Can Innovation Explain the Increasing Growth Differences in the 1990s? • Karl Aiginger

During the 1990s, the growth performance varied not only between the EU and the USA, but also across EU countries. The variance in growth increased for the total economy, but grew even larger for manufacturing, which plays a central role in determining performance differences. The growth in EU manufacturing is indeed related to the factors which economic theory suggests: research, human capital, knowledge, capabilities and the use of ICT technology. However, the competitive pressure was strong in the 1990s for low-growth countries, as well as for mature, capital-intensive industries. This implies that the variance of productivity differences did not increase in parallel to that of the growth differences, and that productivity increases were driven not only by innovation but also by needs for restructuring (passive change). Furthermore, the 1990s spanned a period of severe external shocks, including the currency crisis in the first half, and the Asian crisis in the second. European integration made an important step forward, evolving from the Single Market to the Monetary Union. Individual countries pursued various strategies to combat high unemployment and to cut budget deficits. These factors make it difficult to carve out the exact impact of innovation on growth in output and productivity.

The strongest increase in productivity occurred in technology-driven industries, where not only the research intensity, but also innovation outlays in general are very high, thus establishing a correlation between innovation and growth across sectors and industries. However, specifically in the EU, and during the first half of the 1990s, productivity also increased quickly in capital-intensive industries. Some labour-intensive industries managed to remain competitive by increasing productivity and quality, as did mainstream industries in which Europe is specifically strong. The acceleration of productivity growth between the first and the second halves of the 1990s was, nevertheless, mainly driven by the technology-intensive sector.

Manufacturing in the USA excelled in several respects during the 1990s. Growth was higher, productivity increased more strongly and accelerated faster than in the EU during the second half of the decade. The impact of technology seems to have been stronger, or at least more direct, than in the EU: the share of technology-driven industries has been historically higher, and the productivity lead – however difficult to measure – is highest in these industries. In the USA, many high-tech industries, and the group of technology-driven industries as such, enjoyed double-digit annual growth rates in labour productivity during the second half of the 1990s.

The industry pattern of growth is therefore related between the USA and the EU, but not completely. This is also true for individual EU countries. We have drawn country profiles, showing in which industries countries are specialised, how they perform according to drivers of future growth, which contribution is made by innovative activities and how policies are aimed at increasing growth and competitiveness. Having illustrated all the differences across countries, we can venture to draw the tentative conclusion that policies and performance do seem to be converging a little within EU countries, however at a very slow speed and with fits and starts, experiments and errors. For most drivers of growth, the USA was leading during the 1990s, and, due to the cumulative nature of causes and effects, the gap will not close without specific policy efforts in Europe. However, the top countries in Europe are managing to close the gap on an individual basis and are successfully contesting the USA in an increasing number of fields.