This challenge was introduced by Florence Blandinieres, Paul Hünermund and Martin Murmann, researchers, ZEW Centre for European Economic Research (ZEW) in Mannheim
This challenge was selected by the teams BBS Wirtschaft 1 Ludwigshafen and Albertus-Magnus-Gymnasium Stuttgart.
Technological progress through innovation is probably the most important driving force of the productivity (and in turn welfare) growth of developed economies. An example of such technological progress is named Moore’s Law. Moore’s Law states that the computing power of new computer chips doubles about every two years. This exceptional technological performance has been observable for more than 50 years now and represents an impressive example of exponential growth (exactly 35% per year) of our technological opportunities. In the more recent past, however, this exponential growth could only be maintained through a massive increase in expenditures on research and development (R&D). The graph below illustrates the phenomenon: the largest semiconductors manufacturers (Intel, Samsung, Siemens, etc.) needed to increase their R&D expenditures by nearly 80% over the last 45 years to maintain Moore’s law.
Source: Bloom, N., Jones, C. I., Van Reenen, J., & Webb, M. (2016). Are Ideas Getting Harder to Find?. Manuscript, Stanford University, Palo Alto.
Decreasing returns to R&D efforts are a multifaceted problem which we observe across many industries. Most developed economies counteract this challenge by increasingly investing in education and research, but the annual economic growth rates keep decreasing, year by year. What happens, however, when it becomes increasingly difficult to develop new, groundbreaking ideas that increase our productivity and promote economic growth? In Germany, we observe that the innovative strength becomes increasingly concentrated in a few industries, such as the automotive and chemical industries. At the same time, other sectors, for example, the software industry, was never really competitive on an international level. A similar specialization also takes place at a regional level. Companies in some regions of Germany, especially in the south, are highly innovative and contribute strongly to overall economic growth, while other regions are stagnating.
In this project, the social chances and risks of different national innovation strategies are to be compared and discussed, in order to derive recommendations for future political action.
How can (and should) policy react to the decreasing returns to R&D? Should the trend towards more specialization be actively encouraged – so that at least parts of the companies and regions will remain internationally competitive in the future and will be able to compete with the USA or China? Should research and development and the foundation of start-ups be particularly promoted in a few promising sectors? Should curricula of schools and universities be aligned with the needs of innovative industries? Alongside opportunities, such a strategy also entails major risks. What would it mean, for example, for the equality of opportunities between sectors and regions and, above all, for the people working there? And how would we determine which technologies are worth being promoted? Or should policy rather try to counter the growing specialization in the economy in order to ensure the equality of opportunities – for example, by particularly supporting the weakest sectors and regions? Is the best policy response possibly “Trumponomics”? Namely, that we close ourselves off from international markets in order to escape the growing competitive pressure for the best ideas in the world?