenza nei paesi OCSE, con particolare riguardo al capitale
umano, per valutare la loro performance economica. Inoltre, è posta
in evidenza la necessità di una politica per la crescita di lungo
periodo per le economie dei Paesi dell’Unione Europea coerente con
la strategia di Lisbona, il saggio cerca quindi di suggerire alcune
proposte di policy per la crescita di lungo periodo dell’economie
dell’Unione Europea che vanno nella direzione dell’Agenda di
Lisbona.
4
Index
Introduction
7
1. Knowledge and Human Capital
9
2. Institutions matter: the issue of ‘open knowledge’
16
3. Investing in knowledge: performances and policies for the
growth
19
Conclusions
27
References
29
Working Paper Series
32
5
Introduction*
An increasing economic literature suggests that the ability to
create, distribute and exploit knowledge is central to competitive
advantage, wealth creation and better standards of living.
Investing in knowledge becomes the ideal strategy to increase
the productive capacity of capital goods, labour and natural resource
inputs, and it is considered one of the main cause of the deep
transformations in the structure of modern economies and also a
strategic engine for the long run growth.
Joel Mokyr (2002, 2005a) maintains that the central fact of
modern economic growth is the irreversibility of the accumulation
of useful knowledge paired to ever falling access costs, so that useful
knowledge can be disseminated to all those who can use it for
production. He also thinks that necessary changes in the institutions
to complement technological progress are required, since intellectual
factors never operate alone, hence institutional changes become
equally important.
In the recent years it appears clear the existence of a longstanding trend in the OECD area, reflected in the expansion of
knowledge-related investments and activities, transforming the
industrial economies into knowledge-based economies.
The term ‘knowledge-based economy’ reveals a “sea-change”
from the past and it captures a qualitative distinction in the
organization and production of the economic system. This concept
indicates that the content and structure of economic activities, as well
as many social foundations of industrialized countries, may be
distinguished from their historical antecedents by the rate and extent
of knowledge generation and use (Steinmueller, 2002). One of the
*
This essay belongs to the research project “Dinamica strutturale: profili storici,
tecnologici e organizzativo-istituzionali”. This project is supported by Università
Cattolica del Sacro Cuore, linea D.1 anno 2006, under the direction of professor
Alberto Quadrio Curzio at CRANEC.
An earlier draft of the paper has been presented at the Workshop “New Forms of
Division of Labour, Innovation and Local Development” University of Salento,
Lecce, 26-27 January 2007. I wish to thank Nicola De Liso for his helpful
comments. The usual disclaimer applies.
7
main feature of knowledge-based economies is their reliance on new
information technologies. The rapid development of scientific and
technological knowledge base and the high level of innovation also
mark the knowledge-based economies: these are actually the main
factors that foster economic growth. In such economies, moreover,
the share of intangible capital is greater than that of tangible capital
in the overall stock of real capital, and the proportion of knowledgeintensive jobs is high, so the endowment and the quality of human
capital become also crucial for the growth. Finally, in the
knowledge-based economies the weight of service activities tends to
increase, whereas the manufacturing sector changes its structure of
production and its organization.
This view is supported by the evolutionary economists (Foray
and Lundvall, 1996; Abramowitz and David, 1996; OECD, 1996;
Steinmueller, 2002; Mokyr, 2002; David and Foray, 2003; Foray,
2004), for whom the emergence of a knowledge-based economy is
invoked as a factor to explain historical developments and structural
economic changes.
Evolutionary economists, we know, are
fascinated with non-equilibrium dynamics of co-evolutions over
time, whereas neoclassical economists emphasizes the continuous
operation of the equilibrium-seeking market mechanism as a
problem-solver at each moment of time.
In this paper I am sympathetic with a Schumpeterian view that
looks at the modern economic growth as a knowledge-driven
process. Although I am aware that long run growth is a complex
process that cannot be explained by one factor alone. Essentially in
the Schumpeterian economy technological progress is the driver of
economic growth, so goods are produced under conditions of
substantial increasing returns to scale, and innovation becomes the
principle source of wealth. This view must be enriched with the idea
that institutions have an important role to play in the creation and
diffusion of new knowledge and in the process of growth, even if it is
difficult to establish ex ante the nature of these relations. Thus in the
paper, I focus on scientific and technological knowledge and its
relationship with human capital, on the issue of open science and the
necessary setting of appropriate institutions for knowledge creation.
8
Moreover, I examine OECD data related to investment in knowledge
in OECD countries, with particular attention to human capital, to
evaluate their economic performances, and I underline the need of a
long term growth policy for the EU economies consistent with the
Lisbon Agenda. Conclusions end up the paper.
1. Knowledge and Human Capital
Knowledge is a basic resource for the economy and it has been
historically at the heart of the process of economic growth. Scientific
and technological knowledge, in particular, is of key importance for
the growth, and also knowledge about how to organize and manage
economic activities is crucial to determine the performance of
economies and of firms.
The economic historian Joel Mokyr (2002) has ably described the
way in which the accumulation of knowledge has transformed the
western economies into modern economies based on knowledge.
Mokyr highlights the importance of “useful knowledge” for the
economic growth, that is, «the beliefs people hold about their
physical milieu». ... «The effective deployment of that knowledge,
scientific or otherwise, in the service of production is the primary –
if not the only – cause for the rapid growth of western economies in
the past centuries »1. He suggests that the change in the rate and
nature of economic growth must be explained through developments
in the intellectual realm concerning this “useful knowledge”.
Therefore, societies are richer since they “know” more. This means
that the social knowledge, defined as the union of all pieces of
individual knowledge, has expanded. However, the creation of useful
knowledge is a necessary but not sufficient condition for the growth,
since a variety of mechanisms to reduce access costs must be found
and, hence, appropriate institutional changes must be carried out to
make those mechanisms effective.
1
Mokyr (2002), p. 19.
9
If the creation of knowledge is a cumulative enterprise and is
strongly affected by the information exchange, nevertheless
knowledge must not identified with information. Scholars of
technological change have challenged the view that information and
knowledge should be considered as synonymous, by arguing that this
view is inadequate for understanding the process of technology
transfer. Knowledge is fundamentally a matter of cognitive
capability2, since it empowers its possessors with the capacity for
intellectual and physical action. According to Leydesdorff (2006),
knowledge enables us to codify the meaning of information; thus, it
enables us to discard some meanings and to retain others. Moreover,
knowledge itself can be codified, although the codification of
knowledge works imperfectly. Information, instead, consists of
structured and formatted data that remain inert until used by those
with the knowledge needed to interpret and process them. Therefore,
information is passive, static and discrete. Information and
knowledge have also different costs of reproduction. While the cost
of replicating information amounts to no more than the price of
making copies (the marginal cost of copying is decreasing thanks to
the adoption of ITCs), reproducing knowledge is a far more
expansive process, because cognitive capabilities are not always easy
to transfer to others and, in any case, they require learning and the
mobilization of cognitive resources. But knowledge may not be
codified and rests in implicit personal or institutional practices, often
associated with craft-like skills, awareness of reputations and handson techniques. In this case we have tacit knowledge that cannot be
reduced to conscious and codified methods and procedures. Tacit
knowledge is naturally excludable, since it cannot be considered
immediately and freely exploited. This tacit knowledge can be
transferred by demonstration and by personal instructions, but in any
case it cannot be assimilated to information3.
Moderns economies, which are knowledge based, are
characterized by an explosion of data and codified knowledge,
propelled by a revolution in information and communication
2
3
Foray (2004), p. 4.
Polanyi (1966); Cowan, David and Foray (2000).
10
technologies (ITCs)4. ITCs, in fact, are considered general purpose
technologies5, so the demand for them tend to be elastic;
furthermore, they are networking technologies, which favours
integration.
The process of globalization is also characterising the economies
today and this process is creating a stronger integration of markets
and a major role for knowledge. The global economy is actually
based on knowledge, skills, learning and innovations mainly
produced by R&D, and globalization has become more pervasive just
because it is driven by the use of ITCs.
It is possible to distinguish two conceptual frameworks
concerning knowledge-driven economies6. One is the framework that
emphasizes the ‘scientization of technology’, stressing the key roles
of R&D, ITCs, ‘high-tech’ industries and the knowledge economy.
In this theoretical framework the massive growth of externalities
associated with scientific knowledge affects the large sector of
science-based industries. Firms belonging to this type of industries
share scientific and technological parameters, including intellectual
understandings concerning technical functions, use of materials,
performance characteristics and so on. The increasing power of
absorptive capabilities of firms plays a critical role here. Thus, large
communities of ‘intelligent agents’ combined with an intensive use
of new ITCs are likely to make the marginal costs of reproducing,
transmitting and acquiring knowledge fall dramatically. The
knowledge economy is, therefore, an economy in which knowledge
externalities are more powerful than ever due to the double trend of
ITC development and increasing investments in education.
Another
conceptual framework, that can be called the
‘engineering-based’, stresses the key role of design and
craftsmanship and focuses on lower tech and more established
industries and sectors. According to this second framework,
networks and ITCs will reinforce the existing configurative
4
In 2001 the ITC sector represented 10% of business value added in the OECD
area. OECD (2005), p. 10.
5
Helpman (1998).
6
Smith (2002); Thompson (2004).
11
production environment and enhance its potential productivity gains
rather than displace it with a completely new paradigm of
production. In particular, the role of ITCs is to create better
conditions to communicate between network participants, thus, to
complement the ‘handshakes’ rather than substitute for them.
Therefore, if we consider the ‘engineering-based’ framework, the
emphasis would shift towards considering a complex combination of
forms of production that do not ignore the tacit, craft-based and
design-led aspects of the present production environment.
The two different conceptual frameworks outlined above don’t
need to be considered mutually exclusive. First, there are important
feedbacks coming from the engineering techniques and practical
experience that produce scientific and technological innovation.
Second, since knowledge becomes central for producing goods and
also services, we experience complementary forms of production,
which has been historically kept divided. So craft production based
on tacit knowledge reassumes importance, but also lean production
and flexible specialization are typical forms in these economies
founded on knowledge and innovation. Even aspects of mass
production still remain important in industries like biotechnologies,
ITCs, and others associated with natural sciences, that have been
experiencing high rates of growth.
In modern economies, technology is knowledge (Mokyr,
2005b), and knowledge, despite it is difficult to handle, is at the core
of modern economic growth. Then, economic growth is possible if
there is a sustained technological progress. In knowledge-based
economies new technologies are deeply changing the economic
structure and contributing to productivity increases. Neoclassical
theory of innovation and growth in its more recent literature
considers knowledge production and technological progress to be
simply a function of rational and purposeful application of research
and development (R&D), and of accumulation of complementary
physical and human capital. But R&D covers only a small part of all
innovation and knowledge production activities. Innovation is a
process that involves a break from past familiar practice; it also
implies a considerable uncertainty about how to make the new
12
practice work effectively. The innovative activity requires
sophisticated learning by doing and using, and is characterized by
high risk of failure, as well as a major payoff from success. These
aspects of innovation are not considered enough by mainstream
economic literature7.
Moreover, following Mokyr, David, Nelson et al., a theory of
innovation and growth based on knowledge creation and diffusion
and on technological progress needs also to consider the institutional
factors that allow knowledge to be applied and become profitable.
These institutional factors such as the intellectual property rights, the
operation of a well functioning labour market, the efficiency of the
credit system, the relationship between firms and universities, the
community-networks of scientists, the quality of intellectual property
rights system, become complementary to technological progress and
knowledge creation and must change with them. Therefore, the
institutional environment is also crucial for the long run growth.
In the following part of this section, I stress the importance of
human capital, in particular of education and instruction, since
human capital can be acquired through formal schooling and on-thejob training, emphasizing its central role for knowledge creation and
its effects on the long run growth.
The growth and productivity differentials among countries, which
are empirically observed, depend essentially on the capability of
improving the quality of human capital and of immaterial factors of
production, and the capability of improving these un-tangibles assets
seem to depend on the creation and the transfer of new knowledge
and new ideas. Thus, human capital is important for the diffusion of
new knowledge, and its endowment and its quality is essential for the
growth. The relevance of human capital has been already pointed out
by Adam Smith, who interpreted human capital as skills, dexterity
7
Nelson (2005), p. 26. Metcalfe (2002) stresses, instead, the relevance of the
demand side of innovation, emphasizing the micro-diversity of behaviours and the
link between the process of creativity and the formulation of novelty by consumers
and firms.
13
(physical and intellectual) and judgement8. A consequence of this
view is that societies with a better endowment of human capital are
considered to have a greater development potential than societies
with scarce or inadequate human resources. Moreover, improving the
quality of human capital has another important policy implication:
upgrading the knowledge and the skills of human capital facilitate
not only higher level of production, but can also determine a less
badly skewed distribution of income.
Despite the wide agreement among the economists on the fact
that human capital is an important determinant of economic growth,
there is little consensus on the exact contribution of different
measures and indicators of human capital to economic development
and on how the passage from human capital endowment to economic
growth is achieved9. However, there is a widespread literature of
models that postulate a relation between the high quality of human
capital and total productivity, so the quality of human capital
becomes essential for the growth. In short, the long run growth of a
knowledge-driven economy depends on the quality of its human
capital and on the capacity of matching its educational supply with
labour demand, which tends to become more sophisticated; in fact,
human capital and technology have a complex relation, which is
difficult to predict. EU economies, for instance, have shown in the
last decade wide differences in the growth rates; this outcome can be
partly due to the role of human capital. In several empirical studies, it
has become evident the significancy of the quality of human capital
with respect to the evolution of technology, of job satisfaction, of
8
Since Smith the term of human capital was used by Marx, but the best-known
application of the idea of human capital in economics is that of the Chicago School
of economics. In particular, Becker’s Human Capital (1964) became a standard
reference for many years. In Becker’s view human capital is similar to physical
means of production; one can invest in human capital (via education, training,
medical treatment), so one’s output depend partly on the rate of return on the human
capital one owns. More recently, Lucas (1988) has demonstrated that the growth of
human capital is a permanent source of economic development.
9
For a critical survey on human capital measurement and its effects on growth see
Helpman (2004, chps. 4 and 5).
14
matching educational supply and local labour needs, and also of
migration.
More likely, to have a correct assessment of the quality of human
capital, rather than a measure of educational stock or any
accumulation indicators, it is important to take into account some
indicators of the quality of the education provided, as a measure
(number or percentage) of high school students, of university
graduates, of post-graduates and doctorates, and a measure of
employment of high graduate people.
In conclusion, the relationship between knowledge and human
capital is essential for growth. Mokyr thinks, in fact, that the
advances in knowledge and their capability to improve the human lot
is critical to material progress10, even if the growth of knowledge
alone is not a sufficient condition and it needs an environment in
which knowledge can be put at work. To make this possible Mokyr
takes into consideration human capital, with its knowledge and
competences11. He thinks human capital important for the growth,
because it reduces access costs: the marginal cost involved in
acquiring knowledge possessed by someone else in society. But
progress in knowledge and human capital, although important, are
not enough to allow a long term and sustained growth, it is also
necessary to have an appropriate institutional environment which
must allow the spreading of knowledge, and institutional changes
that complement the knowledge systems, which, in turn, follow an
evolutionary path.
In the following section I examine the issue of ‘open knowledge’
in knowledge-driven economies, analyzing also the role of economic
and political institutions, with the aim to explain and underline why
institutions matter.
10
Mokyr (2005a), p. 33.
Mokyr defines ‘competence’ the knowledge needed to execute a technique.
Competence consists of the knowledge how to read, interpret, and execute the
instructions in the technique and the supplemental tacit knowledge that cannot fully
written down in the technique’s codified instructions. (2005b), p. 1120.
11
15
2. Institutions matter: the issue of ‘open knowledge’
Although knowledge is a public good in the sense that the
consumption of one does not reduce that of others, the private costs
of acquiring it are not negligible; thus, exploiting the existing stock
of knowledge will depend on the efficiency and cost of access to
knowledge. When the access costs become very high, the social
knowledge tends to disappear. Mokyr (2005b) argues that the
determinants of these access costs are both institutional and
technological. «”Open knowledge” societies, in which new
discoveries are published as soon as they are made and in which new
inventions are placed in the public domain through the patenting
system (even if their application may be legally restricted), are
societies in which access costs will be lower than in societies in
which the knowledge is kept secret or confined to a small group of
insiders. ... As access costs fells in the early modern period, it
became more difficult to maintain intellectual property rights through
high access costs, and new institutions that provided incentives for
innovators became necessary...»12. Therefore in Mokyr’s view
economic institutions (i.e. laws to protect property rights, a well
functioning relationship between firms and universities) are
necessary to stimulate the accumulation of knowledge and its
application to the development of new technologies. He also thinks
that is important to have appropriate political institutions to provide
the ‘right’ environment to make the innovation activity possible.
David (2007), in turn, identifies in the ‘open science’ a basic
feature of the modern knowledge societies. An essential
characteristic of this ‘open science’ is its public, collective character,
and its commitment to cooperative inquiry and free sharing of
knowledge13. Moreover, openness reduces duplication and fosters
spillover effects. The ethos of the ‘open science’ is supported by an
institutional infrastructure, that is, a constellation of differentiated
institutions shaping the conduct of scientific and technological
research. David is firmly convinced that the idea for public
12
13
Mokyr (2005b), p. 1119.
David (2007), p. 6.
16
universities to help support themselves financially by owing and
exploiting intellectual property is a bad idea14. Therefore, he is
against the proposal of the emerging “entrepreneurial university”,
especially in Europe. He thinks, in fact, that institutions are
influenced by past history, so they are path dependent; then Europe
must be aware of its past and, at the same time, find suitable
institutional innovations, considering reforms that build upon the
region’s own rich and diverse institutional foundations to promote
economic growth.
Already Dasgupta and David (1994) carried out a fundamental
analysis of open knowledge, where they offered an explanation for
the prevalence of distinct norms, customs and institutions governing
university scientific knowledge, on the one hand, and industrial
R&D, on the other. Dasgupta and David concentrate on rules of
priority and the role of validated priority claims in the reward
structure of academic scientists, and also on the institutions
associated with scientific communication. One of their main
propositions is that there are no economic forces that operate
automatically to maintain dynamic efficiency in the interaction
between university-based open science and commercial R&D. Thus
they warn that the dependence of knowledge-based industrial
development upon the science-technology nexus must not be
transformed into a regime of “universally privatised science”15.
Also Nelson (2004) criticizes the idea of a science that tend to
become extensively privatized, since science base largely is the
product of publicly funded research, and the knowledge produced by
that research is and must remain open and available for potential
innovators to use16. He makes clear that the theoretical position about
open scientific knowledge must be defended and that to privatize
basic knowledge is a danger both for the advance of science and for
the advance of technology. Nelson stresses that technological
advance is an evolutionary process, thus there are great advantages
of having multiple paths explored by a number of different actors.
14
David (2005), p. 168.
Dasgupta and David (1994), p. 515.
16
Nelson (2004), p. 455.
15
17
From his perspective the fact that most of scientific knowledge is
open is extremely important: many individuals and firms can use the
scientific knowledge they need in order to compete intelligently in
this evolutionary process17.
The analysis of the theories of these economists show that the
emergence of institutions and the need of institutional change
become crucial to keep “open knowledge” societies and to sustain
growth. Thus institutions matter and this is one of the main
proposition of those who do not accept the traditional neoclassical
view, because it leaves out institutions from its analysis. Douglas
North (1990), in particular, believes that institutions constitute the
fundamental explanation of economic growth, rather than factors of
accumulation and innovation, which are necessary but no sufficient
conditions for the growth. In North’s view institutions are the rules
of the game that guide the conducts of the organizations and govern
the evolution of their behaviours. The wide and recent economic
literature on institutions has demonstrated that the institutional
infrastructure is crucial to determine the incentives to innovation and
to influence the development of new technologies and the
organization of production, it also affects the degree of competition
within an industry, the flows of information between the industries
and the organizations that produce new technological knowledge
(Universities, Research Agencies), the incentives to accumulation of
physical and human capital and it concurs to improve the quality of
human capital as well18. Institutions create the external environment
in which organizations and individuals operate, reducing the
uncertainty, but they must be reliable, produce stability, and be able
to adapt themselves to the changing environment, if they want to
guide the process of knowledge creation and to promote the long run
growth19.
In the next section a descriptive analysis at macroeconomic
level is put forth that focuses on investment in knowledge in the
17
Nelson (2004), p. 460.
Mokyr (2002). For a critical discussion of the recent economic literature on
institutions: Helpman (2004), chp.7.
19
Schilirò (2004), pp. 41-42.
18
18
OECD countries to evaluate their economic performances,
emphasizing the role of human capital and of institutional education
(i.e. the universities). Moreover, I underline the need of a long term
growth policy for the EU economies suggesting some proposals
consistent with the Lisbon Agenda.
3. Investing in knowledge: performances and policies for
the growth
On the whole, the OECD economies are based on knowledge and
information. It is estimated that over 50 per cent of Gross Domestic
Product in the major OECD economies is now knowledge-based. In
its recent Science, Technology and Industry Scoreboard OECD20 has
produced many indicators and statistics, focusing on investment in
knowledge, which comprises expenditure on R&D, public spending
on higher education, and software21. The theoretical framework
implicitly assumed by OECD is that of a knowledge economy,
characterized by science-based industries, which emphasizes the
scientization of technology and the role of globalization.
Investment in knowledge in the OECD area reached around
5,2% of GDP in 2002, compared to around 6,9% for investment in
machinery and equipment. If expenditure for all levels of education
were included, investment in knowledge would be in excess of 9% of
GDP for the OECD area22. A theoretical reading of these data can
suggest that investment in knowledge increases the productive
capacity of the other factors of production and also transforms them
into new products and processes. Moreover, knowledge can spill
over from one industry to another or from one firm to another, with
new ideas used repeatedly at little extra cost. Such spillover can ease
the constraints placed on growth by scarcity of capital or other
20
OECD (2005). The data for each country are usually referred to years 2002-2003,
but in some cases are referred to previous years (back to 1999).
21
Software is a global, young and dynamic industry, which employs about 2 million
of workers just in Europe. Software as a commodity is complementary to other
investments and it is an input to the production of many products and services.
22
OECD (2005), p. 14.
19
factors (i.e. energy). Since knowledge investment is characterized by
increasing returns, it becomes the main engine of long-term
economic growth. Hence, sustained increases in innovative
investment can lead to continuous improvements of economic
performance and to rise a country’s growth rate. This latter
proposition is confirmed by Furman and Hayes (2005), who
maintain, through their empirical analysis and qualitative assessment,
that economies such as South Korea, Ireland and Finland have
succeeded in becoming innovative and economic growth leaders
because in the 1980s and in the 1990s they have continuously
increased their investments in R&D and human capital over time and
also raised their commitments to innovation-supporting policies23.
Considering the main OECD macro-areas, the United States
invests most in knowledge (6,6%) followed by Japan (5,0%) and the
European Union (3,8%). The ratio of investment in knowledge to
GDP in 2002 varied from 1,8% (Portugal) to 6,8% (Sweden) across
OECD countries, see Table A.
The share was lowest in southern European countries (Italy is
among them with a share of 2,3%) and highest in Nordic Countries,
South Korea and United States. These data are also consistent with
the empirical results of Furman and Hayes on emerging countries.
One of the components of the investment in knowledge is R&D
expenditure. Actually, R&D expenditure is one of the two indicators
(the other is R&D personnel) to measure the resources allocated by a
country to R&D efforts.
OECD defines R&D as creative work undertaken on a
systematic basis in order to increase the stock of knowledge,
including knowledge of man, culture and society, and the use of this
stock of knowledge to devise new applications. Yet, the OECD’s
definition of R&D contains some deficiency; in particular it does not
23
Furman and Hayes (2005), p. 197. Furman and Hayes examine a panel dataset of
23 countries between 1978 and 1999. They focus on the emerging innovator
countries to analyse the factors of their success in catching up to the world’s leader
innovator countries.
20
take fully into account tacit knowledge24, which is the main informal
source of innovations especially for the small and medium firms, as
it is the case of Italy, where the industrial sector is constituted mainly
by a multitude of small and medium firms that are organized in
industrial districts. Therefore, the following figures must be
interpreted with a pinch of salt.
Table A
Table B, instead, shows the R&D intensity, which is given by
R&D expenditure relative to GDP, for the OECD countries in 2003.
24
Tacit knowledge cannot be reduced to codified methods and procedures, but it is
an important source of new products and new processes. Cowan, David and Foray
(2000).
21
In particular, in Japan and European Union the R&D intensity has
increased steadily over the past years. Although EU (15) is below
United States and Japan. In 2003, Sweden, Finland, Japan and
Iceland were the only four OECD countries in which R&D intensity
exceeded 3%, well above the OECD average of 2,2%. The shortfall
in Europe’s relative R&D expenditure level vis-à-vis Japan and U.S
is not the lower rate of public sector research investment, but, rather,
the comparative shortfall in private business investment in R&D as
proportion of GDP.
Table B
R & D intensity, 2003
22
Knowledge-based economies are also strongly influenced by the
quality of human capital. There is a significant and positive
correlation between quality of education at university level and
economic performance. The countries with the best universities are
usually those that have a better innovative capacity and the highest
rates of growth25. Paul David has significantly identified the
university as the institution suited to meet the critical needs (research
and innovation) for the knowledge-driven economic growth26.
An important specific indicator of the investment in knowledge
is represented by the flows of university graduates. The higher
education system is indeed the main source of human resources in
science and technology. This human capital variable, considered by
the OECD Scoreboard and referred to university graduates,
represents the country’s potential for assimilating, developing and
diffusing knowledge and supplying the labour market with highly
skilled workers.
In 2002, for instance, OECD universities awarded some 5.9
million degrees at university level, of which 156000 doctorates.
Finland and Australia had the highest graduation rates at university
level (over 45% of the population )27. Moreover, about one-third of
university graduates obtain a degree in the social sciences, business
and law. Science-related studies (excluding health and welfare) are
the second most popular field of study, with one OECD graduate in
four obtaining a science and engineering (S&E) degree. United
States and European Union outflows of university graduates
represent some 32% and 39% of total OECD university degrees
respectively. EU higher education systems deliver more advanced
research and S&E diplomas. In 2002, European universities granted
532000 S&E university degrees, which is 42% of total OECD
university degrees awarded in these fields, compared to only 23% for
25
The universities currently fulfil three primary functions: a) the development of
highly qualified human resources; b) the accomplishment of R&D activities; c) the
synergistic relationship with the surrounding society, through the public use of the
scientific and technological potential of the university.
26
David (2005).
27
OECD (2005), p. 46.
23
the United States. The gap widens for doctoral degrees: European
universities awarded 55% of all S&E doctorates. This evidence
demonstrates that Europe is a leader actor in the world scene for
qualifying human capital in scientific and engineering knowledge28.
Another significant indicator of the quality and upgrading of
human capital and of the labour market’s innovative potential is the
employment of tertiary level graduates. Investments in human capital
and, in particular, in education have led in many countries to a rise in
educational attainment, which is also reflected in the composition of
employment. More specifically, the employment of scientists and
engineers is an important mechanism for effecting knowledge
transfers that bring economically valuable spillovers to the
commercial R&D sector29.
On average, 28% of persons employed in the OECD area had a
tertiary-level degree in 2003. Canada and Japan (over 40%) and the
United States (38%) ranked far ahead of the European Union,
where less than one worker out of four holds a tertiary-level degree.
But Europe shows large cross-countries disparities: Finland, Belgium
and Sweden tertiary-level graduates account for more than a third of
employment, whereas Portugal, Italy and Slovak Republic account
for less than 15%.
A third relevant indicator concerning human capital and
specifically the human resources allocated to R&D is the number of
researchers employed. Researchers are viewed as the central element
of the R&D system: they are defined as professionals engaged in the
conception and creation of new knowledge, products, processes,
methods and systems and are directly involved in the management of
projects. In 2003, approximately 3.4 million researchers were
engaged in R&D in the OECD area. This corresponds to about 6.6
researchers per 1000 employees, a significant increase from 1995
level of 5.6 per 100030.
28
Of course, there are wide differences among European countries and among
European regions.
29
Dasgupta and David (1994), p. 511.
30
OECD (2005), pp. 60-61. For those countries that compile data by qualification
only, data on university graduates employed in R&D are used as a proxy.
24
Among the major OECD regions, Japan has the highest number
researchers relative to total employment, followed by United States
and the European Union. Anyway, 38% of all OECD area
researchers reside in the United States, 29% resides in the EU15 and
19% in Japan. In the major economic areas, the share of business
researchers in the national total differs widely. In the United States,
four out of five researchers work in the business sector but only one
out of two in the European Union.
The analysis of these OECD statistics confirms that education is
at base of the development of human capital since it constitutes the
legacy of one generation to the following one. Winning countries and
regions, in fact, have a much better stock of education. Moreover, the
acquisition of knowledge is strongly related to the institutional
education and, for the higher education, to the role of the
universities. By providing higher education a country can contribute
with this policy to foster the competitiveness and economic
performance of industries, firms and regions and also to attract
companies from other countries. The contribution of education is not
only via improvements the quality of the workforce and the
formation of managerial expertise, but also via innovation with the
diffusion of new processes and new products, because of the
dynamic links and feedbacks between educational level, learning
activity and advances in technology. Therefore, improving education
has a long-run and permanent effect on the economic growth rate.
To sum up, the data on R&D expenditures and on investment in
human capital, specifically in tertiary education, would seem to show
that Europe, with the exception of the Nordic countries, had a weaker
performance and lagged behind United States, Japan and some
emerging countries (i.e. South Korea) in the recent past. This has
been largely a consequence of weaknesses of several EU countries in
the crucial technological fields that characterize the contemporary
knowledge-based economy.
A relevant view, based on a theoretical approach more close to
mainstream economics, is that of Zilibotti (2008), who argues, by
25
analyzing a number of empirical applications of his growth model of
imitation and innovation using OECD data31, that economies, which
fail to introduce economic reforms as they grow, may become stuck
in non-convergence traps. In other words, they grow without
developing. This happens because the evolution of the institutional
environment (i.e. contractual arrangements that adapt to the changing
needs of technological progress) is neither necessary nor
serendipitous, but it is subject to high uncertainty and path
dependence. Then, institutional change must be pursued with
appropriate policies.
The foregoing analysis brings me to suggest that to overcome
the weaknesses which characterize the European economy on the
whole, it is necessary to pursue a set of policies consistent with the
Lisbon strategy that brings Europe on a virtuous path of long run
growth. Especially nowadays when the emergence of high growing
economies, like China, South Korea, India, Russia, etc., sets a new
stage of global competition.
Empirical and theoretical economic studies have widely shown
that EU economies can significantly grow if the accumulation of
knowledge is enhanced. To make this target feasible it is necessary to
have higher investment in R&D. But, following David (2005),
Europe can achieve this aim through the creation of new institutions
that will provide the organizational infrastructure, complementary to
its universities and institutions of higher education, to foster the
production of knowledge and, hence, the generation of commercially
successful science-based innovations, whose results are built upon
publicly supported research. Higher ITC investments are also
necessary, since knowledge-based economies are strongly influenced
by the transmission and diffusion of knowledge. Europe must create
the conditions to have a stronger impact of technology diffusion,
then low access costs, as Mokyr (2005b) maintains, are a
fundamental condition to facilitate it.
Furthermore, EU economies must be sustained to upgrade their
human capital with higher investment in education and instruction,
31
Zilibotti considers in his model either physical-capital investment and
firm-specific human-capital investments (2008, pp. 331-332).
26
and to increase their share of employment of the best qualified
individuals. Europe must achieve a deeper integration of markets (
especially in the service sector), and it must be able to possess
suitable institutions that improve the regulatory environment. In
general, institutions, according to Mokyr, must co-evolve with
technological change, so institutional change becomes a necessary
condition to guarantee the growth in the long run. But it is also
important to realize that there is no a unique correspondence between
the functions that good institutions perform and the form that such
institutions take.
Finally, in several EU economies (i.e. France, Italy, Portugal)
small and medium firms characterize the industry, this type of firms
usually follow the engineering-based framework of production,
where a complex combination of forms of production that do not
ignore the tacit, craft-based and design-led aspects often give content
to the process of creativity that mark their products. So it is
necessary an innovation policy aimed to help specifically these type
of firms with measures like fiscal and credit facilities, but also with
an institutional infrastructure as an organized system, in terms of
legislation, operational conducts, research partnerships with the
university-industry-government infrastructures aimed to knowledge
production and technology transfer.
All these policy proposals might help Europe to overcome its
present situation of relative low growth pushing it on the virtuous
path of a stable long run growth, coherently with the Lisbon strategy.
Conclusions
This paper, following a Schumpeterian view that looks at the
modern economic growth as a knowledge-driven process, has
focused on knowledge, human capital and institutions to explain the
process of long run economic growth of modern industrial
economies, which are increasingly becoming knowledge-based, that
is, economic systems founded on high levels of investment in
knowledge, which imply investment in education, research and
development, software and information systems. Moreover, the paper
27
tries to suggest some proposals for a long term growth policy of the
EU economies consistent with the Lisbon Agenda.
In the first section, the relationship between knowledge and
human capital is analysed. Since the diffusion of technological
knowledge requires sophisticated learning, the transfer of knowledge
needs high quality of human capital and, hence, a good education
system to increase the productivity of the economy, more than the
accumulation of human capital endowment. Moreover, two
frameworks related to the knowledge-based economies are identified.
The first one focuses on the scientization of technology and stresses
the role of R&D, codified knowledge, ITCs and high-tech industries.
The second framework focuses on an engineering approach and
stresses the relevance of tacit knowledge, of craft-based and designled aspects of production and on lower tech and more established
industries. In both frameworks the quality of human capital is crucial
to acquire and transfer knowledge.
In this paper an important place has been given to the analysis
of ‘open knowledge’ and its effects on growth, and the consequent
necessary setting of appropriate institutions. Following Mokyr,
David, et al., a theory of growth must be based on a system of ‘open
knowledge’ that favours knowledge creation and diffusion and the
development of technological progress, but this view implies the
need to consider institutions, and it requires necessary changes in the
institutional environment.
Finally, I have analyzed the performance of knowledge
economies in the OECD area giving a descriptive analysis and
showing some significant data related to expenses in R&D,
investment in human capital and employment of tertiary-level
graduates in OECD countries. The descriptive analysis of OECD
data demonstrates that countries’ development is directly related to
their continuous investments in education and R&D, and that
qualified university graduates constitute a country’s basic source for
developing and diffusing knowledge. Moreover, some policy
proposals have been suggested that might help Europe to reach and
go along a virtuous path of long run growth, consistently with the
Lisbon strategy.
28
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31
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