sou · GWB3105EN · 2009-01-01 00:00:00 — Staff training most commonly focuses on business administra- tion, health care and IT.111 The focus of at least a part of the staff training indicates that the investment in training is complementary to other investments, particularly IT investments. staff training has been shown to increase the positive effects of IT investments on productivity growth.112 Staff training is not included in measures of education level that are often used for estimating the significance of education for productivity. Instead staff trainings contribution to productivity is included in the total factor productivity measure. 4.3.3Total factor productivity has many underlying factors In total factor productivity has accounted for not quite half of the increase in labour productivity in the last 25 years. Total factor productivity growth was considerably higher in after 1995 than it was in the 1980s (figure 4.7). Total factor productivity growth has increased in both and the since the 1980s. The opposite has occurred in EU countries, with total factor productivity growth falling. 108Statistics [g], (/templates/Product8989.asp). Other costs were labour, , accommodation and food. 109National Agency for Higher Education [2004]. 110Ericson, T. [2004]. 111Statistics [2006a]. 112Gunnarsson, G., , E. & Savvidou, E. [2004]. The Long-Term Survey 2008 Figure 4.7 Total factor productivity in the business sector, annual change in , the and the EU 1980–2004 Source: Timmer, M. and others. [2003], calculations. Research points to a number of different factors that may help to explain total factor productivity growth: 113 the emergence and growth of information technology level of internationalisation and technology transfer competition and deregulation of product markets structural change and organisational changes. 113 See for example, , D., Ho, M. & Stiroh, K. [2007], SOU 1991:82, Appendix 6 to the Long-Term Survey 2008 (SOU 1991:14), and [2005]. The Long-Term Survey 2008 The large differences in total factor productivity between different industries indicate that industry specific characteristics may affect total factor productivity growth. As total factor productivity in the statistics is calculated as a residual item, there are also other explanatory factors in addition to the above. One example already mentioned is that staff training is not captured by the measure of labour force composition. Research and innovations increase total factor productivity Innovations that improve products or lead to new products or to new, more efficient methods of production contribute to the growth of total factor productivity by reducing the cost of using the inputs and capital. It is unclear exactly what determines a countrys innovative capacity, but the and the EU use various indicators to try to capture countries innovation capacity. The most common indicator is companies investment in research and development (R&D). Results from various studies show that invests more in knowledge and R&D as a percentage of GDP than does any other country. In 2005 companies in invested the equivalent of more than 3 per cent of GDP in R&D, the highest investment intensity of any country. is also in the forefront with respect to return on investment in the form of patents, etc., but is ranked somewhat lower in high technology exports.114 It is also important to point out that in international rankings, has had a high return in the form of high growth in total factor productivity in the last ten years . Even though manufacturing companies are responsible for a substantial part of R&D investment, knowledge intensive service industries, not least business services, may play an important role in the spread of innovation in the economy. First, the business services industry itself is a source of innovations, second, it contributes to the spread of information and third, it helps companies – particularly smaller ones – get access to the skilled workers they themselves are unable to employ since they only need a few working hours to acquire the needed skills. 114 [2007e], page 216, During 1996–2005, growth in exports of high-technology goods outstripped that of total manufacturing in all countries except and . The Long-Term Survey 2008 Internationalisation contributes to the transfer of knowledge and technology Even though invests a relatively large amount in research, the investment makes up only about 1 per cent of world invest- ment. By far the largest part of new knowledge is thus generated outside and has to be imported in order to help increase productivity here. For many countries, technology transfer is the main source of productivity growth and small countries are more dependent on foreign technology than big countries.115 Trade and direct investment affect the transfer of knowledge between countries. Companies that export are bigger and more productive than non-exporting companies. Exporters are also more capital intensive and pay higher wages. Exporting companies were already more productive before they began exporting, but there are also indications that exports lead to higher productivity in companies.116 Exporting companies get access to new technology and new production methods from competitors through trade. In the same way, more import competition can contribute to higher productivity, but the import of inputs will also contribute to a potential increase in the inflow of knowledge.117 Like trade, direct investment is important for technology trans- fer between countries. Direct investment makes the transfer of group-specific knowledge possible between different companies in the same group. Productivity in multinational companies is higher than in companies with production in only one country. Internationalisation also means that new rapidly growing industrial countries such as and have been integrated into the world economy. The new industrial countries competitive advantages are primarily in production that uses a relatively large amount of low-skilled labour. The expansion of production in these countries has contributed to greater demand for more highly skilled labour in Sweden.118 This, in turn, has contributed to greater productivity. 115Keller, W. [2004]. 116Girma, S., , D. & Kneller, R. [2004]. P. and others [2007]. 118Hansson, P. [2005]. The Long-Term Survey 2008 Entrepreneurs exploit new business opportunities Entrepreneurship is a broad concept used to explain how new business opportunities are exploited. A basic tenet of economic theory is that established companies do not want to abandon well- tried technology and products and are disinclined to take the risks associated with the introduction of new ones. Therefore, entre- preneurs and new companies are important for productivity growth. It is not only the increase in input factors or their greater availability that propels growth, but also the entrepreneurs ability to combine input factors in a way that generates more value. This may be new combinations of for producing new products or new markets in which to sell the products. If this is so, entre- preneurship should be made an independent factor of production in the growth function.119 The definition of entrepreneurship varies from study to study and entrepreneurship is thus often used as a collective concept, for example, for new companies and small companies. According to a research review, entrepreneurs are better at innovating and have a small, but significant, effect on both labour productivity and total factor productivity.120 Studies of Swedish companies also show that entrepreneurs make a positive contribution to productivity growth, particularly total factor productivity and particularly over a longer period.121 Positive correlation between competition and productivity According to most studies, competition has a positive effect on innovation and thus on technological development and produc- tivity. leads to greater productivity primarily through three channels: Allocation efficiency – competition means that the most productive companies survive and thus contribute to a more efficient distribution of the economys production resources. 119See Henrekson, M. & Stenkula, M. (2007) for a discussion of the role of the entre- preneur. 120Van Praag, M. & Versloot, P. [2007]. 121Henrekson, M. & Stenkula, M. [2007] and , C. & , K. [2007]. The Long-Term Survey 2008 Production efficiency – competition requires companies to use the most effective production technology in order to survive. X- inefficiency thus decreases. Dynamic efficiency – competition provides companies with the incentive to innovate in order to maintain their competitiveness. Empirical studies have found a correlation between the degree of competition and productivity.122 According to most studies, competition has a positive effect on innovation, even though some results point to a hump-shaped correlation between competition and innovation.123 In the 1990s a major liberalisation and reform of the regulatory framework were carried out in in order to increase competition in various parts of the economy; see chart 4.1. Not least, changes were made to the regulatory regimes for transport, postal and telecommunications services, and electricity production. The changes probably contributed to the rapid productivity growth that has taken place in these industries since the beginning of the 1990s. In addition to the regulatory reform, the Competition Act was strengthened and the Public Procurement Act was introduced, which, like EU membership, fostered competition in all industries. But in the 2000s, the pace of reform has moderated and since 2001, only two major reforms have been implemented. 122EU [2007]. 123OECD [2003], Aghion, P. & Howitt, P. [2005]. Good Productivity Growth The Long-Term Survey 2008 2006 Major reforms up to 2006 Taxi market liberalised. Freight market opened to Vin & Sprit monopoly separated from the national Note: In several markets the regulations have been changed several times and this figure shows the year when the liberalisation was initiated. is the Public Procurement Act Source: See, for example, SOU 2005:4. In many service industries, competition, not least international competition, has been and still is limited. To some extent, the very nature of the service may explain this; for example, some services must be consumed at the same time that they are produced. However, technological development, particularly in IT, has made increased competition in the service industries possible. Inter- national deregulation and agreements also promote more compe- tition. in the form of trade and direct investment in the service sector has also increased sharply in recent decades. However, substantial disparities among service industries remain. There is some empirical support indicating that reducing entry barriers in the service sector increases productivity, but the increase originates in manufacturing rather than in the service sector.124 Lower entry barriers in post and telecommunications 124 Nicoletti, G. & Scarpetta, S. [2003]. The Long-Term Survey 2008 have had a positive affect on the growth of total factor productivity in the industry, but there is no evidence that the same would also be true for other service industries.125 international competition in service industries may have an effect on productivity growth. There is some evidence support- ing the view that companies in importing a higher propor- tion of the total services they use have higher productivity than other companies have.126 However, the effect is modest. In the , off-shoring and outsourcing service production to other countries with lower costs has helped increase productivity growth in the United States.127 The result indicates that measures that promote greater inter- national competition in the service sector have a positive effect on productivity growth in the economy. Directive and judgments in the Court of will probably contribute to more international competition in several service industries in the future. This could, in turn, have positive effects on productivity growth. Productivity growth in the Swedish business sector has been good since the beginning of the 1990s from both a domestic and an international perspective. There are many indications that struc- tural factors such as the growth in information technology (IT), internationalisation, innovation and deregulation may account for the positive growth. An exceptionally robust increase in total factor productivity in the telecommunications products industry accounts for a substantial part of the productivity growth in the economy as a whole during this period. Productivity growth is determined by investment, labour force skills and technological developments. These in turn are influenced by such factors as the range and orientation of education and training; general conditions for companies and entrepreneurs; avail- ability of risk capital for research and development, and compe- tition. 125Inklaar, R., Timmer, M.P. [2008]. 126Hagsten, E., , S. & Karpaty, P. [2006]. 127Amiti, M. & , S-H. [2006]. The Long-Term Survey 2008 In addition, macroeconomic stability is of importance as it affects pressure to restructure and uncertainty. In many cases various factors may interact and strengthen each others effects. It has proved difficult to assess how much one individual factor affects productivity growth so a policy to promote good produc- tivity growth should take a broad approach and have as a general aim greater competition and free trade.128 The policy should aim at creating good conditions and a level playing field for companies and entrepreneurs. Facilitating research and innovation, not least by good access to labour with a post- graduate education, is also important. In addition, measures to increase competition, both nationally and internationally, are important, not least in the service sector. The approach should not only be broad, but also general, rather than focused on individual industries. The sectoral differences in productivity are substantial and they also vary over time. There is nothing to indicate that the public sector can foresee any better than the market which industries have the best productivity outlook in the long term. On the contrary, a policy aimed at favouring particular industries instead risks locking resources into industries that afterwards turn out to have weak growth. The increasing demand for services has led to a shift in employment to the service sector, a sector that has historically had a lower productivity growth than manufacturing. But owing to the growing role of services as an input in other production, the effect of this structural change on productivity in the economy as a whole is uncertain. Clearly, with a growing service sector, productivity growth there will be increasingly important for the economy. There is international competition in several service industries compared to manufacturing and international speciali- sation is less advanced. The nature of services accounts for this to some extent; for example, some services must be consumed in connection with production. However, with the development of information technology, an increasing share of services can be purchased internationally. Chapter 7 discusses the possibilities of increasing productivity in government services. Competition there has been low in the past but by opening these services to competition, new actors can contribute to the growth of the activity, both public and private. 128A newly published review by , K. [2008] argues that the most important lesson from European industrial policy is that free trade and competition rather than market intervention contribute to productivity growth. 5Economic Change and Adaptability economy has changed considerably in the those days approximately 75 per cent of employed worked in agriculture whereas today only about 3 per cent do (figure 5.1). Figure 5.1 Employment in various sectors 1850–2000 1850 1859 1868 1877 1886 1895 1904 1913 1922 1931 1940 1949 1958 1967 1976 1985 1994 Source: , O. & , L. [2007]. Economic Change and Adaptability The Long-Term Survey 2008 Economic change contributes to better productivity growth, but at the same time it may involve costs. Each transfer of production resources requires adaptability so that production resources are not idle. Low mobility causes unemployment and idle capital. The better the economy can adjust, the higher the pace of change can be in the economy. Therefore discussing adaptability is much more relevant than discussing whether or not the pace of change has quickened. Nevertheless, the issue of the pace of change often comes up in debates, not least in the context of increasing internationalisation. Developments in recent decades do not provide an entirely clear picture of whether the pace of economic change has increased. The result depends on the measure used as well as the periods compared. 5.1Alternative definitions of change. The Long-Term Survey 2008 uses the concept of change in a general sense. In order to analyse changes both between and within industries, we use two additional concepts (see fact box 5.1). 1.Structural change – production resources are moved between industries. 2.Employment dynamic – the number of jobs that are created or disappear at the enterprise or workplace level. In section 5.2.3, an additional concept is used for change that originates at the enterprise level, the business dynamic, which specifies new and closed down companies as percentages of the total enterprise stock. The Long-Term Survey 2008 Economic Change and Adaptability Fact Box 5.1 Definition of change Structural change can be defined by starting with the concept of structure. According to the National Encyclopaedia, structure is defined as the arrangement of and the relationships between the parts of a whole. Structural change may thus concern different levels in the whole, from the workplace to the economy divided into two sectors. , the definition of structural change is a matter of the level that is the starting point. The two extremes can be said to be either measuring only the change-over between the manufacturing, service and agriculture sectors or measuring all the changes down to when a factor of production changes its task in the individual workplace. In order to analyse both shifts between and within industries, the Long-Term Survey 2008 will use two concepts: 1.Structural change – Production resources are moved between industries measured at the two digit level in accordance with the Swedish Standard Industrial Classification (SNI).2 The reason for choosing the two digit level is that it is the lowest level at which the majority of the statistics used are available. 2.Employment dynamic – the number of jobs that are created or disappear at the company or workplace level. What is being measured is whether the workplace or the company is increasing or reducing its work force, not if an individual leaves a job and is replaced by someone else. 1Hjalmarsson, L. [1973]. 2SNI means the Swedish Standard Industrial Classification and is based on the EU standard NACE. Units of production such as companies and workplaces are classified under the activity conducted. The demographic trend, internationalisation and the increased demand for services all affect structural change and the employ- ment dynamic. The demographic trend means that demand is shifted to particular industries. Internationalisation increases competition and may lead to both more rapid and slower change. Increased demand for services leads to a rise in the service sectors share of the economy. As a rule, change leads to further change in an ongoing process. The previous change may bring companies both new opportunities and difficulties. Regardless of the reasons for the change, the effects will seem different in the long and the short term. The costs of the change will likely appear primarily in the short term, for example, in the form of unemployment, while the benefits will primarily occur in the long term, for example, in the form of lower prices and more innovation. Economic Change and Adaptability The Long-Term Survey 2008 5.2The pace of change is unclear The dramatic change in the employment structure in in the last 150 years is evidence that economic change is not a new process. But the question is whether change is more rapid now than before. This section describes the pace of structural change based partly on earlier studies and partly on new estimates. The description of the employment dynamic is based primarily on the results in one of the Survey's appendices Based on Swedish experience, it is impossible to reach any clear- cut conclusion on whether the pace of change has altered. Most of the studies used indicate that the pace of structural change increased in connection with the crisis in the 1990s, particularly when compared with the 1980s, but also with the 1970s. The pace of structural change is thought not to increase continuously but it has changed. The time series for the employment dynamic are shorter but they show considerable stability during the period, if the 1990s crisis is disregarded. 5.2.1The pace of structural change has varied Earlier Swedish studies have found that the pace of structural change has been relatively stable from 1960 to the mid-1990s.130 Our results for 1970 to 2005 indicate a higher pace of structural change during the 1990s and 2000s compared with the two preceding decades (table 5.1 in fact box 5.2). There appears to have been an upward shift in the pace of structural change but there is not a steady increase. Regardless of the measure used, it is clear that the pace of change was lower in the 1980s than it was in the 1970s and in the years 1990-2005. However, whether the pace of structural change was lower or higher in the 1970s compared with the years after 1990 is not as clear-cut. Figure 5.2 shows the results using one of the measures. It shows the percentage of hours worked and the value added that were shifted between sectors between 1972 and 2004. For example, the value 1.1 for the total hours worked in 2004 shows that in that 129Appendix 7 to the Long-Term Survey 2008 (SOU 2008:21). 130Lindmark, M. & , P. [2002] and , L., , O. & , L. [2000]. The Long-Term Survey 2008 Economic Change and Adaptability year, the industries that grew relatively did so by 1.1 percentage points at the cost of the contracting industries. Figure 5.2 Structural change measured as the percentage shifts, three year moving average, 1972–2004 Hours worked, excl L-Q Note: The values show the percentage of hours worked and the value added that were shifted between sectors between 1972 and 2004. Education, health and care and other social services are included in the industries L-Q under the Swedish Standard Industrial Classification (SNI). Source: EU KLEMS and calculations. Economic Change and Adaptability The Long-Term Survey 2008 Fact box 5.2 Measures of the pace of structural change Since both labour and capital are used in production, it would be interesting to study the changes that have occurred in the production structure due to each of these factors of production. However, the lack of data on capital stocks makes it difficult to analyse the change in the use of capital in various industries. This section therefore reports both data for hours worked and data for value added.1 Together they also provide a picture of the capital structure, since business services along with labour inputs and total factor productivity create value added. In the 1970s, there was a major expansion in the Swedish public sector. It affected the proportion of labour in various industries.