The IPL newsletter: Volume 19, Issue 390

NSF Announces $20 Million to Support the Commercialization of NSF-funded Research

SSTI Weekly Digest
The National Science Foundation (NSF) announced approximately $20 million in new funding through its Partnerships for Innovation (PFI) program. The PFI program offers NSF-funded researchers at institutions of higher education opportunities to connect new knowledge to societal benefit through translational research efforts and/or partnerships that encourage, enhance, and accelerate innovation and entrepreneurship.

How ICT Can Restore Lagging European Productivity Growth

Robert D. Atkinson, ITIF
Compared with the United States, Europe has had far smaller productivity gains from ICT. Although the contribution of ICT varies between European countries—only two Scandinavian nations (Denmark and Sweden) have gained more from ICT than the United States—other EU nations have been able to reap fewer benefits. This variation between countries, along with variation at the industry and firm levels, makes clear, however, that those countries, industries, and firms that do invest in and use more ICT reap significant benefits. The primary proximate cause for Europe’s limited gains is simply lower levels of capital investment in ICT. Since the 1990s, European countries have significantly lagged behind the United States in levels of ICT investment, both as percent of total fixed capital investment and as percent of GDP. And this is true not just of the ICT-producing sector itself. ICT-using sectors, primarily the service sector, have invested less in ICT than their counterparts in the United States. Productivity in European private-sector services grew less than half as fast as it did in the United States between 2006 and 2016, because the positive effects of ICT production didn’t spill over into use. This report examines EU and U.S. productivity trends; discusses why higher productivity is critical for the future of Europe; examines both the relationship between ICT and productivity in the United States and Europe, and major causes of EU lag; and lays out in further detail the eight key policy principles for attaining EU digital prosperity

TBED Book Review: Research Universities and the Public Good

Jason Rittenberg, SSTI Weekly Digest
Jason Owen-Smith, executive director of the Institute for Research on Innovation and Science (IRIS) at the University of Michigan and a researcher with work covered previouslyby SSTI, has written a book explaining the benefits of university R&D. Research Universities and the Public Good: Discovery for an Uncertain Future (Stanford University Press) provides an accessible argument for the peculiar benefits of universities’ approach to R&D. Owen-Smith’s explanation for why top research universities are strong at advancing the public good boils down to three structural elements. Universities are:

• Network sources — producing unique opportunities for collaboration and discovery;
• Community anchors — creating a lasting and location-bound presence to stabilize development; and,
• Connecting hubs — providing a point of common pass-through for a wide variety of actors.

The writing’s emphasis on examples and history makes the book a quick and easy read, while providing an opportunity to be interesting and, hopefully, persuasive to audiences without an academic or science policy background.

Still Walking the Lifelong Tightrope: Technology, Insecurity, and the Future of Work

Chris Brenner et al., Working Partnership USA
The economic insecurity fueling the current political climate underscores one of the key challenges of the complex economic restructuring the United States is experiencing. Despite low unemployment and more than nine years of unbroken economic growth, the majority of Americans remain anxious about their economic conditions and futures. The purpose of this report is to provide an updated analysis of the prevalence and causes of economic insecurity and inequality in our information economy. The report focuses on Silicon Valley, the epicenter of economic restructuring, but the lessons learned here have implications far beyond the region. It also outlines a range of solutions to insecurity and inequality—solutions that can be implemented at a local or state level, with an eye to widespread replication by communities across the country and/or eventual scaling up to the national level. For these solutions to be effective, however, they have to be built on an understanding of the rules and dynamics of the information economy—that is, able to ensure continued economic prosperity while addressing key structural features driving insecurity and inequality—and thus the report also discusses the key causes of economic challenges.

Regional Differences Accessing Finance in UK SMEs: Do They Matter?

Ross Brown, Enterprise Research Centre
In recent years, there has been a growing body of empirical evidence examining spatial variations in access to bank finance in UK SMEs. The overwhelming bulk of this work suggests a firm’s geographic location plays a crucial role its ability to access finance. Innovative and growth-oriented firms seem those most affected. Regions most adversely affected are peripheral and rural areas with sparse bank branch networks. The main causes of these disparities seem to be connected to the pervasive use of new automated lending technologies and the rapid decrease in the size of the UK bank branch network. The knock-on effect of these trends may be increasing the use of other forms of substitutive finance and increased levels of borrower discouragement within SMEs located in peripheral areas. From the evidence base reviewed, it would appear that regional funding gaps do exist and they do matter. The full impact of their effects on firm performance and wider economic growth remain unknown however.

Superstars: The Dynamics of Firms, Sectors, and Cities Leading the Global Economy

James Manyika et al., McKinsey Global Institute
There is much discussion about “superstar” firms and “superstar effects” in reaction to the rapid growth of very large global companies. This has been accompanied by a growing body of research examining various aspects and drivers of superstar effects in the economy. Yet questions remain and much of the evidence is still inconclusive as well as incomplete. This paper aims to fill some of the empirical and data gaps, take a global perspective and examine the issue beyond just firms. It assesses the extent to which a superstar effect can be observed in the global economy in three arenas—firms, sectors, and cities—and the dynamics, including churn and changing characteristics, in each of these arenas. It also examines what characteristics, similarities, differences, and linkages can be observed across firms, sectors, and cities and what economic effects and questions this raises for further research. The report concludes with some preliminary implications for leaders.

SELECTED FINDINGS

• Superstars exist not only among firms but among sectors and cities as well, although the report finds the trend most evident among cities and firms. Relative to their peers, superstars share several common characteristics. In addition to capturing a greater share of income and pulling away from their peers, superstars exhibit relatively higher levels of digitization; greater skilled labor and innovation intensity; more connections to global flows of trade, finance, and services; and more intangible assets than peers. Yet there are some variations. There are higher churn rate among superstar firms compared with cities, indicating higher levels of persistence among superstar cities.
• Superstar firms are the top 10 percent of firms capturing 80 percent of economic profit among companies with annual revenues greater than $1 billion.
• Over the past 20 years, the gap has widened between superstar firms and median firms, and also between the bottom 10 percent and median firms. Today’s superstar firms have 1.6 times more economic profit on average than superstar firms 20 years ago. Today’s bottom-decile firms have 1.5 times more economic loss on average than their counterparts 20 years ago, with one-fifth of them (a growing share) unable to generate enough pretax earnings to sustain interest payments on their debt. The growth of economic profit at the top end of the distribution is thus mirrored at the bottom end by growing and increasingly persistent economic losses, suggesting that in addition to firm-specific dynamics, a broader macroeconomic dynamic may be at work.
• Superstar firms are diverse and getting more so over time. They come from all sectors and regions and include global banks and manufacturing companies, long-standing Western consumer brands, and fast-growing US and Chinese tech firms. The sector and geographic diversity of firms in the top 10 percent and the top 1 percent by economic profit is greater today than 20 years ago. The 575 superstar firms in this analysis exhibit widely acknowledged markers of successful firms: they include 315 of the world’s 500 largest firms by market capitalization, 230 of the world’s 500 most valuable brands, 188 of the world’s 500 best employers (as rated by their employees), and 53 of the world’s 100 most innovative companies.
• For sectors, the report analyzes 24 sectors of the global economy that encompass all private-sector business establishments. It finds that 70 percent of gains in gross value added and gross operating surplus have accrued to establishments in just a handful of sectors over the past 20 years. This is in contrast to previous decades, in which gains were spread over a wider range of sectors. Superstar sectors over the past 20 years include financial services, professional services, real estate, and two smaller (in gross value-added and gross operating-surplus terms) but rapidly gaining sectors: pharmaceuticals and medical products, and internet, media, and software.
• Today’s superstar sectors share one or more of the following attributes: fewer fixed capital and labor inputs, more intangible inputs, and higher levels of digital adoption and regulatory oversight than other sectors. With the exception of real estate, superstar sectors are two to three times more skill-intensive than sectors declining in share of income in the G-20 countries. In addition, superstar sectors tend to have relatively higher R&D intensity and lower capital and labor intensity than other sectors. The higher returns in superstar sectors accrue more to corporate surplus rather than labor, flowing to intangible capital such as software, patents, and brands. Though some superstar sectors have stronger multiplier effects on economic growth than declining sectors, their gains are more geographically concentrated compared with sectors in relative decline. For instance, gains to internet, media, and software activities are captured by just 10 percent of US counties, which account for 90 percent of GDP in that sector.
• For cities, the report analyzed 3,000 of the world’s largest cities, each with a population of at least 150,000 and $125 million GDP (adjusted for purchasing power parity), that together account for 67 percent of world GDP. Fifty cities are superstars by this definition, among them Boston, Frankfurt, London, Manila, Mexico City, Mumbai, New York, Sydney, Sao Paulo, Tianjin, and Wuhan. The 50 cities account for 8 percent of global population, 21 percent of world GDP, 37 percent of urban high-income households, and 45 percent of headquarters of firms with more than $1 billion in annual revenue. The average GDP per capita in these cities is 45 percent higher than that of peers in the same region and income group, and the gap has grown over the past decade.
• Superstar cities share some characteristics in addition to their economic size and incomes. Of the 50 superstar cities, 31 are ranked among the most globally integrated cities, 27 among the world’s 50 most innovative cities, 26 among the world’s top 50 financial centers, and 23 among the world’s 50 “digitally smartest” cities. Twenty-two are national and regional capitals, while 22 are among the world’s largest container ports. At the same time, a notable number of superstar cities (and not just the city-states) have a disproportionate share of their national income given their share of the population. In addition to the 50 global superstars, there are more than 75 regional superstar cities that are smaller but share many of these characteristics and could become global economic hubs in the future.
• The report finds linkages between firms, sectors, and cities that may be reinforcing superstar status and that raise the question of whether a “superstar ecosystem” exists. For example, superstar sectors generate surplus mostly to corporations rather than to labor, driving a geographically concentrated wealth effect in superstar cities with a disproportionate share of asset management activity and high-income-household investors. Labor gains from superstar sectors are also concentrated in narrow geographic footprints within countries, often in superstar cities and accrue mostly to high-skill workers. But counter observations also raise questions. For example, why do some superstar sectors but not others produce superstar firms? What explains superstar firms in declining sectors? Why do some superstar sectors and firms thrive despite their low digital intensity, low R&D intensity, or low levels of cross-border trade and investment activity?

Please forward this newsletter to anyone you think will find it of value. We look forward to collaborating with you on this initiative. If you would like to comment on, or contribute to, the content, subscribe or unsubscribe, please contact us at ipl.munkschool@utoronto.ca.

This newsletter is prepared by Jen Nelles.
Project manager is David A. Wolfe