Think Like an Enterprise: Why Nations Need Comprehensive Productivity Strategies BY ROBERT D. ATKINSON | MAY 2016 ABSTRACT Increased living standards depend on increased productivity. But productivity growth will lag unless governments implement smart productivity policies. To be effective, these policies need to go beyond the conventional solutions grounded in neoclassical economics and embrace four other key components: incentives, including tax policies, to encourage organizations to adopt new tools to drive productivity; policies to spur the advance and take-up of systemic, platform technologies that accelerate productivity across industries; a research and development strategy focused on spurring the development of productivity-enabling technologies such as robotics; and sectoral productivity policies that reflect the unique differences between industries. Finally, for nations to put sophisticated productivity policies in place, the single most important step is to establish productivity as the principal economic policy goal, ahead of other factors such as stable prices or low unemployment. Part I of this report provides an overview of productivity, including what it is, why nations need to accelerate it, and how it grows through shifts in enterprises and technology. It then examines the current debates about whether productivity kills jobs (it does not) and whether it still benefits workers as it has in the past (it does). The report then reviews productivity performance in nations and analyzes the debate about the future of productivity—ranging from stagnation to exponential acceleration. Part II provides a framework for thinking about national productivity policies. Finally, Part III lays out a comprehensive agenda for spurring productivity growth, which most nations can use as a guide in tailoring their own national productivity policy agendas. INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | MAY 2016 PAGE 1 CONTENTS Abstract ........................................................................................................................................................... 1 Introduction ..................................................................................................................................................... 5 Part I: Overview of Productivity ........................................................................................................................ 7 What Is Productivity? ........................................................................................................................... 7 Why Nations Need Productivity Growth .................................................................................................. 8 Why Productivity Does Not Kill Jobs .................................................................................................... 11 Productivity Still Lifts All Boats .......................................................................................................... 20 How Productivity Grows: Enterprise and Industry Shifts ........................................................................ 21 How Productivity Grows: Technology ................................................................................................... 25 Productivity Performance ................................................................................................................... 30 Global Productivity Performance .................................................................................................... 31 U.S. Productivity Performance ....................................................................................................... 31 Developed-Nation Productivity Performance ....................................................................................... 32 Developing-Nation Productivity Performance ...................................................................................... 33 Why Has U.S. Productivity Growth Stagnated? ..................................................................................... 36 Unmeasured Output ...................................................................................................................... 37 It Takes Time to Adapt and Learn................................................................................................... 37 Inadequate Investment in New Tools .............................................................................................. 38 Difficulty Adopting New Tools ........................................................................................................ 38 Failure to Take Full Advantage of Tools........................................................................................... 39 It Is Harder to Raise Productivity Now ............................................................................................ 39 The Future of Productivity: Stagnation, Revolution, or More of the Same................................................ 41 Stagnationists ............................................................................................................................... 42 Techno-Utopians ........................................................................................................................... 44 Opportunities for Productivity Growth by Sector ............................................................................... 47 Part II: A Framework for National Productivity Policies .................................................................................. 49 Productivity and Economic Doctrines .................................................................................................. 49 Why Do Nations Need a Productivity Policy? ........................................................................................ 55 Public Goods Help Firms Boost Productivity .................................................................................... 55 Externalities and Enterprise Failures............................................................................................... 56 System Interdependencies and Productivity .................................................................................... 60 Part III: Productivity Policies ......................................................................................................................... 62 Framework Conditions ........................................................................................................................ 63 Labor Market Regulations .............................................................................................................. 64 Product Market Regulations ........................................................................................................... 64 Social Policy Regulations ............................................................................................................... 65 Competitive Markets...................................................................................................................... 66 Firm Size Agnosticism ................................................................................................................... 68 A Pro-Productivity Culture ............................................................................................................. 74 Supporting Factor Inputs .................................................................................................................... 77 Infrastructure ............................................................................................................................... 77 An Educated and Skilled Workforce ................................................................................................ 77 Management Capabilities .............................................................................................................. 79 Scientific and Engineering Research Funding ................................................................................. 80 Organizational Incentives ................................................................................................................... 80 Increased Labor Costs ................................................................................................................... 81 Reduced Capital Equipment and Software Costs ............................................................................. 82 INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | MAY 2016 PAGE 2 R&D and System Productivity Policies ................................................................................................. 84 Productivity-Focused Platform Policies ........................................................................................... 84 Scientific and Engineering Research Policy for Productivity.............................................................. 86 Sectoral Policies for Productivity ......................................................................................................... 90 Industry Typologies ....................................................................................................................... 90 Sectoral Analysis and Sectoral Policies ........................................................................................... 91 Productivity Policy for Government ................................................................................................. 95 Government Institutional Changes ......................................................................................................