Improving EU productivity. The role of ICT, human capital and intangible assets. Paper by Matilde Mas in I Workshop KIIS. Valencia Nov15

1. [ 1 ]
Improving EU productivity
The role of ICT, human capital and intangible assets
Matilde Mas
Universitat de València and Ivie
I Workshop KIIS
Knowledge, Innovation and Internalization Strategies
Facultad d´Economia, Universitat de Valencia
Valencia, 19th-20th November
This project has received funding from the European Union’s Seventh Framework Programme for
research, technological development and demonstration under grant agreement No. 612774

2. [ 2 ]
Labour Productivity growth is key for per capita income growth
“Productivity isn’t everything, but in the long run it is almost everything”.- Paul Krugman
y = 1,01x + 0,21
R² = 0,90
‐1
0
1
2
3
4
5
6
‐1 0 1 2 3 4 5 6
Per capita income growth (percentage), 1950‐2014
Labour productivity growth (percentage), 1950‐2014
Figure 1. Labour productivity and per capita income, 1950-2014
Source: Total Economy Database, May 2015 (TCB)

3. [ 3 ]
Objetive
 To revise the behaviour followed by EU productivity
 From an international perspective, comparing the EU with 12 leading
economies of the world
 With a high level of industry disaggregation
 Focusing on the most recent period 2006-2013
 Making use of the highly disaggregated PREDICT database
 Searching for potential factors explaining its poor performance:
 The importance of the ICT industries
 Intangible investment
 R&D
 Human Capital
 Other intangibles (Organizational Capital and Training)

4. [ 4 ]
PREDICT and DICTA Projects
PREDICT:
Period: 2006-2012
Variables: GVA; Employment (nº of Workers); Labour Productivity; BERD; R&D Personnel; R&D
Researchers
Countries: EU-28, US, Norway, Switzerland, Japan, China, India, Korea, Taiwan, Australia, Canada,
Russia and Brazil
Level of Disaggregation (for details see below)
Focused on: ICT industries (OECD (2007) Definition)
Non-ICT Industries but R&D Intensive
Two ICT industries definition: Comprehensive and Operational (excludes Trade)
DICTA:
Period: 1995-2015
Variables: same than PREDICT but including also the variable hours worked
Countries: same than PREDICT
Level of Disaggregation (for details see below)
Same than PREDICT but:
Much higher level of ICT service industries disaggregation
It also Includs: Media and Content industries
Retail sale via mail order hours or via Internet
Two ICT industries definition: Comprehensive and Operational (excludes Trade)

5. [ 5 ]
Industry Disaggregation. PREDICT 2015
NACE Rev.2. Description
a) ICT sector (comprehensive definition)
261‐264, 268, 465, 582, 61, 62, 631, 951 A. ICT Total [A=B+C]
261‐264, 268 B. ICT manufacturing industries [B=1 to 5]
261 [1] Manufacture of electronic components and boards
262 [2] Manufacture of computers and peripheral equipment
263 [3] Manufacture of communication equipment
264 [4] Manufacture of consumer electronics
268 [5] Manufacture of magnetic and optical media
465, 582, 61, 62, 631, 951 C. ICT total services [C=C1+C2]
465 C.1. ICT trade industries [C1=6+7]
4651 [6] Wholesale of computers, computer peripheral equipment and software
4652 [7] Wholesale of electronic and telecommunications equipment and parts
582, 61, 62, 631, 951 C.2. ICT services industries [C2=8 to 12]
582 [8] Software publishing
61 [9] Telecommunications
62 [10] Computer programming, consultancy and related activities
631 [11] Data processing, hosting and related activities; web portals
951 [12] Repair of computers and communication equipment
TOT D. Total (ICT and non‐ICT)
b) ICT sector (operational definition)
261‐264, 61, 582, 62, 631, 951 A'. ICT Total (operational) [A'=B'+C']
261‐264 B'. ICT manufacturing industries (operational) [B'=1 to 4]
261 [1] Manufacture of electronic components and boards
262 [2] Manufacture of computers and peripheral equipment
263 [3] Manufacture of communication equipment
264 [4] Manufacture of consumer electronics
582, 61, 62, 631, 951 C'. ICT services industries (operational) [C'=9+13]
61 [9] Telecommunications
582, 62, 631, 951 [13] Computer and related activities [13=8+10+11+12]
c) Additional sectors
10‐33 Manufacturing
20‐21 Manufacture of chemicals and chemical products; Manufacture of pharmaceuticals, medicinal chemical and botanical products
20 Manufacture of chemicals and chemical products
21 Manufacture of pharmaceuticals, medicinal chemical and botanical products
27‐28 Manufacture of machinery and equipment
29‐30 Manufacture of transport equipment
29 Manufacture of motor vehicles, trailers and semi‐trailers
30 Manufacture of other transport equipment
303 Manufacture of air and spacecraft and related machinery
45‐47 Wholesale and retail trade, repair of motor vehicles and motorcycles
45 Wholesale and retail trade and repair of motor vehicles and motorcycles
49‐99 Services, except trade
49‐53 Transportation and storage
58‐63 Information and communication
64‐66 Financial and insurance activities
69‐82 Professional, scientific, technical, administration and support service activities
69‐75 Professional, scientific and technical activities
85 Education
86‐88 Human health and social work activities

6. [ 6 ]
Industry Disaggregation. DICTA 2015
NACE Rev.2. Description
a) ICT sector (comprehensive definition)
261‐264, 268, 465, 582, 61, 62, 631, 951 A. ICT Total [A=B+C]
261‐264, 268 B. ICT manufacturing industries [B=1 to 5]
261 [1] Manufacture of electronic components and boards
2611 [1.1] Manufacture of electronic components
2612 [1.2] Manufacture of loaded electronic boards
262 [2] Manufacture of computers and peripheral equipment
263 [3] Manufacture of communication equipment
264 [4] Manufacture of consumer electronics
268 [5] Manufacture of magnetic and optical media
465, 582, 61, 62, 631, 951 C. ICT total services [C=C1+C2]
465 C.1. ICT trade industries [C1=6+7]
4651 [6] Wholesale of computers, computer peripheral equipment and software
4652 [7] Wholesale of electronic and telecommunications equipment and parts
582, 61, 62, 631, 951 C.2. ICT services industries [C2=8 to 12]
582 [8] Software publishing
5821 [8.1] Publishing of computer games
5829 [8.2] Other software publishing
61 [9] Telecommunications
611 [9.1] Wired telecommunications activities
612 [9.2] Wireless telecommunications activities
613 [9.3] Satellite telecommunications activities
619 [9.4] Other telecommunications activities
62 [10] Computer programming, consultancy and related activities
6201 [10.1] Computer programming activities
6202‐6203 [10.2] Computer consultancy and computer facilities management activities
6202 [10.2.1] Computer consultancy activities
6203 [10.2.2] Computer facilities management activities
6209 [10.3] Other information technology and computer service activities
631 [11] Data processing, hosting and related activities; web portals
6311 [11.1] Data processing, hosting and related activities
6312 [11.2] Web portals
951 [12] Repair of computers and communication equipment
9511 [12.1] Repair of computers and peripheral equipment
9512 [12.2] Repair of communication equipment
TOT D. Total (ICT and non‐ICT)
b) ICT sector (operational definition)
261‐264, 61, 582, 62, 631, 951 A'. ICT Total (operational) [A'=B'+C']
261‐264 B'. ICT manufacturing industries (operational) [B'=1 to 4]
261 [1] Manufacture of electronic components and boards
262 [2] Manufacture of computers and peripheral equipment
263 [3] Manufacture of communication equipment
264 [4] Manufacture of consumer electronics
582, 61, 62, 631, 951 C'. ICT services industries (operational) [C'=9+13]
61 [9] Telecommunications
582, 62, 631, 951 [13] Computer and related activities [13=8+10+11+12]

7. [ 7 ]
Industry Disaggregation. DICTA 2015 (Cont.)
NACE Rev.2. Description
c) Retail sale via mail order houses or via Internet
4791 Retail sale via mail order houses or via Internet
d) Media and Content sector
581, 59, 60, 639 A. MC sector [A=B+C+D]
581 [B] Publishing of books, periodicals and other publishing activities [B=1 to 4]
5811 [1] Book publishing
5812 [2] Publishing of directories and mailing lists
5813‐5814 [3] Publishing of newspapers, journals and periodicals
5813 [3.1] Publishing of newspapers
5814 [3.2] Publishing of journals and periodicals
5819 [4] Other publishing activities
59‐60 [C] Audiovisual and broadcasting activities [C=5 to 6]
59 [5] Motion picture, video and television programme production, sound recording and music publishing activities
591 [5.1] Motion picture, video and television programme activities
5911 [5.1.1] Motion picture, video and television programme production activities
5912 [5.1.2] Motion picture, video and television programme post‐production activities
5913 [5.1.3] Motion picture, video and television programme distribution activities
5914 [5.1.4] Motion picture projection activities
592 [5.2] Sound recording and music publishing activities
60 [6] Programming and broadcasting activities
601 [6.1] Radio broadcasting
602 [6.2] Television programming and broadcasting activities
639 [D] Other information service activities [D=7 to 8]
6391 [7] News agency activities
6399 [8] Other information service activities n.e.c.
e) Additional sectors
10‐33 Manufacturing
20‐21 Manufacture of chemicals and chemical products; Manufacture of pharmaceuticals, medicinal chemical and botanical products
20 Manufacture of chemicals and chemical products
21 Manufacture of pharmaceuticals, medicinal chemical and botanical products
27‐28 Manufacture of machinery and equipment
29‐30 Manufacture of transport equipment
29 Manufacture of motor vehicles, trailers and semi‐trailers
30 Manufacture of other transport equipment
303 Manufacture of air and spacecraft and related machinery
45‐47 Wholesale and retail trade, repair of motor vehicles and motorcycles
49‐99 Services, except trade
49‐53 Transportation and storage
58‐63 Information and communication
64‐66 Financial and insurance activities
69‐82 Professional, scientific, technical, administration and support service activities
69‐75 Professional, scientific and technical activities
85 Education
86‐88 Human health and social work activities

8. [ 8 ]
The EU should aim at improving its Labour Productivity
Figure 2. Labour productivity, average 2006-2013
(Thousands of 2010 EUR PPP)
Source: DICTA 2015 database elaborated by Ivie and JRC-IPTS
85.2
77.0
66.3 64.2 62.9
60.2
56.9
52.2
46.9
29.3
21.1
11.9
8.4
0
10
20
30
40
50
60
70
80
90
Norway
US
Switzerland
Australia
Taiwan
Canada
EU
Japan
Korea
Russia
Brazil
China
India
Average 25.7

9. [ 9 ]
The rate of growth of labour productivity (LP) in the EU has
been…modest
Figure 3. Labour productivity growth. EU and Non-EU countries, 1995-2014
(annual rates in percentages)
Source: Total Economy Database, May 2015 (TCB)
8.19
4.68
3.17 2.98 2.72
1.67 1.26 1.02 0.96 0.96 0.86 0.85 0.75
0
1
2
3
4
5
6
7
8
9
10
China
India
Korea
Taiwan
Russia
US
Australia
EU
Canada
Japan
Brazil
Switzerland
Norway
Average = 2.3%

10. [ 10 ]
The leadership of the US in LP with respect to the EU has widened during the
2006-2012 period in all industries but two
ICT industries
1 Manufacture of electronic components and
boards [261]
2 Manufacture of computers and peripheral
equipment [262]
3 Manufacture of communication equipment
[263]
4 Manufacture of consumer electronics [264]
5 Telecommunications [61]
6 Computer and related activities [5820, 62,
631, 951]
Non‐ICT industries
7 Manufacture of chemicals and chemical
products [20]
8 Manufacture of pharmaceuticals, medicinal
chemical and botanical products [21]
9 Manufacture of machinery and equipment
[27‐28]
10 Manufacture of motor vehicles, trailers and
semi‐trailers [29]
11 Manufacture of other transport equipment
[30]
12 Transportation and storage [49‐53]
13 Information and communication [58‐63,
except Computer and related activities]
14 Financial and insurance activities [64‐63]
15 Professional, scientific and technical
activities [69‐75]
16 Administration and support service
activities [76‐82]
17 Education [85]
18 Human health and social work activities [86‐
88]
Figure 6. ICT sector Productivity. Dynamics of US-EU differences by industry. 2006 and 2013
(Thousands of 2010 euros PPS)

11. [ 11 ]
We will concentrate on some of the most relevant ones (though not all) with the
objetive of checking how EU performs:
1. The role of ICT industries and ICT R&D
2. Intangible Assets
2.1 R&D,
2.2 Human capital,
2.3 Other Intangible Assets: Organizational Capital and Training
What might be the sources of EU
disappointing performance

12. [ 12 ]
1.The role of ICT
• Traditionally, the manufacturing sector has experienced higher rates of LP growth than
services.
• Since the ICT revolution this classical view has been challenged, basically due to the
contribution of ICT to:
• i) economic globalization;
• ii) vertical disintegration of the production process;
• iii) organizational changes within firms
And, hence, to productivity growth.
• ICT can be viewed from the producing industries side or from the assets´ (software,
hardware and communications) side. Software is both an ICT asset and an intangible asset.
• ICT impact on LP operates through three classical channels: i) labour quality; ii)
technological progress embedded in capital assets; iii) MFP
• Plus the spillover effects generated by the difussion of technical progress from ICT
producing to ICT using industries.
• And its complementarity with other, mainly intangible, assets.

13. [ 13 ]
Source: PREDICT Report 2015 database elaborated by Ivie and JRC-IPTS
EU
NO
CH
AU
BR
CA
CN
IN
JP
KO
RU
TW
US
y = 0,59x + 3,16
R² = 0,76
0
10
20
30
40
50
60
70
80
90
100
0 50 100 150 200
Labour productivity (in thousands 2005 EUR PPS), average 2006‐
2012
ICT Labour productivity (in thousands 2005 EUR PPS)
average 2006‐2012
There is a positive and significant correlation between LP growth in the ICT
sector and aggregated LP growth.
Figure 4. Total labour productivity and ICT labour productivity. EU and Non-EU
countries, average 2006-2012

14. [ 14 ]
LP of ICT sector improved in all countries in relation to the EU
Figure 5. ICT sector Productivity. Dynamics of other economies’ differences vs. the EU
average. 2006 and 2013
(Thousands of 2010 euros PPS)

15. [ 15 ]
3. Spillover effects of ICT. Intangibles and Growth
• The impact of ICT technologies should not be considered in isolation from a
broader concept of investment, especially intangible assets.
• Tangible assets include machinery, buildings, as well as ICT assets such as
hardware and communication. Only recently National Accounts recognize some
intangible assets such as software (ICT) and R&D.
• ICT, intangible assets and productivity (both labour and MFP) are closely related
• Empirical evidence shows a strong correlation between intangibles and LP and
MFP growth (Corrado, Haskel, Jona-Lasinio and Iommi (2013)).
• Corrado, Haskel and Jona-Lasinio (2014) also find:
• i) a complementary relation between ICT and intangible capital
• ii) significant spillovers of intangible capital.

16. [ 16 ]
The US, followed by the UK, have the highest share of intangible assets in total
GFCF. Greece, Portugal, Spain and Italy are on the lowest bound.
Figure 8. Share of GFCF on intangible assets over total GFCF. EU-15 and US. Average
2006-2010 (percentages)
Source: Eurostat, INTAN-Invest and own elaboration.
63.0
56.7
46.8 45.7 45.5
42.8 41.8 41.7 41.5 41.5 40.6
35.0
33.3
28.6 27.8 27.5
19.0
0
10
20
30
40
50
60
70
US
UK
Sweden
Netherlands
France
Ireland
Denmark
Belgium
Finland
Germany
EU15
Luxembourg
Austria
Portugal
Italy
Spain
Greece
Average = 40.6%

17. [ 17 ]
3.1. R&D and growth
• R&D affects LP by:
• i) improving the quality of goods and services produced
• ii) reducing the average production costs
• iii) widening the array of final goods or intermediate inputs available to
companies.
• R&D may also (and it usually does) produce positive spillover effects
(knowledge spillovers)
• The return to R&D is not an invariant parameter, but the outcome of a
complex interaction between firm strategy, competition strategy, and the
macroeconomic environment which is basically unpredictable (Hall, Mairesse and
Mohnen, 2010)

18. [ 18 ]
The advantage of the US in terms of LP is higher than the one it should
have according to its BERD intensity
Figure 9. BERD intensity and labour productivity, average 2006 and 2012
Source: PREDICT Report 2015 database elaborated by Ivie and JRC-IPTS
EU28
NO
CH
AU
BR
CA
CN
IN
JP
KO
RU
TW
US
y = 13.98x + 25.01
R² = 0.22
0
10
20
30
40
50
60
70
80
0 1 2 3
Labour productivity (in thousands 2005 EUR PPS),
average 2006‐2012
BERD intensity, average 2006‐2012

19. [ 19 ]
Figure 10. BERD intensity (BERD/GDP). EU and Non-EU countries, average 2006-2012
(Percentages)
BERD intensity in the EU ranks 7th out of 13 economies
Source: Eurostat and PREDICT Report 2015 database elaborated by Ivie and JRC-IPTS
2.75
2.61
2.14
2.01 1.95
1.27 1.23 1.22
0.99
0.85
0.70
0.49
0.26
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Korea
Japan
Switzeland
Taiwan
US
Australia
EU
China
Canada
Norway
Russia
Brazil
India
average = 1.5%

20. [ 20 ]
BERD intensity is much higher in the ICT sector in all countries contributing to
its faster LP growth
Figure 6. BERD intensity (BERD/GDP). Whole economy and ICT sector. EU and Non-EU
countries, average 2006-2012
(Percentages)
Source: PREDICT Report 2015 database elaborated by Ivie and JRC-IPTS
0
2
4
6
8
10
12
14
16
18
20
Korea
Japan
Taiwan
US
Norway
Canada¹
EU
China
Australia
Brazil¹
India
Russia
Total ICT sector

21. [ 21 ]
3.2. Human Capital and Growth
• It is widely accepted the need to distinguish between the number of workers
(labour quantity) and their qualification measured from different perspectives
(labour quality).
• Dynamics is important for the impact of human capital on economic growth:
• Programs to improve cognitive skills through schools take time to be implemented
• The impact of improved skills will not be realized until the students with greater skills
move into the labour force.
• The economy responds over time through the development and implementation of new
technologies
• A good indicator of Human Capital should combine education attainment with
type of ocuppation performed and level of competencies (PIAAC).
• ICT have a positive effect on these three elements

22. [ 22 ]
EU
NO
CH
AU
BR
CA
JP
KO
RU
TW
US
0
20
40
60
80
100
0 10 20 30 40 50 60
Labour productivity (in thousands 2005 EUR PPS), average 2006‐
2012
Highly qualified employment/Total employment (%)
average 2006‐2012
y=0,92x+18,6
R²=0,24
The US uses its qualified workers in a more efficient way than the EU.
The US LP is higher…
Figure 11. Labour productivity and highly qualified employment*. EU and Non-EU
countries, average 2006-2012
* Employment in ISCO 1-3/total employment
Source: PREDICT Report 2015 database elaborated by Ivie and JRC-IPTS and ILO

23. [ 23 ]
Figure 12. Employment in ISCO 1-3/Total employment. EU and Non-EU countries, average
2006-2013
(Percentages)
…for a similar share of highly qualified employment
Note: for China and India data are not available
Source: Eurostat, ILO and own elaboration
47.9
44.5 43.1 42.6 41.5
38.9
36.8
33.2
24.1
21.6
19.9
0
10
20
30
40
50
60 Switzerland
Norway
Canada
Australia
Russia
EU
US
Taiwan
Japan
Korea
Brazil
Average = 35,8%

24. [ 24 ]
UK and Netherlands have a larger share of OC investment than the US,
and Denmark a larger share in Training. Spain and Greece appear in the
lowest bound.
Figure 14. Share of GFCF on intangible assets over total GFCF. EU-15 and US. Average
2006-2010 (percentages)
Source: Eurostat, INTAN-Invest and own elaboration.
a) Organisational capital b) Training
19.6
14.4 14.4
12.9
12.1 11.5
10.4 10.2
9.6
8.6 8.4 8.2
6.3 6.1
5.1
4.2
2.1
0
5
10
15
20
25
UK
Netherlands
US
Belgium
France
Ireland
EU15
Sweden
Portugal
Germany
Finland
Austria
Italy
Luxembourg
Denmark
Spain
Greece
Average = 10.4%
7.2
6.9
6.6
6.1 5.9 5.7 5.6
4.9 4.9
4.1
3.7
3.5
3.1 2.9
2.6 2.4
0.9
0
1
2
3
4
5
6
7
8
9
10
Denmark
US
UK
Germany
Ireland
France
Netherlands
Luxembourg
EU15
Austria
Sweden
Italy
Finland
Belgium
Portugal
Spain
Greece
Average = 4.9%

25. [ 25 ]
Facts: The EU has a LP problem as shown by:
• A lower LP level than the US, Swiztzerland, Norway, Australia, Canada and Taiwan
• An increasing gap with the US that has widened steadily since 1995, and worsened after 2009
What are the reasons underpinning this EU disappointing achievement
1. The role of ICT industries and ICT R&D. LP in the EU ICT sector has shown during 2006-2013:
• Worse performance than the other 12 economies considered
• Lower BERD intensity than Norway, Canada, Japan, Korea, Taiwan and the US
It should be highlighted that the EU LP productivity gap affects not only the ICT sector but (almost) all sectors
of the economy. Thus, the EU has not fully taken advantage of the efficiency gains enabled by the ICT
revolution. Something else is missing
2. Intangible Assets. Their impact is positively affected by ICT through spillover and complementarity effects
which also reinforce the positive effects of ICT.
• The EU needs increasing the share of GFCF in intangibles approaching that of the US
• Specially BERD intensity (both total and ICT BERD) which is much lower
• As well as in organisational capital, on-the-job training, design and branding
• However, the EU also needs to improve the statistical information in these last forms of intangible capital
Last Warning: The EU is conformed by very different countries/regions. The present situation is much more
unfavourable for Southern and Eastern countries/regions. Regional Policies (as well as information at the
regional level) are needed .
Concluding Remarks