R&D Tax Subsidies are ‘Desperately Needed’ to Boost Productivity, says Torben Schubert of the Fraunhofer ISI

An interview with Torben Schubert, Economics Professor at the Fraunhofer ISI

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Torben Schubert is Deputy Head of the Competence Center Innovation and Knowledge Economy at the Fraunhofer Institute for Systems and Innovation Research ISI. He is also an associate professor at the Center for Innovation, Research and Competence in the Learning Economy (CIRCLE) at Lund University in Sweden. He specialises in quantitative empirical analysis of innovation-related topics and strategies, and believes investment in research and development is key to company success.

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.

Torben Schubert, Deputy Head of the Competence Center Innovation and Knowledge Economy at Fraunhofer ISI in Germany, believes the only sustainable source of economic growth in the long run is productivity growth. He argues governments must prioritise boosting productivity if they are to survive the economic fallout of Covid-19.

The role of productivity for economic growth was pioneered by US economist Robert Solow. In his 1956 work A Contribution to the Theory of Economic Growth, he showed that long-run growth can only be sustained by increases in productivity.

Schubert says this work set the bar for economic thinking, but he believes investments into human capital and R&D should now be included as essential for growth.

“Today we know that capital accumulation – or simply growing populations and having more people in your economy – will not lead to per capita growth in the long run. The question is: where does productivity growth come from? It has a lot to do with investments into human capital and expanding technological opportunities. To put it simply, tech progress is essential for productivity growth, and productivity growth is the only source of economic growth.”

For firms, this means investing in research and development (R&D). Schubert thinks tax-based subsidies are “desperately needed” in many countries, including Germany, to encourage firms to invest more money into research. He adds this is even more critical now with the onset of Covid-19. His concern is that R&D is the first area where businesses will cut back as they adjust to the economic fallout of the pandemic.

“When firms are hit by severe crises, the first thing they do is cut back on things not absolutely vital. Unfortunately innovation appears something dispensable in the short term. But innovation is what will keep firms alive in the long run. Innovation should apply to any company. It could simply involve an employee setting a little of their time aside to improving a process inside the firm,” he says.

Measuring productivity

Schubert thinks the pandemic will have a short-term effect on productivity figures but he’s not sure of the long-term consequences.

Lockdown meant many people were not working or producing anything, even though they were still employed. Many countries introduced furlough schemes, paying part of workers’ salaries if they had to temporarily stop work due to lockdown.

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 encourage companies to keep workers on.

Schubert says firms who take advantage of this will find they are able to scale up production quickly again when they are ready.

“When this crisis ends those firms will still have their employees in place. They haven’t lost their human capital. They will be very fast in scaling up production because they won’t have to go to the labour market to find new, qualified employees. Germany’s experience in the financial crisis showed that countries that introduced furlough schemes will get a headstart in their economic recovery.”

Many economists say part of the reason for low productivity is simply in the way it’s measured. Hal Varian, a former microeconomics professor at Berkeley who is now chief economist for Google, says productivity numbers only include paid goods and services. But lots of hi-tech developments have taken place in the past decade that allow users to do things more efficiently for free. Take, for example, online tools that can instantly translate conversations or apps that allow companies to track the movement of workers. These aren’t included in productivity figures but have boosted efficiency for companies.

Schubert agrees there are substantial issues in productivity measurement. He says national statistics don’t take into account increases to the quality of products. “In the 1960s, the economist Gordon Moore observed that computer chips increased their capacity every 18 months, but they did not double in prices every 18 months. The price stayed roughly the same. But of course chips got faster. This isn’t reflected at all in productivity, which puts the emphasis on the price upfront. Another example today would be your mobile phone. When you buy a phone, you are essentially getting an unfinished product. There are continuous updates to the operating system, which is something you don’t pay for. So there’s continuous improvement to the technology you have in your hand, but the work that goes into it will not be reflected in any form of productivity statistics.”

Impact of Covid-19 on workplaces

Many commentators have said the coronavirus pandemic will lead to a shift to more home working. Schubert agrees that travel between offices will be reduced substantially in the near-future and that companies must invest in the correct IT infrastructure to adapt to remote working.

He says that in Germany, the buzzword among economists is i4.0 – a term used to describe the convergence of IoT-driven technologies, augmented decision making and advanced automation. “Very few companies are currently there but these developments could lead to huge changes to our lives in 20 years’ time – particularly in countries that have a stronger emphasis on manufacturing rather than services. The Covid-19 pandemic will highlight that not everything needs to be done in person. So we could see this technological revolution come sooner if companies are able to invest and take advantage of the changing world.”

Schubert’s key conclusions:

  • Companies who have retreated from innovation should rethink their strategy; Covid-19 will be painful, but R&D and innovation should remain very high on the agenda of firms
  • Governments should consider more tax subsidies to encourage firms to invest in R&D
  • New machinery will not necessarily give companies a head start – employees must be taught how to use it effectively
  • There are substantial issues in the way productivity is measured, as the figures don’t take into account increases to the quality of products, such as free software upgrades for smartphones
  • A technological revolution, dominated by artificial intelligence, could be brought forward by the pandemic as more people work remotely

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