What’s the impact of innovation in public policy?
It has long been argued that innovation is a driver of economic competitiveness and export performance. Indeed, in economic theory innovation should make workers more efficient. As a result, fewer people are required to produce the same amount of output and the same number of people can produce more output. This should strengthen competitive advantages and support GDP growth. In this short article, I will quickly review the literature and public initiatives in the field of innovation.
Innovation in theory
Oslo Manual defined innovation as the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relation (1). Innovation is based on the results of new technologies, new combinations of existing technology or the use of other knowledge acquired by the enterprise (2).
Joseph Schumpeter considered innovation as a prerequisite for economic development. According to his theory of creative destruction, from the one side innovation destroys technology and decreases employment, whereas from the other side it simultaneously creates more output and other jobs (3, 4). According to Michael Porter, innovation, when defined as a process that allows companies to produce more with the same amount of resources or produce as much with a smaller amount of resources, leads to sustainable competitive advantage (5, 6, 7).
Bengt-Åke Lundvall’s concept of ‘innovation system’ stresses that the flow of technology and information among people, enterprises, and public authorities is key to an innovative process (8). It contains the initiatives needed in order to turn an idea into a process, product, or service and aims to support the performance of economic actors in global value chains. Innovation strategies typically support the transition from cost-based competitiveness to the one based on innovation (9).
Innovation in practice
Nobel prize-winning economist Joseph Stiglitz argues that truly disruptive innovations provoke widespread macro-economic restructuring (10). For instance, rural workers were negatively impacted by technological changes in the farming sector in the 1920s in the US (11). Many families suffered from a sharp drop of income while the number of jobs collapsed in rural areas. Banks blindness prevented many people from moving to cities in order to gain new skills (12). Ultimately this caused a crash in demand that affected the entire economy and weakened the financial sector.
While agriculture became less labor intensive, employment in the industry sector grew rapidly. Half a century later similar structural changes affected the economy. Technological changes in the industry sector negatively impacted manufacturing workers. While robotics and automation became popular among factories, employment in the service sector boomed. Today it is the service sector which is becoming less labour intensive. These developments illustrate how the dialectic between innovation and cost competiveness gradually transform the structure of the economy (13).
While international competitiveness can be measured in terms of either revenue or cost, researchers and policymakers have predominantly chosen to use aggregate cost-based indicators for their analysis and recommendations. In view of data availability challenges concerning the productivity and costs of capital, often only one factor of production, labour, is considered in the analysis. A very popular indicator in this respect is aggregate Unit Labour Cost (ULC), defined as the ratio of workers’ compensation per employee to labour productivity (14).
This indicator is very sensitive to changes in the structural composition of output provoked by disruptive innovations. First, data shows that innovation often triggers an increase of labour productivity. Fewer people are required to produce the same amount of real output. Technological investments increasing the capital intensity of the economy induce competitive gains. At the same time, price analysis suggest that innovation could also generate a decrease of nominal output value. Technological improvements in the process of production and in the market structures of economies may lead to lower price mark-ups and thus lower nominal prices. Finally, the growth of sectors with higher labour intensities deteriorates competitive estimates.
An econometric analysis by Marco Vivarelli showed that investments resulting in product innovation are generally labor-friendly, while those resulting in process innovation are generally labor-saving. Therefore, innovation policies that support research and product innovation, especially in high-tech sectors, can lead to the emergence of new sectors and new jobs. Meanwhile, any initial displacement of workers as a result of process innovation can be countered by compensation mechanisms that reduce the direct job-destroying impact of innovation (15).
Innovation in public policy
The impact of technological innovation on jobs and competitiveness are widely debated. There is uncertainty about the effects of breakthroughs such as peer-to-peer platforms, blockchain and robotization. Governments are already exploring these new opportunities and preparing for the transformations they will cause.
The Belgian Government recently unveiled a simple and low tax rates for peer-to-peer marketplaces (16). With this new legislation, Belgium is at the forefront of sharing economies in Europe. The new regime consists of an advantageous but limited tax regime for individuals who provide services through a digital platform and a tax withholding at source by the sharing platforms. The effective tax rate is 10% as long as the income does not exceed €5,000 per year. At the same time, the Belgian post company ‘bpost’ (50% owned by the state) launched bringr, a sharing platform that finds drivers for deliveries (17).
Sharing platforms can help to dramatically improve the quality of services provided to the public. Car-sharing solutions (e.g. Cambio, Drive Now, Zencar) help to improve the quality of public transport while easing the parking pressure. Peer-to-peer car-pooling platforms (e.g. Uber, Taxify, Blablacar) also improve mobility and usage of vehicles already on the roads. Parking sharing marketplaces (e.g. Parkshare, Garage, Justpark) make underutilized private parking spots, driveways or garages available and easy to access for users. Drivers communities (e.g. Waze, Coyote) gather and communicate information about traffic and road incidents. The advantages of sharing platforms go far beyond the transport sectors. It can also strengthen tourism capacities, pull together public and private resources, and streamline the efficiency of public services.
The Maltese Government has recently approved a national blockchain strategy. It plans to turn Malta into one of the first countries to fully embrace blockchain technology and cryptocurrencies (18). Malta intends to set the standards for other countries to follow. The authorities are currently examining implementation of blockchain technology in the Lands Registry and the national health registries. The Malta Stock Exchange has created a Blockchain Committee which will prepare experimentations with blockchain-based trading (19). In the meantime, Malta got its first bitcoin ATM (20).
Blockchain can really transform the way governments, companies and markets work. The use cases go far beyond digital currencies like Bitcoin. Blockchain provide an opportunity to establish a strong system for digital identity. Thanks to its embedded cryptography, it represents a secure way to manage digital while protecting users’ personal information (e.g. health and criminal records). Blockchain can also be used for authenticating physical items (e.g. real estate, machines, animals). The objects are paired with a corresponding digital token that can be used to digitize supply chain management, intellectual property, and fraud detection.
Blockchain technology can transform inter-organizational data management. It is less about maintaining a database, and more about managing a system of records. For instance, Sweden’s land registry authority started using blockchain technology for recording property transactions. Moreover, data recorded on decentralized digital ledgers could be admissible as evidence in court. Self-executing blockchain-based smart contracts could even make courts redundant. With Initial Coin Offerings, blockchain is also disrupting the way startups raise funds.
The Dutch government aims to take the lead in terms of automation. It took several initiatives to facilitate robotized activities in the Netherlands. The government made electronic invoicing compulsory for new contracts with the central government, starting 1 January 2017 (21). It allowed drone pilots to apply for a light permit for operating unmanned aerial vehicle weighing no more than 4 kg (22). It simplified the legal framework for testing self-driving vehicles on Dutch public roads (23, 24).
Emerging technologies such as robotics, automation and cognitive computing will transform the workforce. Most public-sector jobs could be automated by 2030. One of the key drivers behind the rise of robot workforce in our public services is, of course, financial. Self-driving vehicles would make it much cheaper to run public transports. Smart contracts, Artificial Intelligence, Machine Learning, Application Programming Interfaces and Robotic Process Automation are key enablers to create public services that can run by themselves (25). For instance, electronic invoicing makes it possible to get rid of costly and time-consuming manual handling of invoices.
Although the international debate about innovation and the potential impact on competitiveness has become fiercer in recent years, governments are already starting to explore the new opportunities. The use cases for new technologies are plentiful. IoT can help to reduce traffic jams, Artificial Intelligence is promising way to address skill shortages, transparent digital ledgers are key to avoid the development of imbalances in the real estate sector, and blockchain can strengthen the financial sector. The list of opportunities to use innovative technologies to improve public policy is endless. Let’s keep exploring it.
Photo credit: James Cridland, Flickr