inclusive growth bobby willig adapted from: “competition and innovation-driven inclusive...

Inclusive Growth

Bobby Willig

Adapted from:“Competition and innovation-driven

inclusive growth,”Mark Dutz, Ioannis Kessides, Stephen

O’Connell and Robert Willig, in Promoting Inclusive Growth: Challenges and Policies, Luiz de Mello and Mark Dutz (eds.), OECD, 2012.

Our Analytic Challenge

Low income countries need knowledge-based innovation-driven growth.

BUT conventional wisdom is that such growth

disproportionately benefits investors, managers, highly skilled workers, and higher income consumers.

The World Bank and OECD asked us to test empirically whether innovation-based growth is inclusive of the poor

Why Innovation-Driven Growth?

• “Differences in measured inputs explain less than half of the enormous cross-country differences in per capita GDP”– A key “stylized fact” of development (Jones and Romer,

AEJM 2010)

• Much of the rest is differences in total factor productivity (TFP).– Countries are poor because use their inputs less efficiently

• The innovations and productivity brought by knowledge have caused far more than 50% of historical economic growth.• Works for poor countries too!

Productivity and Innovation

• Innovation raises total factor productivity– New products better liked raise value created by inputs– Better technology and new improved processes use inputs

more effectively for more of the same outputs

• For development, innovation need not be world new• New diffusion and adaptation of existing technologies• Entrepreneurship facilitation• Management can be a crucial innovative technology

5

Solar ovens manufactured in Uganda with technology developed in Chicago and Berkeley curtails lung disease from wood burning smoke, saves fuel costs, and creates

employment.

2.6 2.8 3 3.2 3.4mean of management

USGermanySweden

JapanCanadaFrance

ItalyGreat Britain

AustraliaNorthern Ireland

PolandRepublic of Ireland

PortugalBrazilIndia

ChinaGreece

6

Overall management is worse in developing countries

Average country management score, manufacturing firms 100 to 5000 employees(monitoring, targets and incentives management scored on a 1 to 5 scale

using the methodology developed in Bloom & Van Reenen (QJE 2007))

69533627012234431218876238292231102140

524171

620559

# firms(slide by Bloom, Eifert, Mahajan, McKenzie and Roberts, March 1 2010 LSE/UCL seminar)

Innovation in Management and Organization Raises Productivity

Proven with controlled experiment (2011) providing management consulting to

random sample of cotton textile firms in India. Firms’ leaders lacked information and incentives. Big gains in productivity

and profits.

Nick Bloom (Stanford)Benn Eifert (Berkeley)

Aprajit Mahajan (Stanford)David McKenzie (World Bank)John Roberts (Stanford GSB)

e.g. firms have large scattered inventories of yarn

9

Now, after months of consulting, stock

is organized, labeled, and

entered into the computer with

details of the type, age and location.

Organizing inventory enables firms to substantially reduce inventory capital stock and losses.

10

Chilean Wine Industry

From no exports in 1990 to booming sector today, with substantial investments in knowledge and technology transfer for growers,

viticulturalists, merchants and workers.

What can make innovation-driven growth inclusive??

• JOBS FOR THE POOR

• Studies show that in developing countries, entry-level jobs for the poor are often stepping-stones out

of extreme poverty.

• However, where there is little personal mobility or little commercial competition, unskilled jobs may

lead nowhere.

11

2012 Study of Experience Since 2000

Our Research• We study from extensive data whether innovation-

driven growth creates jobs for the unskilled as well as for skilled workers, and for women as well as for men.

• The data are from WB Enterprise surveys on a sample of over 26 000 manufacturing establishments across 71 countries (from Albania to Zambia, both OECD and developing), from 2002 to 2006.

• We estimate several layers of interrelated relationships:• What correlates with enterprise R&D activity?• What correlates with enterprise process and product innovation?• What correlates with enterprise level of TFP?• What correlates with enterprise level of employment growth?

2002 2003 2004 2005 2006 Number of observations

(establishments)

Mean employment

(persons)

Standard deviation,

employment

OECD member countries

Chile x 675 137 262Czech x 123 169 683

Estonia x 66 166 559Germany x 448 111 433Greece x 141 135 312

Hungary x 326 104 255

Ireland x 216 107 334

Mexico x 2118 105 344

Poland x 473 47 113

Portugal x 164 232 665

Slovakia x 46 307 1394

Slovenia x 80 179 296

Korea x 267 178 478

Spain x 206 115 354

Turkey x 870 138 244OECD accession country

Russian Federation x 167 189 485

Brazil x 1575 124 321

China x 1601 261 787

India x 2072 89 314

Indonesia x 667 587 1148

South Africa x 564 330 1098Developing countries

Albania x 71 86 243

Algeria x 460 59 128

Arab Republic of Egypt x 955 122 469

Armenia x 222 50 96

Belarus x 98 110 209

Benin x 150 22 58

Bih x 55 171 333

Bulgaria x 69 157 215

Cambodia x 60 409 985

Costa Rica x 298 60 229

Croatia x 88 164 503

Dominican Republic x 131 72 159

Ecuador x 380 84 287

El Salvador x 465 98 251

Ethiopia x 418 107 419

Former Yugoslav Republic of Macedonia (FYROM)

x 39 194 538

Georgia x 37 92 124

Guatemala x 435 120 376

Guyana x 155 40 93

Honduras x 428 92 252

OECD enhanced engagement countries

2002 2003 2004 2005 2006 Number of observations

(establishments)

Mean employment

(persons)

Standard deviation,

employment

Jamaica x 50 61 88

Kazakhstan x 303 82 154

Kyrgyz Republic x 101 103 179

Kyrgyz Republic x 73 174 357

Latvia x 43 129 194

Lesotho x 35 409 831

Lithuania x 82 94 144

Lithuania x 71 103 152

Madagascar x 238 166 416

Malawi x 306 325 1265

Mali x 93 43 147

Mauritius, Republic of x 152 147 393

Moldova x 96 108 177

Moldova x 135 125 288

Mongolia x 170 72 184

Morocco x 125 106 203

Nicaragua x 452 45 170

Niger x 75 41 120

Oman x 69 31 23

Peru x 134 51 128

Philippines x 665 314 851

Romania x 370 105 229

Senegal x 149 41 63

Serbia Montenegro x 74 205 332

Sri Lanka x 408 375 630

Syrian Arab Republic x 172 25 48

Tajikistan x 107 23 54

Tajikistan x 83 150 225

Tanzania x 145 64 133

Thailand x 1385 372 843

Ukraine x 201 106 380

Uzbekistan x 99 125 357

Uzbekistan x 98 174 329

Vietnam x 1370 340 869

Zambia x 100 210 842

Enterprise R&D Investment EquationInfluences behind variables:

Appropriability – IPR protectionProgressivity of firm’s sector elsewhereOwnership of firm – foreign, governmentalAbility to fund – access to capitalIncentives from expansion opportunities if successful innovation

access to markets – already competing in exports? -- business environment in home retail markets?

access to funding – access to capital access to labor – difficulty of hiring and of firing

Size of firmAge of firm

Enterprise Process & Product-Innovation Equations

Influences Behind VariablesFirm’s ability to innovate -- R&D spend

-- access to capital -- implementation skills? -management quality -have formal training program? -- access to ideas? -part of a business association -use internet?

Ownership of firm – foreign, governmentalIncentives from expansion opportunities if successful innovation

access to markets – already competing in exports? -- business environment in home retail markets? access to funding – access to capital access to labor – difficulty of hiring and of firing

Size of firmAge of firm

Measuringtotal factor productivity (TFP)

• For each 2-digit sector we estimate across the establishments a Cobb-Douglas production function

• Output is the real value of enterprise sales, and inputs are the real value of fixed assets, total labor costs (actual or ILO wages) and materials expense.

• Each firm’s residual from its regression is the ln of its TFP – higher values imply lower average and marginal costs of producing value.

𝜀 = ln (total factor productivity)

Enterprise TFP EquationInfluences Behind Variables

Firm’s ability to innovate -- new process or a new product? -- access to capital -- implementation skills? -management quality

-have formal training program?-- access to ideas? -part of a business association -use internet?

Ownership of firm – foreign, governmentalIncentives from expansion opportunities if successful innovation

access to markets – already competing in exports? -- business environment in home retail markets?

access to funding – access to capital access to labor – difficulty of hiring and of firing

Size of firmAge of firm

Enterprise Employment Growth-Rate Equation

Influences Behind the VariablesDid establishment have product innovation?Did establishment have process innovation?The establishment’s level of ln(TFP)The incidence of innovation among peer establishmentsThe establishment’s non-skilled production workers as % of all workersThe establishment’s female workers as % of all workersEstablishment age and size controlsVarious permutations with and without other establishment controls, like those in the

innovation equations.Fixed effects for country of establishmentFixed effects for sector of establishment’s main product

Estimate this equation on whole sample and on various subsamples by age, size and innovativeness of the enterprise.

Econometric Findings• Innovation is an important driver of enterprise

employment growth – several percentage points out of avg of 6% for each!

• Innovation-driven employment growth is inclusive!

– innovative firms hire significantly larger shares of unskilled workers than non-innovative firms

– innovative firms hire significantly larger shares of female workers than non-innovative firms

– Innovative firms’ hiring is not depressed by relatively high wages, the way that hiring by non-innovative firms is.

More econometric findings• significant factors for innovation and for employment

growth are access to: finance (investment capital from both local banks and foreign borrowing), communications (enterprises using the internet grow significantly faster), export markets, and other essential business services such as ISO management certification, business associations and formal worker training programs.

• In addition, having less government ownership and having greater access to global know-how through some foreign ownership are both positive correlates of enterprise employment growth

The Competitive Business Environment• Young firms (less than 5 years old) have the greatest

rate of employment growth by far.• Young firms’ innovation activities are vulnerable and

sensitive to the business environment.– Particularly sensitive to their countries’ indicators of ease

of getting credit, ease of registering property and the ability to enforce business contracts.

– Sensitive to the overall ranking of their countries’ ease of “Doing Business” indicators.

World Bank’s Study of Impacts of Routine Business Regulation

• Ease of starting a business• Hiring and firing

• Registering property• Getting credit

• Mandated disclosures to protect investors• Enforcing a commercial contract

• Ease of closing a business

Routine Business Regulation & Economic Growth

+ 2.3 % in annual economic growth

Is impact of best versus worst regulation of

business practices!

Djankov, McLiesh and Ramalho, 2006. Growth of GDP per capita,1993-2002, Quartiles in World Bank “Doing Business Data Base.”Impacts of education, government consumption, inflation levels etc not as sizable in these econometrics!

Economy

Start-up Procedures (number)

Start-up Time

(days)

Licensing Procedures (number)

Licensing Time

(days)

Firing costs

(weeks of wages)

Bankruptcy Recovery

rate

RANK: Ease of Doing

Business

Argentina 15 32 23 288 139 36.24 101

Bosnia and Herz. 12 54 16 467 33 33.72 95

Brazil 17 152 19 460 37 12.09 121

Bulgaria 9 32 22 226 9 34.43 54

Cambodia 10 86 28 181 39 0.00 143

Chile 9 27 12 171 52 20.02 28

China 13 35 29 367 91 31.50 93

Croatia 10 45 28 278 39 28.91 124

Czech Republic 10 24 31 271 22 18.48 52

Egypt 10 19 30 263 186 16.57 165

Finland 3 14 17 56 26 89.08 14

Greece 15 38 17 176 69 46.29 109

Italy 9 13 17 284 2 39.66 82

Macedonia, FYR 10 18 18 222 22 15.47 92

New Zealand 2 12 7 184 0 68.62 2

Poland 10 31 25 322 13 27.92 75

Romania 5 11 17 242 3 19.93 49

Serbia 10 18 20 211 27 22.56 68

Singapore 6 6 11 129 4 91.35 1

Slovakia 9 25 13 272 13 48.07 36

Slovenia 9 60 14 207 40 44.91 61

Tajikistan 14.00 67 18 187 22 39.07 133

Turkey 8 9 32 232 95 9.77 91

United Kingdom 6 18 19 115 22 85.17 6

United States 5 5 18 69 0 76.97 3

Venezuela 16 141 13 276 47 6.67 164

Weaknesses of our statistical treatment• Our estimated correlations are not proof of causality.

– Few of the many variables are fully exogenous –

• Data are all from pretty good macroeconomic times (pre-crash), and only a snapshot of each enterprise.

• None of the enterprises in our data are “informal.”• No tracking of individual employees over time.Principal next step is to secure and analyze panel data on enterprises – several snapshots of each – including

tougher macroeconomic years.

Conclusions• Innovation-driven employment growth is inclusive• There seem to be productive roles for policy

– Better access to financing, international trade and partnerships, management practices, and internet help foster productivity, employment growth and innovation.

– The legal and regulatory system surrounding vulnerable (often young) firms is critical for their innovation and employment growth: property and contract protection, financial opportunities, and ease of entry and exit.

• Quantitative analysis confirms that changes in labor earnings are the largest contributor to poverty reduction. In 10 of 18 Latin American countries, changes in labor income explain more than half the reduction in poverty, and in another 5 countries, more than a third. In Bangladesh, Peru, and Thailand, changes in education, work experience, and region of residence mattered, but the returns to these characteristics (including labor earnings) mattered most. Just having work was not enough, given that most people work in less developed economies. What made a difference for escaping poverty was increasing the earnings from work.

Variable Mean SD Mean SD

Growth and innovation

Annual compound employment growth rate 5.66 21.54 6.00 23.48ln (Total Factor Productivity) 3.28 2.49 3.19 2.40Whether firm introduced a new process (0/1) 29.6% 45.6% 36.7% 48.2%Whether firm introduced a new product (0/1) 34.7% 47.6% 43.1% 49.5%Whether the firm does R&D (0/1) 18.9% 39.2% 23.0% 42.1%R&D spending/total sales 0.4% 2.8% 0.7% 4.1%

Establishment-level business environment

Whether the firm exports (0/1) 28.1% 44.9% 28.0% 44.9%Whether the firm uses internet (0/1) 77.8% 41.6% 59.8% 49.0%Whether the firm is part of a business association (0/1) 59.9% 49.0% 59.2% 49.2%Whether the firm has ISO certification (0/1) 26.1% 43.9% 21.1% 40.8%Whether the firm offers formal training programmes (0/1) 47.2% 49.9% 47.3% 49.9%Fraction of borrowing in foreign currency 23.0% 33.5% 11.9% 29.7%Fraction of investment capital from local banks 13.9% 25.4% 20.1% 30.9%Log of (average annual wage) 9.54 0.89 8.08 1.79Whether the firm established a new foreign joint venture (0/1) 6.6% 24.8% 6.4% 24.5%Whether the firm established a new licensing agreement (0/1) 8.4% 27.8% 9.0% 28.7%

Enterprise characteristics

Whether the firm is government owned (0/1) 1.6% 12.6% 6.8% 25.2%Whether the firm is foreign owned (0/1) 9.5% 29.4% 12.4% 32.9%Whether the firm is incorporated (0/1) 57.8% 49.4% 52.6% 49.9%Fraction of workforce comprised of management employees 5.4% 12.0% 9.9% 14.7%Fraction of workforce comprised of skilled production employees 51.5% 30.3% 38.9% 30.1%Fraction of workforce comprised of unskilled production employees 23.0% 28.9% 34.3% 31.6%Fraction of workforce comprised of female employees 17.4% 23.9% 28.2% 30.1%

Sectoral and country business environment

US 4 digit ISIC sector average R&D intensity 1.7% 1.8% 1.6% 1.4%

OECD accession and enhanced engagement countries; developing

countriesOECD member

countries

Underlying survey question

Growth and innovation

Annual compound employment growth rate The following table refers only to permanent workers of your plant: {Average number of workers}, {Average number of workers 3 years ago}

Whether firm introduced a new process (0/1) Has your company undertaken any of the following initiatives in the last three years? {Introduced new technology that has substantially changed the way that the main product is produced}

Whether firm introduced a new product (0/1) Has your company undertaken any of the following initiatives in the last three years? {Developed a major new product line}

Whether the firm does R&D (0/1) How much did your establishment spend on design or R&D last year? {>0}R&D spending/total sales How much did your establishment spend on design or R&D last year? / Please provide the following information on your

establishment’s production, sales and expenses. {Total sales}Establishment-level business environment

Whether the firm exports (0/1) What percent of your establishment’s sales are:{exported directly}+{exported indirectly (through a distributor)}Whether the firm uses internet (0/1) Does your enterprise regularly use e-mail or a website in its interactions with clients and suppliers?: {E-mail}, {Website}Whether the firm has external auditor (0/1) Does your establishment have its annual financial statement reviewed by an external auditor?Whether the firm is part of a business association (0/1) Is your establishment/firm a member of a business association or chamber of commerce?Whether the firm has ISO certification (0/1) Has your firm received ISO (e.g. 9000, 9002 or 14000) certification?Whether the firm offers formal training programs (0/1) Do you offer formal (beyond “on the job”) training to your permanent employees?Fraction of borrowing in foreign currency What share of your total borrowing (loans, accounts payable) is denominated in foreign currency?Fraction of investment capital from local banks Please identify the contribution over the last year of each of the following sources of financing for your establishment’s: ii)

New investments (i.e. new land, buildings, machinery and equipment): {Local commercial banks}Average annual wage The following table refers only to permanent workers of your plant: {Total wages} / {Average number of workers}Whether the firm established a new foreign joint venture (0/1) Has your company undertaken any of the following initiatives in the last three years? {Agreed to a new joint venture with

foreign partner}Whether the firm established a new licensing agreement (0/1) Has your company undertaken any of the following initiatives in the last three years? {Obtained a new licensing agreement}

Enterprise characteristics

Whether the firm is government owned (0/1) What percentage of your firm is owned by: {Government/State}Whether the firm is foreign owned (0/1) What percentage of your firm is owned by: {Private Sector: a) foreign}Whether the firm is incorporated (0/1) What is the current legal status of your firm? {Publicly listed company; Private held, limited company}Fraction of workforce comprised of management employees Average number of workers: {Management}, {Total}Fraction of workforce comprised of skilled production employees Average number of workers: {Skilled production workers}, {Total}Fraction of workforce comprised of unskilled production employees Average number of workers: {Unskilled production workers}, {Total}Fraction of workforce comprised of female employees The following table refers only to permanent workers of your plant: {Average number of workers of which: % female}

Variable