Productivity Growth and the Internationality of Innovative Milieus

The total factor productivity growth is generally low in Germany. However, the manufacturing sector shows comparatively high productivity growth rates. Within the manufacturing sector, more innovative milieus are more international. Lessons can be learned.

Technological progress is a major component of substantial economic growth, apart from increases in labor participation and capital endowment. As a notion to the work of Robert Solow, technology does not fall like ‘Manna from Heaven’. But what drives technological progress and does indication exist that international engagement of companies can be associated with more innovative abilities?

Companies are at the core and forefront of inventing new products and to redoing existing processes. While the growth in productivity today is generally low in Western economies, the manufacturing sector is the main force of innovation. Therefore, it is of great interest to characterize the companies in this sector so that lessons can be drawn from the best and innovation can be achieved for companies within and across sectors.

Seven innovative milieus in Germany

In a survey of more than 1,000 companies from the manufacturing sector and its related services in Germany, companies were assigned to seven different milieus according to their innovation characteristics by using factor analysis as a tool to find joint variations in the data. Using an output-indicator which compromises various aspects, the diverse milieus could be scored on a scale from 0 to 100 on their innovation-output. This leads to the following milieus:

• Technology leaders:

• Technology leaders are the most successful innovators. Their focus is on R&D, science, and technology while they have a structured organization of innovation. Technology leaders are global leaders in high-technology industries. Companies of this group often have high returns, but at the same time, there are relatively many start-ups in this milieu. Score: 69
  

  Disruptive innovators:

• Disruptive innovators are characterized by their openness to new ideas. They are venturesome and carry out radical projects with the potential of disruption. Disruptive innovators are also characterized by strengths in innovative organizational structures and in networking. Most start-ups are in this milieu. Score: 62
  

  Conservative innovators:

• Conservative innovators are characterized by their emphasis on R&D which leads them to a high number of patents. Nevertheless, they are less innovative than technology leaders due to their lower culture for innovations and participation in networks. Score: 46

• Cooperative innovators:

• Cooperative innovators put emphasis on their employees and on internal networks. Due to that, innovation is mainly driven by interdisciplinary collaboration. Cooperative innovators are mainly active in industry-related services. Score: 43

• Random innovators:

• Random innovators lack a clear innovation strategy. They mainly innovate through trial-and-error in competitive environments. This milieu has the most small and medium enterprises (SMEs). They can improve due to R&D as well as to their culture and organization, and need to enhance the skills of their employees. Score: 25

• Passive adapters:

• Passive adapters are not the major force behind innovations themselves, but they rely on strong networks with their customers to implement their input. This milieu exhibits a relatively large share of older enterprises. Score: 21

• Companies lacking a focus on innovation:

• Companies lacking a focus on innovation are the poorest innovators. They do not perceive innovations as necessary to endure in competition. Nevertheless, there exist indications that they misjudge their competitive environment. They need to improve in all areas. Score: 4

Fig. 1: Innovative Milieus in Germany, 2019 – Share as percentage of all companies

International engagement and innovations – part of the Manna for productivity growth?

Coming back to the initial question, the companies which are most active with foreign countries are by far the technology leaders and the conservative innovators. The share of exports in returns amount 41.4% when it comes to the technology leaders and account for 51.0% of the conservative innovators – passive adapters are third with 16.0%. Furthermore, the share of foreign production is 18.5% for the technology leaders and 12.6% for the conservative innovators – disruptive innovators and random innovators are third, each with 6.5%. However, there are several possible reasons why other milieus are not that international.

The disruptive innovators show good results considering their innovation and economic performances, but are not as international as technology leaders and conservative innovators. This could be due to the fact that the milieu of disruptive innovators is the youngest which did not yet allow them to build structures for international engagements. Other milieus which are neither innovative nor international exhibit a high rate of SMEs. These possibly lack financial and personal resources for innovations or they simply do not perceive innovations as central to their business model.

However, for the economy as a whole, innovations are a necessary element to sustain competitively and this can work more easily with co-operations and learnings from companies in other countries. The technology leaders need to find well secure frameworks for their businesses because their innovation power can have positive spill-over effects as well as effects along the supply chain for companies in other milieus.

Furthermore, other milieus should try to learn from the way technology leaders engage in R&D and networks because an increase in their capabilities to innovation can also make them economically more successful. Apart from that, assistance for companies with a lack of resources is important to enhance their innovativeness. Options for such assistances include superordinate measures that flank the innovation processes of SME via economics of scale.

Without being able to state any causal relationship, international orientation generally goes along with the capability to innovate. This is an important insight as innovations are a necessary condition for long-term economic growth and due to these results, it seems to be rather unlikely that firms can be as innovative as others when they do not have an international focus.

Potential explanations include that internationally engaged companies can learn from people with diverse cultural background along the supply-chain. This could also improve the quality and diversity of networks which in turn fosters the creation of new ideas. Innovators may as well profit from their sheer size and capacities since that makes it easier to get abroad for doing businesses – something which SMEs probably need more help with for unfolding their full potential.

References:

Pohl, P., & Kempermann, H. (2019). Innovative Milieus. Die Innovationsfähigkeit deutscher Unternehmen. In Bertelsmann Stiftung (Hrsg.): Produktivität für Inklusives Wachstum, Bd. 06. Gütersloh, Deutschland.