On December 4, 2015 DIGITALEUROPE hosted a workshop with the European Center for International Political (ECIPE) and SIIA on a recent ECIPE report written by Erik van der Marel.  Van der Marel explains the importance of “complementary policy” in unleashing greater productivity growth resulting from the use of Information and Communications Technology (ICT) in the EU.  By complementary policy, ECIPE means especially trade freedom, product market regulations, non-resident patent filings, general property rights protection, the strength of legal rights in general, R&D spending (particularly from abroad), and a number of other factors.  The special importance of trade openness (including data flows), investment openness (R&D investments and patent applications financed from abroad), and intellectual property rights (IPRs) is no surprise to SIIA.  Policymakers should review Van der Marel’s document carefully.

Importance of ICT
To begin with, ECIPE notes the increasingly recognized importance of ICT for European economies.  Van der Marel’s contribution is to determine what complementary policy measures affect the relative productivity-enhancing effects software services have for different industries in the EU.  Then, he assesses how these complementary policy measures increase value-added within the ICT industry itself within the context of competitiveness, i.e. trade.  The key conclusion is that to make the most of ICT’s productivity-enhancing potential, trade openness, labor market reform, R&D expenditures (particularly from abroad), open to patent filings from abroad, trade secret protection and product market reforms are key.

“Complementary” Policy Measures Key to Getting the Most out of ICT
ECIPE reviewed the relationship between software investments and total factor productivity (TFP).  It turns that for the sectors ECIPE studies, “countries with greater quantities of accumulated software stocks are the ones that on average are also the ones that effectively have demonstrated greater TFP growth rates over time.”  But crucially, some sectors have demonstrated greater TFP growth rates than others.

ECIPE argues that the complementary policy measures explain why some countries make better use of ICT investments than others.  Policies influencing TFP levels include: temporary employment protection; product market regulations; non-resident patent applications; private sector credit; R&D expenditure as a percentage of GDP; the share of R&D financed from abroad; and, R&D expenditure as a percentage of GDP.  Policies influencing TFP growth include temporary employment protection; trade secret protections; procedures required to start a business; temporary employment protections; and, private sector credit.

Foreign Patent Applications Important
The role of non-resident patent applications demonstrate the importance of strong IPR systems.  The significance of R&D financed from abroad also demonstrates the importance of trade and investment openness. Given that overseas R&D finance often involves foreign investment, much of it intra-company, unimpeded data flows are crucial as well – an issue also addressed in the study. As the Brookings Institution pointed out in its report on transatlantic data flows, much of the growth in data flows between the United States and the European Union will come from intra-company exchanges.

Trade is Crucial

ECIPE also studies trade in ICT value-added products and services for the EU.  Van der Marel points out two important things in this context.  First, we live in a world of global value chains (GVCs).  Second, the role of imports is as important as the role of exports in generating value-added.  This is an important insight worth repeating given the overwhelming importance attached to exports on both sides of the Atlantic.  But, van der Marel also points out that: “what ultimately matters within the value-chain to become competitive is the extent to which countries are able to generate value-added domestically.”

Complementary Policy Again Critical in Generating Value-Added
So how do countries generate this domestic value-added?  For one thing, it helps to have a high level of GVC trade integration.  Again, the level of trade openness is important.  The document includes a revealing chart (Figure 8) which shows the importance of integration on both the selling (exporting) and buying (importing) side in generating domestic value addition.  Domestic policies also matter – a lot.  They include non-resident patent applications; trade freedom (which includes data flows); patent protection; strong property rights protection; financial freedom; resident patent applications; the percentage of R&D financed from abroad etc.

ECIPE has made an important contribution in synthesizing the literature on productivity (especially from the OECD) and ICT’s role in influencing productivity. There are a couple of takeaways from this.  ICT can make a big difference in improving TFP and hence a big difference in growth.  In order to do that though, ICT’s productivity-enhancing potential has to filter through the whole economy.  It is not enough to just increase factor inputs such as ICT.  Factor inputs need to be used productively.  Trade and investment openness (including data flows), and high quality IPR systems are crucial in unlocking this potential.

Carl Schonander is Senior Vice President for Global Public Policy.