Boosting Access to Finance Helps Firms Survive Covid-19, says Valentina Meliciani of Luiss University

An interview with Valentina Meliciani, Economics Professor at Luiss University, Rome


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Valentina Meliciani is Professor of Applied Economics at Luiss University in Rome, Italy. She has a PhD from Sussex University in the UK and specialises in the economic consequences of innovation in the field of productivity. Meliciani says investment in intangible assets such as branding and marketing will help businesses come through the coronavirus pandemic, and that banks and governments must ensure finance is available.

Productivity has become a pressing concern among economists across Europe in recent months as nations try to contain the impact of Covid-19. Previous economic crises have shown that businesses tend to scale back on investment and conserve cash in times of uncertainty. So how can business owners and managers boost productivity at a time when they are likely to be mindful of costs? In this special report on productivity, Soldo speaks with leading European economists and business specialists to find the solution.

 

Valentina Meliciani, an economist at Luiss University in Italy, says investment is the major determinant of innovation, growth and employment. This doesn’t just mean investment in physical infrastructure, but also allocating resources towards intangible assets such as R&D, design, marketing and advertising. She believes workers that have efficient technology will be more productive, but that they also need to be taught how to use it correctly.

“Productivity is the major driver of long term economic growth. Output is cyclical and may go up and down depending on demand. But in the long run what drives GDP growth is the capability to use new technologies and to adapt organisations to changing trends. Businesses need new equipment and infrastructure to stop them becoming stagnant. But if they do not have the capability to use the technology in the best way possible, then tech advancements alone will not provide any benefits.”

Of course, many businesses will find it hard to justify spending money at a time of economic uncertainty. The Covid-19 pandemic has already hit overheads hard and scientists are forecasting that we may be living in the shadow of the pandemic for some years to come. In this sense, innovation is likely to be the first source of cuts as businesses look to make cost savings.

The current financial situation is full of opportunities for those willing to accept a bit of risk

But Meliciani believes that for firms to overcome a crisis, innovation is fundamental. She says governments and banks must play their part to support growth. Bank lending to businesses must be a priority, while governments should look at what they can do to increase venture capital, which is an essential form of funding for start-ups and has been a strong driver of productivity in the US.

“People might be more risk averse after this crisis, so it may be harder to find venture capital. But start-ups need access to funding at an early stage and also later when they want to grow. We need to provide the right fiscal incentives to encourage this. Actually, the current financial situation is full of opportunities for those willing to accept a bit of risk. Bank interest rates are at a record low so investors will not be making money having their money sitting in a bank account. If we can find ways to encourage the distribution of this money, it would be a win-win situation. It would give companies the resources to invest in new technologies and investors could find good earning potential.”

In Italy, Meliciani says the situation is very precarious with one in three firms in danger of going bankrupt. But the furlough schemes that many countries have put in place, which subsidises part of workers’ salaries if they had to temporarily stop work due to lockdown, should help avoid a long-term crisis. In the UK, the Government has announced businesses will be paid a £1,000 bonus for every furloughed employee they bring back to work, in the hope it will reduce unemployment.

The importance of global value chains

Much has been written about the part of global value chains (GVCs) as drivers of productivity growth. GVCs simply refer to different parts of a business being produced in various territories across the world. For example, a firm is likely to do the design and marketing in their home country but outsource production processes to China. It gives firms the flexibility to relocate each stage to where it can be done most efficiently, which will increase overall productivity in the production of the final product.

Meliciani argues that although participation in GVCs is beneficial for firms, gains are unevenly distributed between participating countries. Firms that invest in intangible assets such as R&D will get a much larger share of the value of the goods overall.

“Look at Apple for example. Apple is producing a very small part of the final product, but is getting more than 50 per cent of the total value of the final product. Chinese firms are understanding that it is important to upgrade their position in GVCs; to move from basic tasks such as assembling the goods or producing simple components to producing more value-added activities. Those that are able to do that will have higher economic growth. So it’s important for countries to benefit from the capability of GVCs by upgrading the production process.”

There is concern about technologies substituting labour, particularly with the rise of automation. Technology changes the types of tasks workers do, and there will be a loss in certain occupations as processes are automated.

Meliciani says economic thinking has moved away from using the terms skilled and unskilled labour and now distinguishes between routine and non-routine tasks. “You can have routine tasks in intellectual labour. Parts of accounting, for example, could be easily done by machine using artificial intelligence. So intellectual jobs might be substituted by machines. But this creates opportunities in non-routine occupations. Maybe there will be a rediscovery of artisan work to adapt to specific tasks required by the customer. So it’s a matter of guiding the new generations towards value-added skills that cannot be substituted and where human activity still plays an important role.”

There will be a rediscovery of artisan work to adapt to specific tasks required by the customer

New opportunities

Meliciani adds that all crises create opportunities. The Covid-19 pandemic has taught us that we can overturn the structure of the workplace. While we’ve learned that some activities require physical proximity to get the best experience, for example teaching, there are activities that can be done in a very productive way without the physical interaction.

“Workers can be productive working from home. So this is an opportunity to reorganise production. Companies should have a rotation where workers switch between coming into the workplace and doing their tasks from home. This would solve problems of heavy traffic at peak hours. There are also some risks. It is very difficult to monitor work done at a distance but I’m noticing the problem is more the opposite. The amount of work firms ask people to do when they are at home is much larger than when they were at the workplace. People may end up working longer hours because they find it difficult to switch off.”

Meliciani’s key conclusions:

  • Investment in intangible assets such as R&D, design and advertising will help firms stay competitive
  • Governments and banks must play their part to support growth by increasing access to finance
  • Firms must look at their part in the global value chain and spot where they have the potential to add value
  • Artisan work could make a resurgence amid the rise of automation
  • The structure of the workplace will be transformed by Covid-19, with workers switching regularly between the office and home

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