Conference on Knowledge-Based Capital

 

"Growth, Innovation and Competitiveness: Maximising the Benefits of Knowledge-Based Capital"

Opening remarks by Angel Gurría, OECD Secretary-General

Paris, 13 February 2013

(As prepared for delivery)

 

Ladies and Gentlemen,

It is a great pleasure to welcome you to the OECD’s Conference on "Growth, Innovation and Competitiveness - Maximising the Benefits of Knowledge-Based Capital".

This is a very important topic. Investment in Knowledge-Based Capital is becoming one of the most important new sources of growth. In fact, in many countries it is already the main driver of economic recovery.

Governments must ensure that policies and institutional frameworks create a fertile climate for KBC investment. This is the purpose of today’s conference. This meeting provides a great opportunity for us to put our heads together with policymakers and business leaders to ensure that governments learn from each other and “get it right” in promoting KBC.

Today’s discussions will be based on the interim results of our project on “New Sources of Growth: Knowledge-Based Capital.” I want to draw on some of its main findings to kick off this meeting.

KBC: The Code for Higher Growth and Productivity

The drawn-out nature of the economic crisis has led policy analysts, governments and the OECD to think about the structural drivers of growth and the policies that can be put in place to strengthen the recovery and lay the foundation of more resilient growth in the years to come. Demographic changes and natural resource constraints will make growth in advanced economies increasingly dependent on non-physical assets, such as R&D, data, software, new business models, and firm-specific skills and design.

These assets are intangible in nature and are based on human ingenuity – a factor of production that never runs out!

The good news is that some countries are already investing more in KBC than in physical capital, such as machinery, equipment and buildings. In Canada, for example, between 1976 and 2008, real investment in KBC rose by 6.4% a year, while investments in tangible assets increased by 4.1% [1]. This is also the case in the United States, where business investment in KBC has risen faster than investment in tangible assets for around the last 30 years [2].

These investments are making a significant impact on productivity. Our work shows that between 1995 and 2007, 27% of labour productivity growth in the United States was driven by investments in KBC [3]. And across Europe investment in KBC accounted for 20% to 25% of average labour productivity growth between 1995 and 2008 [3].

Investments in KBC Bring Higher Value Added and Competitiveness

Investments in KBC also play a key role in enhancing our participation in global value chains and the competitiveness of our economies. The highest level of value creation within a global value chain is often found in design, new concept development, R&D, marketing, branding or customer service. These activities create new opportunities for firms to increase their contribution to global value chains.

China, Brazil and other emerging-market economies are investing in KBC to reach higher-value segments in global production chains. China has nearly doubled its investments in KBC – from 3.8% of GDP for the total economy in 1990 to 7.5% in 2006 [4]. In Brazil, business investment in KBC increased from 3% of GDP in 2000 to 5% in 2008 [5].

And nowadays, KBC is transforming whole industries. In the automotive sector for example, software is becoming a key to success. Ten of the largest automotive firms now have advanced research centres in Silicon Valley.

However, the rise of KBC creates new challenges for policymakers and business. To ensure that companies can invest in those assets, it is essential to get the policies and framework conditions right.

Let me outline some of the OECD’s key policy recommendations in this regard.

Fostering Investment in KBC: Four Essential Steps.  

First, we should enlarge our concept of innovation beyond the conventional view, in which R&D is pre-eminent. It may sound strange to some ears, but many successful innovative firms do not spend money on R&D. Instead, they invest in assets such as design and computerised information and new forms of workplace organisation.

To support these activities, we need to redesign long-standing innovation programmes, improve access to financing for small innovative firms, and strengthen frameworks that foster collaboration.

Second, we must ensure appropriate taxation. Today, even at this time of acute fiscal constraint, most OECD governments try to encourage innovation via significant tax relief for business spending on R&D. But multi-national enterprises are using cross-border tax strategies to shift profits or costs associated with KBC from one country to another to lower their tax liabilities. 

This means that countries may be losing tax revenue from the activities they have given tax relief to help create. Clearly, such outcomes are undesirable. We identify key areas of concern in our report on Base Erosion and Profit Sharing (BEPS), launched only yesterday.

Third, we need policies that encourage firms to experiment with potential growth opportunities. This means less stringent bankruptcy laws that do not penalise entrepreneurs too hard when they fail. Evidence shows that reducing the stringency of bankruptcy legislation from the highest level to the OECD average, could raise capital flows to patenting firms by around 35%! [6]

We also need to improve conditions for entrepreneurs to market their ideas. This requires well-functioning product and labour markets, as well as effective systems of debt and early-stage equity finance.

Fourth,we must do more in the area of intellectual property rights (IPR). In a knowledge-based economy, high quality intellectual property rights are a crucial framework condition. But systems of intellectual property rights must be coupled with pro-competition policies, because competition is also key to driving innovation.

And we must take steps to address some of the problems affecting patents, such as copyright systems and design rights. Also, the quality of patents has declined in recent years. There is a need to harmonise some aspects of IPR systems internationally to permit cross-border copyright licensing.

 
Ladies and Gentlemen,

I cannot think of a more intelligent strategy to promote long-term and sustainable growth than investing in KBC. As our financial and environmental resources become scarcer, our collective creativity, cleverness and originality are valuable and productive assets that remain largely untapped.

Your deliberations today will be instrumental in defining how governments can best encourage innovation and ingenuity to drive sustainable and inclusive growth. Your views are an essential contribution to our final report on Knowledge-Based Capital, which we will submit to Ministers at our Ministerial Council Meeting this May. I am sure that your contributions will help us to make the most of this important work, for the benefit of our economies and our people.

I wish you an excellent conference and a fruitful debate.

Thank you.