The IPL newsletter: Volume 7, Issue 140

Social Capital, Innovation and Growth: Evidence from Western European Countries

I. Semih Akçomak and Bas ter Weel, MERIT

This paper investigates the interplay between social capital, innovation and economic growth in the European Union. The paper identifies innovation as an important mechanism that transforms social capital into economic growth. In an empirical investigation of 102 European regions in the period 1990-2002, the authors show that higher innovation performance is conducive to economic growth and that social capital affects growth indirectly by fostering innovation. The estimates suggest that there is only a limited role for a direct effect of social capital on economic growth.

Global Flows of Talent: Benchmarking the United States

The Information Technology and Innovation Foundation

This report benchmarks flows of highly-skilled people to the United States against similar flows to seven other high-income countries: Australia, Canada, France, Germany, Japan, New Zealand, and the U.K. The report finds that while many other nations are making it easier for talented immigrants to enter their country, either as students or workers, the United States is struggling to decide what to do. The report then compares how national immigration policies – permanent, temporary, and student – foster or constrict these flows. All seven nations in the comparison group are liberalizing their immigration policies for the highly-skilled, although some more than others. Finally, the report suggests several broad policy recommendations that the United States should consider to ensure that it not only compete effectively for talent in the short-term, but also lead the world toward a global system for developing and using talent that is beneficial for everyone over the long-term.

Small Business Survival Index 2006

Small Business and Entrepreneurship Council

This index ranks the 50 states and District of Columbia according to some of the major government-imposed or government-related costs affecting investment, entrepreneurship, and business. The factors consider range from a wide variety of tax mechanisms, health care policies, cost of living, crime rates, and much more. The Small Business Survival Index provides a measure by which states can be compared according to how the state and local governments treat small business and entrepreneurs. In essence, it is a comparative measure of economic incentives relating to government policies: the lower the Small Business Survival Index number, the greater the incentives to invest and take risks in that particular state.

Competitiveness Index: Where America Stands

Council on Competitiveness

The U.S. has stimulated export-led growth around the world while continuing to attract the largest share of foreign direct investment. The total stock of foreign direct investment in the U.S. is now $1.6 trillion, about twice that of the next largest recipient and more than six times as much as China. Between 1986 and 2004, the U.S. received more annual flows of foreign direct investment than any other country in the world. However, this expansion has been funded primarily through rapidly increasing foreign debt, coupled with high consumption and a return to federal budget deficits, the report cautions. Such imbalances should raise warning flags for the future of American competitiveness and global economic stability, which the study discusses in depth. The report benchmarks two decades of U.S. economic data against emerging global economies. It confirms the U.S. has among the highest levels of productivity and standard of living, making it the most globally competitive among the world’s large economies.

This issue marks the introduction of a new section, the Policy Digest, which summarizes the key policy implications of a recent piece of innovation-related research or policy report.

Here or There? A Survey of the Factors in Multinational R&D Location

Thursby and Thursby, National Academies Press

The primary goal of this study is to identify and rank in importance the factors that affect firm decisions on the location of research and development (R&D) facilities. The survey of this issue was originally proposed by the Government-University-Industry-Research Roundtable (GUIRR) of the U.S. National Academies out of a concern that policy discussions be informed by empirical data rather than anecdote. This document is the result of a survey of over 200 multinational companies across 15 industries with head offices in either the United States or Western Europe. Nearly 90 percent of the respondents have R&D facilities located outside of their country of origin, and for roughly 20 percent of the firms more than half of their technical employees are located abroad. The results of the survey confirm the dominant arguments in current innovation and firm-location literature. That is, that the quality of human capital and the depth of local talent are the primary drivers of location decisions in developed markets.

The responses to survey questions regarding the location of current or planned R&D facilities contravene the notion that these facilities are increasingly being located in developing economies (such as India). Overwhelmingly, US firms are more likely to invest in Western Europe than in an emerging market, and vice versa. However, when asked about planned facilities, there is evidence of a small, but significant, movement towards the developing economies. This result leads the authors to conclude that ‘in the near future’ there will be an expansion of R&D activities into developing markets, with a corresponding contraction in developed economies. Significantly, over 75 percent of respondents indicated that the R&D facility under discussion was part of an expansion in R&D activities, rather than a relocation of R&D. According to the results, more relocation occurs within the home country than towards other countries.

The factors that affect the decisions regarding R&D location are quite complex and often vary depending on whether the site is in a developed or developing economy. Regardless of R&D location, four factors stand out: output market potential, quality of R&D personnel, university collaboration, and intellectual property protection. The most important driving factor for firms locating in developing economies is the growth potential of the market, followed by the quality of R&D personnel. Tied for third place were costs (net tax breaks), expertise of university faculty, and ease of collaboration with universities. The quality of intellectual property protection in these economies tended to be a detractor.

In developed economies both the quality of R&D personnel and the quality of IP protection were cited as the most important locational factors. The expertise of university faculty and the ease of collaboration with universities also ranked high on the list of driving factors. Policy makers can draw some important lessons from these results. First, it is clear that the quality of inputs is the most significant determinant of R&D location decisions. Therefore, while costs (i.e. taxes) may be higher, developed economies still have a comparative advantage in R&D because of the quality of personnel. This is also significant insofar as developed economies compete with one another for R&D facilities. These results suggest that the ‘winners’ of the R&D location contest will be those countries (and the jurisdictions within them) that can maintain a superior quality of talent in both the private and public research sectors.

This study provides valuable evidence to support policy makers in their effortss to attract and retain R&D facilities by opening a window into the location decisions of R&D intensive multinational firms. While it suggests that developed economies still have an advantage over developing economies in this arena, this advantage is not guaranteed over the long term, nor can it be maintained without strategic investments and interventions.