Research for Innovation-fuelled, Sustainable, Inclusive Growth in EuropeDSC_0241

ISIGrowth addresses the topic “EURO-2-2014: The European growth agenda” and in particular the dimensions 2 (“Innovation-based growth strategy for Europe”) and 3 (“Global production and innovation networks – costs and benefits for Europe”) of its scope.

The main goal of ISIGrowth is twofold. First, we will provide novel and comprehensive diagnostics of the relationships between innovation, employment dynamics and growth in an increasingly globalized and financialised world economy. Second, on the grounds of such diagnostics, we will elaborate policy scenarios and we will deliver a coherent policy toolkit to achieve the Europe 2020 objectives of smart, sustainable and inclusive growth.

In order to deliver our comprehensive diagnostics and coherent set of policy tools, we will undertake the analysis from several, highly complementary, angles, namely (i) we will analyse the long-term dynamics of European economies, considering especially their degrees of innovativeness, their patterns of structural transformation, and their growth performances (WP 1); (ii) we will assess the position of European economies in the global production and financial networks, in order to study the effect of increasing globalisation of production and finance on the emerging de-industrialisation patterns observed in some European regions (WP 2 and 3); (iii) we shall analyse the nature and drivers of the observed increasing inequality in an attempt to disentangle purported ‘skill biases’ of technical change, ‘globalisation effects’, ‘financialisation effects’ and possible broader institutional causes (WP 3 and 4); (iv) we will address the multiple links between the financial sector and the real economy, which are important for the rates of innovation, growth and income distribution (WP 4); (v) we will explore the dual role of innovation as a driver of income and employment growth and a labour-saving factor, relating the ensuing patterns to the flows of job creation and destruction (WP 5); (vi) we shall study the links between ‘Schumpeterian’ patterns of innovation and ‘Keynesian’ mechanisms of demand generation, and study the conditions under which their combination and different ensembles of policies can drive socially inclusive and environmentally sustainable growth. (WP 6 and 7).

Our analysis addresses these points from both a theoretical and an empirical, intensively data-driven perspective. In particular, we use the idea that the economy and its main domains (e.g., technologies, agents, social relations and institutions) should be studied considering their complex system nature. More specifically, we will employ (i) state-of-the-art econometric techniques combining rich micro, industry, market-, regional and country level data together with ‘theory-informed’ historical case studies of key industry actors in particular sectors; (ii) network approach to stuy the possible dynamics that are crucial to growth (e.g. mitigating financialisation and deindustrialisation, fostering innovation and sustainable development); (iii) empirically-grounded models as laboratories for policy analysis exploring the conditions under which smart and sustainable growth (as described above) can be achieved by different combinations of innovation, industry, fiscal and monetary policies.

The Great Recession has brought to the fore the longer-term structural imbalances that have accumulated over the last three decades in Europe, also showing by the ineffectiveness of standard policy instruments to put bank EU economies on steady growth paths. More than ever, it is evident that markets alone cannot ensure the strong economic growth required to approach full employment, even in the presence of extraordinary and unconventional policy support. ‘Animal spirits’ of business cannot be assumed; they must be created. This poses massive challenges for public policy beyond fixing markets. Markets must be actively shaped and created (Mazzucato, 2013a).

New approaches are thus needed in the design of growth policies and for new types of models for the analysis of policy impacts. In particular, in an environment of a highly globalised, financialised and interconnected economy, policy measures from different domains interact strongly in terms of shaping growth paths, as well as the ability for comprehensive inclusion of all citizens in the EU area and in member states. Isolated consideration of each of these policy domains is not sufficient to understand the full range of complex implications of policy choices made with a particular objective in mind; this undermines the efficacy of the policy to achieve the objectives for which it was designed. There is a need for new approaches that combine intensive empirical analysis with a modelling philosophy that takes into account the complexity and systemic nature of the policy design issues.

ISIGrowth is taking up this challenge by developing and exploiting a structured systemic framework for policy analysis. ISIGrowth has three main goals: (1) to build clear empirical diagnostics of the underlying structural, economic and institutional factors hampering the return to a path of a sustained growth; (2) to develop models to study what has emerged from these diagnostics; and (3) to combine the empirical and model-based analysis to propose an ensemble of policy measures and institutional reforms apt to sustain innovation-driven, inclusive, environmentally-friendly paths of growth.

Our proposed interpretative perspective leads also to the identification of a number of key cross-cutting themes (CCT) around which the work in ISIGrowth is organized. These CCT are transversal to the work packages and the objectives. They cover policy areas such as innovation policy, fiscal policy, industrial policy, education policy, cohesion policy.

1) Policies Shaping Technologies and Markets. Innovation-driven growth is largely reliant on the ability to generate and shape the emergence of new technologies and new markets. Europe in this domain has been at relative disadvantage compared to the US and some Asian countries. ISIGrowth intends to contribute to a better understanding of the importance of mission-oriented programmes for innovation-driven growth and to provide concrete policy proposals on how such programmes can be effectively established in order to be compatible with the European industry structure and innovation system. [WP1]

2) Financialisation and Structural Change. The shift of economic activity and investment from the real economy to the financial sector represents a substantial obstacle for innovation-driven growth. Given the complex architecture of contemporary finance/real economy interactions, ISIGrowth will combine empirical analysis of the different effects of financialisation on macroeconomic stability, R&D and innovation with the application of state-of-the-art tools for financial network analysis and empirically grounded industry models to gain a sound understanding of how changes in the financial sector influence innovation dynamics and growth. We intend to evaluate the effectiveness of different measures proposed in the ‘Innovation Union’ initiative and also to explore how these results depend on potential changes in the regulatory framework for the financial sector [WP4, 3, 2, and 6].

3) Global Value Chain and Structural Change. A major driver of de-industrialisation trends in Europe rests in the globalisation of networks of trade, finance and production. It is an important objective of ISIGrowth to disentangle the effects of changes in the global value chain on the long-run ability of the European economy to stay close to the technological frontier in key areas and to avoid a continued loss of high-quality, skill-intensive jobs. We will study the possible interactions between globalisation, de-industrialisation and financialisation patterns at the theoretical and empirical level, employing novel theoretical and empirical techniques that make it possible to capture the complexities of global production, trade and financial networks. The insights stemming from such analysis will be taken into account when developing policy recommendations, which will be compared with those from the Europe 2020 flagship initiative entitled ‘An industrial policy for the globalisation era’ [WP2, 4, and 6].

4) Innovation and Mechanisms of Inequality Generation. ISIGrowth builds on the full acknowledgment that both functional and personal distributions of income have dramatically worsened in Europe. ISIGrowth intends to clarify how far the divergent evolution of the upper part of the income distribution is driven by innovation-based growth processes vis-à-vis financialisation and parasitic behaviours, and in how far the increasing inequality between different actors involved in the innovation process hampers innovation dynamics and to feed the resulting insights into normative policy analysis [WP3, 5 and 6].

5) Innovation, Employment and Demand Dynamics. The gradual end of a ‘Fordist’ regime of growth grounded on the demand side, the progressive de-linking of wages to productivity dynamics and the increasing financialisation of the economy are likely to have shifted the balance in favour of labour-saving innovations over demand-creating ones (as well as contributing to increasing levels of inequality) thus modifying the overall processes of job creation and job destruction (Bassanini and Ernst, 2002; Haltiwanger et al. 2014). Such dynamics, accompanied by low corporate investment, imply that innovations will not be able to replace the labour that is displaced. ISIGrowth will study the empirical relation between innovation and employment dynamics in order to understand the different transmission channels through which process innovations and product innovations may or may not promote employment growth. Such investigation should provide fresh evidence to the EU’s ‘Agenda for new skills and jobs’ [WP5 and 6].

6) Micro-Macro Connections. The economy can be considered as a complex system. Consequently, the possible complementarities between microeconomic patterns of innovation and demand dynamics may lead to the emergence of unforeseen consequences at the macro level, affecting short-run economic stability as well long-run growth. In such a framework, a ‘holistic’ approach is needed to design different combinations of policies pertaining to different domains (that is, innovation, industrial, fiscal and monetary policies) and to study their impact on the performance of the EU area (as in, for example, Dosi et al., 2010, 2013 and 2014, Dawid et al., 2014). ISIGrowth will follow a complex-system perspective to develop a family of multi-agent models to perform such analysis, with the ultimate aim of providing a policy agenda to reach the objective of smart, inclusive and sustainable growth of the Europe 2020 strategy [WP6].

7) The Challenges of Climate Change. A transversal theme of the theoretical and empirical analyses of ISIGrowth is the environmental challenges faced by EU economies (especially in WP1 and WP6). We take into account the constraints imposed by climate scenarios on economic performance and policies as well as the possible opportunities. The urgent need to avoid high-end scenarios (wherein world temperatures could rise by 3°C or more) provides a formidable opportunity to shape and create markets related to green technologies, upon which the growth of Europe of the next decades should be grounded.

The work in the different WPs of ISIGrowth will not only provide useful insights and policy analysis with respect to each of these cross-cutting themes, but will also (particularly in WP7) examine the complex feedbacks between effects in these different domains and the (potentially unintended) effects of policy initiatives in domains outside the explicit policy target. We will maximise the impact of the policy agenda elaborated in ISIGrowth by disseminating it in a participatory way, taking into account the possible feedbacks from civil society, firms, and policy makers. In order to achieve such an ambitious objective, WP8 will be entirely dedicated to dissemination.