First European Conference on Moving the Frontier of the Macroeconomic Modelling of Research & Innovation
28 September 2020
Elmer Sterken, economist, University of Groningen, member of the Coimbra Group Executive Board
It is something that academics consider to be an absolute truth: investment in research and innovation is beneficial to societies. In economic terms: there is a positive net return on investment in research and innovation. But in reality the returns are uncertain and sometimes take long to materialize. Yet we know that in advanced societies we need research and innovation to support productivity growth. That is why developed countries signed the Lisbon declaration to target total investment in research and innovation as a percentage of gross domestic product to three percent. Many countries do not comply to this target though. Total investment consists of both private and public investment, and in many cases public investment is disappointingly low. Political decision windows are typically shorter than the expected return terms. So from a policy perspective the main question is what a government can or must do? Are innovation policies beneficial to economic growth? And if so, which type of public policy is most effective? To that extent we need to model research and innovation in macroeconomic policy models and this is typically hard. The discussion is highly relevant to universities, because universities are the main producers of basic unfettered research and are in many cases dependent on government financing.
On 7 and 8 September 2020 the DG Research and Innovation of the European Commission organized an on-line conference on the development of modelling research and innovation in macro models. Hopefully this knowledge is used by central banks, ministries of finance and other government institutions involved in macro model policy advise. After an Opening Address by Director-General for Research and Innovation of the European Commission Jean-Eric Paquet the first speaker was Philippe Aghion (Harvard, LSE) who talked about the importance of labour to innovation. He showed that aggregate innovation is 4.5% lower due to labour market regulation for small and medium-sized firms in France.
In a next section Ufuk Akcigit (University of Chicago) talked about the relation between innovation via education and economic growth. The main takeaway is that education indeed is crucial to growth. Akcigit used Danish data on micro variables such as income, IQ, patents and innovation policy in a theoretical growth model. The allocation of talent is crucial to innovation. A country really benefits from stimulating talented people to get a PhD and to become active as a researcher. This typically holds in countries with relatively low numbers of PhDs. In more advanced countries immigration of high-skilled talented people should be a policy objective.
The other day John van Reenen (LSE, MIT) shared his thoughts on how to model innovation in macro models. This should be based on serious economic theory (so-called endogenous growth theory) using micro data on firm behavior. Following the work by Diego Comin (Darthmouth College) on distinguishing two types of government policies: (1) pushing the fundamental frontier of knowledge (by stimulating unfettered basic research), and (2) adaptation of existing technologies, Van Reenen stressed the importance of offsetting misallocation of technology between firms. He also made clear that improving management structures of corporations is really beneficial for productivity.
Many other speakers contributed to the topic and illustrated various – sometimes complicated – approaches to model innovation. The meeting is the first in a series of events to be organized by the DG on this topic. Hopefully national policy institutions will listen to the recommendations and increase the budgets for research and innovation in the future. It will be essential to societies at large and universities in particular. For all Coimbra Group members interested in this field: Chief Economist Roman Arjona of DG Research and Innovation is the contact person. For an overview of the meeting see: https://ec.europa.eu/info/events/moving-frontier-macroeconomic-modelling-research-innovation-2020-sep-07_en