one key element for the diffusion of innovations is the availability of adequate human capital, especially in view of the markedly knowledge - intensive nature of the current innovation process. a highly skilled and well - trained workforce is not just a productivity driver per se. it is a necessary condition both for the adoption of new technologies in the first place, and for the effective unfolding of their effects on firms ’ productivity. • supporting investment in human capital is therefore another crucial policy aim. the education system needs to provide students with a continuously updated set of skills ; to make them alert and adaptable to knowledge - based innovation ; and to enable them, ultimately, to make the most of the fast changing demands of the labour market. designing an effective education system, including lifelong learning opportunities, and providing the right incentives to teachers and students alike, should also therefore be very much on everybody ’ s agenda. designed by the printing and publishing division of the bank of italy

navigate the early stages. their development can be supported by policies, such as tax breaks ; one must acknowledge, however, that here policy can do little, at least directly, if firms continue to have little appetite for such services. • reallocation inevitably also depends on the process of creative destruction that pushes unviable firms out of the market. sound insolvency regimes are required to ensure fast, effective and fair liquidation and reorganisation procedures, thus preventing assets from becoming trapped in unproductive uses. this is a difficult issue, as in many societies financial default is traditionally associated with social stigma and a sense of personal failure. the length and wastefulness of bankruptcy procedures is also an issue in some jurisdictions ; italy is a well - known example. minimising the trauma and cost of bankruptcy for both debtors and creditors should be the key priority for any insolvency law reform. in an ideal world, default would be synonymous, not with failure, but with a fresh start and a clean slate. • labour market institutions are also central to ensuring that the reallocation of labour resources can happen in a reasonably smooth way, while protecting workers from socially unacceptable insecurity. societal values may differ somewhat in this respect across the world ; we europeans pride ourselves on a model that offers a high degree of social protection. this need not be a brake on labour reallocation, however, if protection is properly designed. the key is finding the right mix between protecting workers and protecting existing jobs. in societies that treasure social protection, effectively and reliably ensuring the welfare of workers that lose their jobs, while preserving the incentives for them to search for new job opportunities, is an essential precondition for allowing the labour market to adapt. • while some reallocation across firms and industries is necessary for increasing productivity economy - wide, the diffusion of innovation among existing firms is also extremely important. in many cases, it can be less disruptive, painful and polarising than reallocation. • fast technological progress, especially if coupled with network externalities, can easily generate winner - takes - all dynamics, which in turn may further increase productivity gaps across firms and raise difficult competition issues. laggards may be discouraged from investing in r & d, since they lose the hope of competing with the top performers ; leaders may divert resources from innovation to unproductive uses, such as defensive strategies for maintaining their rent. under the right conditions, diffusion can mitigate such effects. •