OECD work on knowledge and the knowledge economy

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					          OECD work on knowledge and the knowledge economy

                          National Academies, Washington DC


 OECD/NSF Conference on “Advancing knowledge and the knowledge economy”

                                       10-11 January 2005

             by Berglind Ásgeirsdóttir, OECD Deputy Secretary-General


It is a great pleasure for me to be at this Conference on “Advancing Knowledge and the
Knowledge Economy”. I am very pleased that we do this in a partnership with the
National Science Foundation, the European Commission, the U.S. Interagency Working
Group on IT Research and Development, and the University of Michigan. I especially
want to thank the National Academies for hosting this event. It is truly a marvellous place
to have a distinguished conference and debate about the role and nature of knowledge in
our economies and societies.

While knowledge always has been at the heart of economic development, there is
substantial evidence that the capacity to produce and use knowledge has much more
explanatory value in determining levels of economic welfare and growth than in the past.

The OECD has now for two decades worked on knowledge and the knowledge
economy. The TEP (Technology Economy Programme) in the late 80’s was one of our
first attempts to clarify the relations between technology developments and economic
performance. Since then there have been many others projects. I am sure that many of
you in different capacities have been involved in this work.

Let me mention a few of the more recent OECD projects on knowledge and the
knowledge economy:

                                            (slide 2)

1) The Growth Project aiming at identifying the factors determining growth in OECD
countries;

2) The economic impacts of ICT investments;

3) The role of job-related training;

4) Knowledge management: analysing the production, dissemination and application of
knowledge in different sectors;




                                               1
5) Measurement and indicator development: Science, Technology and Industry
Scoreboard, knowledge management practices in the private sector, intangible
investments in enterprises etc.

6) Human and social capital investments and returns.

Time would not allow me to summarise all this work. I will therefore concentrate on a four
conclusions on what we know about knowledge and the knowledge economy.

                                         (slide 3)

First conclusion: Good “economic fundamentals” are important for stimulating the
knowledge economy

Good “economic fundamentals” such as

   •   stable macro-economic policies that allows long-term planning including well
       functioning product an capital markets;
   •   well-functioning labour, product and capital markets;
   •   efficient training policies that help ensure that the low-educated are equipped with
       the right skills, thus avoiding “knowledge divide”;
   •   competition policies, which drives down the costs of technologies;
   •   liberalisation of telecommunication policies;
   •   openness to trade and foreign direct investments to let in “new ideas”.

are important for stimulating the knowledge economy.

                                         (slide 4)

Second conclusion: The development of the knowledge economy is dependent on
four main “pillars”: innovation, new technologies, human capital and enterprise
dynamics

I have chosen to illustrate the important factors shaping the knowledge economy as a
“Greek temple” with four pillars. The “economic fundamentals” are the base on which the
four pillars are standing. The four pillars are also illustrating that for the knowledge
economy to develop and grow, it is not enough to focus on a single policy or institutional
arrangement. A whole range of policies and coordinated actions to create the right
conditions are necessary. The “policy mix” must be based on a comprehensive strategy
suited to each country or circumstance and will include the four pillars ‘innovation’, ‘new
technologies’, ‘human capital’ and ‘enterprise dynamics’.

At the top of the Greek temple, I have put ‘globalisation’, which is a driver that influence
all four pillars and four key factors that are becoming increasingly mobile and global
under the globalisation process: ‘research and development’, ‘Internet’, ‘highly skilled’
and ‘multi-national companies’.


                                             2
I will briefly go through the main developments in the “four pillars” that have occurred
over the last decade in OECD countries.

                                          (slide 5)

The first pillar is ‘innovation’. R&D expenditure, patents etc. all grew in the second half of
the 1990s in most OECD countries. Innovation has now become more widespread with
increasing activities especially in services, ICTs, and pharmaceuticals as you can see on
the slide. The importance of innovation as a key competitive factor has forced a faster
cycle time and meant that firms had to experiment with new ways to acquire innovations
either through links to universities, alliances with each other or mergers and acquisitions.

                                          (slide 6)

There is little doubt that ICTs are the technologies of our era. The comparisons with bio-
or nano-technologies are weak. The US and small EU countries have had a relative large
impact of ICT investment in terms of its contribution to GDP growth; the effect has been
much smaller in France, Germany and Italy. One of the key issues is to which extend the
rapid technological progress in ICT goods and services contributes to productivity
growth. The Federal Reserve Bank of New York has recently published a study saying
that there is now a consensus that a large portion of the productivity growth in the United
States can be traced to the sectors of the economy that produce information technology
or use ICT equipment and software most intensively.

                                          (slide 7)

The third pillar is human capital – the knowledge, skills and competences instilled in
workers. Human capital is very important for developing a knowledge economy in several
respects. First, we know that there is a well-established relationship between human
capital and labour productivity and human capital is therefore a significant determinant of
growth. Second, the two previous mentioned pillars of the knowledge economy –
innovation and new technologies – are not effective without a stock of trained and
qualified workers to realise their benefits. OECD countries have increased the
percentage of the population that have attained at least a secondary education in order
to meet the increased demand for “knowledge-intensive” employment.

The fourth pillar is ‘enterprise dynamics’. Newly created firms have spurred innovation in
many areas. They have been responsible for an increasing share of the growth in the
private R&D and patent activity in the United States and a number of other OECD
countries. The dynamics in firm turnover (exit and entry) reflects the ability of countries to
expand the boundaries of economic activity, shift resources and adjust the structure of
production to meet consumers’ changing needs.




                                              3
Third conclusion: Globalisation is a pervasive factor that affects all the four pillars
of the knowledge economy

                                          (slide 8)

Globalisation is not new, but strengthened by international mobility of highly skilled, ICTs,
faster and cheaper transportation, trade liberalisation, global capital markets etc. The
R&D share of foreign affiliates compared to the total business R&D is substantial in some
countries as for example Canada, Ireland, Spain, Sweden and United States and less
important in France, Japan and United States and have in all countries exempt Ireland
increased over the period 1995-2001.

                                          (slide 9)

Fourth conclusion: New social, organisational innovations, and knowledge
management practices as well as social capital have to be developed to deepen
the benefits of the knowledge economy

The “softer” social and organisational changes are in many cases very important for the
development of the knowledge economy. Investments in ICTs or R&D without the
management and organisational structures in enterprises that enable productive use of
knowledge workers are less productive. These include teamwork, flatter management
structures, and stronger employee involvement and they often entail a greater degree of
responsibility of individual workers regarding the content of their work. The adoption of
work practices and the presence of labour-management institutions tend to facilitate
take-up of new technology.
Organisations are increasingly paying attention to their systems of knowledge
management to ensure that they are capturing, sharing and using productive knowledge
within their organisation to enhance their learning performance. Joint work by Statistics
Canada and OECD on knowledge management indicates that knowledge management
practices in companies seem to have a far from negligible effect on innovation and other
aspects of corporate performance. A survey on knowledge management practices in
French companies has shown that whatever the company’s size, industry or R&D effort,
firms innovate more extensively and file more patents, if they set up knowledge
management policies.

Social capital in the form of networking and trust can help realise innovative
environments such as Silicon Valley. Trust-based relations facilitate co-operation and are
essential for good economic performance and innovation. Trust reduces transaction
costs and improves the flow of information, and thus has direct economic effects as well
as indirect and wider outcomes. It aids innovation by improving communication flows and
the diffusion of knowledge, within and between organisations.

The knowledge economy cannot simply be characterised by higher “knowledge intensity”
as for example more highly skilled people in the labour force. Increasingly countries
will have to think about how education promotes effective participation in


                                             4
communities of knowledge; and this will include social and moral competences as
well as technical ones.

With this conclusion I will end my presentation of what we know at the OECD about
knowledge and the knowledge economy. I am aware that there is much more that we
need to know. There is a huge agenda for researchers, policy-makers and others to
develop better understandings and policies for the knowledge economy. I am very
confident that this Conference will be one of the finest contributors to the immense task.

Thank you.




                                            5
             OECD/NSF Conference
                      on
Advancing Knowledge and the Knowledge Economy

           National Academies, Washington DC

                   10-11 January 2005



            OECD Work on Knowledge
                      and
             the Knowledge Economy

 by Berglind Ásgeirsdóttir, OECD Deputy Secretary-General

                                                     1
Recent OECD Projects on Knowledge
   and the Knowledge Economy
The Growth Project aiming at identifying the
factors determining growth

The economic impacts of ICT investments

The role of job-related training

Knowledge management

Measurement and indicator development

Human and social capital investments and returns
                                               2
First Conclusion: “Good “economic fundamentals”are
  important for stimulating the knowledge economy

  Good “economic fundamentals” such as

  • Stable macro-economic labour policies that allows long-term planning
    including well functioning product and capital markets;
  • Well functioning labour, product and capital markets;
  • Efficient training policies that help ensure that the low-educated are
    equipped with the right skills, thus avoiding “knowledge divide”;
  • Competition policies, which drives down the costs of technologies;
  • Liberalisation of telecommunication policies;
  • Openness of trade and foreign direct investments to let in “new ideas”.

  are important for stimulating the knowledge economy
                                                                    3
 Second Conclusion: The development of the knowledge
economy is dependent on four main “pillars”: innovation,
new technologies, human capital and enterprise dynamics


                            Knowledge
                             Economy

                                      Highly-
Globalisation R&D Internet skilled MNEs

                         n      gi
                                   es               ise
                      io      o          an       pr
                    at w nol           um tal nte
                                                 r
                                                        ics
                  ov Ne ch            H              am
                 n                         pi E
              In           Te           Ca      D yn
                     Economic Fundamentals
                                                              4
              First pillar: Innovation:
       R&D growth driven by industry structure
    Percentage point increase in business R&D intensity as a share of GDP
    by Pharmaceuticals Services Transport
   ICT industry sector, 1990-2000 equipment Other manufacturing Other non-manufacturing

1.6
1.4

1.2

  1

0.8

0.6

0.4

0.2

  0

-0.2

-0.4
                            Germany




                                                                             US




                                                                                               UK
         Finland



                   Sweden




                                      Ireland




                                                                    Canada




                                                                                  Japan



                                                                                          EU
                                                Denmark



                                                          Belgium




                                                                                                    5
        Source: OECD ANBERD Database
              Second pillar: new technologies:
        ICT capital to GDP growth (in percentage points)

       The US and small EU countries have had a large impact of ICT
            investment, France, Germany and Italy a small one
1.0%          (contribution to GDP growth, in percentage points)
0.9%
            90-95
0.8%
            95-2002*
0.7%
0.6%
0.5%
0.4%
0.3%
0.2%
0.1%
0.0%




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                                                                6
  Source: OECD Productivity Database, May 2004.
 Third Pillar: Human Capital: Population that has
attained at least upper secondary education (2002)

100                                                                                                                         Age Group 25-34
 90                                                                                                                         Age Group 45-54
 80
 70
 60
 50
 40
 30
 20
 10
  0
                       Japan




                                                                                                                                    Italy
      Korea




                                        United




                                                                     France




                                                                                                      Australia
                                                                                                                  Greece
                                                                                                                           United


                                                                                                                                            Spain
                                                                                                                                                    Poland
                                                                                                                                                             Mexico
                               Canada




                                                                              Belgium
                                                 Germany
                                                           Hungary




                                                                                        Netherlands
              Norway




                                                                                                                                                     7
Third conclusion: Globalisation is a pervasive factor that
    affects all four pillars of the knowledge economy

                R&D share of foreign affiliates/total Business and R&D

70.0
                                          65.2
                                                                   R&D share of foreign affiliates in 2001
                                                          59.6     Change in share 1995-2001
60.0

                                                                                 51.9
50.0

                                                                                          40.6
40.0                                                                         38.2
                                   35.2

        30.5                                                     31.0
30.0                                                                                          28.1
                                24.8
                     21.520.7
20.0
                                                                                                         14.9
                                                                    13.5
                                                                                                            11.1
10.0

               2.4                                  3.4

 0.0
        Canada       France     Germany   Ireland    Japan        Spain       Sweden       United    United States
                                                                                          Kingdom
-10.0
        Source: OECD, Main Science and Technology Indicators, 2004/2
                                                                                                     8

                                                    Source: OECD, STI Outlook, 2004 based on Carrodo et al, 2003.
   Fourth Conclusion: New social, organisational
innovations, and knowledge management practices
  as well as social capital have to be developed to
  deepen the benefits of the knowledge economy
The “softer” social and organisational changes are in many cases very
important for the development of the knowledge economy

The adoption of new work practices and the presence of labour-
management institutions tend to facilitate the take-up of new technology

Knowledge management practices seem to have effect on innovation

Social capital in the form of networking and trust can help realise
innovative environments

Increasingly countries will have to think about how education promotes
effective participation in communities of knowledge; and this will
include social and moral competences as well as technical ones.
                                                                      9