An essential driver of regional economic growth is the uptake of ideas and technologies used in other places. But often regions struggle to leverage “innovation diffusion”. Efforts to support the adoption of innovation can unlock significant productivity and economic growth potential in and support the catching up of regions that lag behind the domestic or global innovation frontier.
Productivity and innovation in regions
Productivity and innovation underpin long-term economic growth and competitiveness of regions. They can help regions transition their economic structures and ensure sustainable wage growth for workers. Regions can follow different paths to unlock their potential, pushing the global knowledge frontier in some areas and focusing on uptake and diffusion of innovation in others. With effective governance, innovation policy can be a lever for place-based regional government. To help regions unlock their productivity and innovation potential, understanding the local drivers for productivity growth, the regional innovation system and its bottlenecks and the interplay with policies at different levels of government is key.
Key messages
Regions that leverage their tradable sectors tend to see faster productivity growth. Firms in tradable sectors are more exposed to international competition and therefore need to be dynamic and innovative, raising productivity through either cost savings or exploration of new market opportunities. A holistic strategy to raising productivity should also include measures to encourage a diverse economy, which is less vulnerable to shocks and can recover more quickly from downturns. This requires seeking opportunities to improve productivity in both tradable and non-tradable activities.
Innovation is not only about technological or R&D-driven innovation. A broad understanding of innovation can help regions seize the opportunities offered by other forms of innovation (e.g., social, managerial, product and operational innovation), which can be particularly helpful for micro- and small firms. Innovation in the public sector is another form, which could create greater inclusiveness; support larger societal goals (e.g. addressing climate change); and, generate greater citizen satisfaction with public and administrative services..
Context
Regional productivity gaps are wide and often persistent
Labour productivity, gross value added (GVA) per person employed, in OECD regions differs substantially both between and within countries. On average, within countries, labour productivity in the most productive region is nearly double the productivity of the least productive region. Differences are especially stark in Chile and Mexico: in these countries, the most productive region is more than five times as productive as the least productive region. Overall, around 60% of workers across OECD countries live in a region with productivity levels below the national average.
Seizing opportunities from innovation diffusion
Innovation raises productivity. Firms can innovate by developing knowledge in-house or accessing knowledge around them or in other regions. Knowledge diffuses through different channels, such as the exchange of goods and services through supplier relationships, the mobility of workers or collaboration in innovation activity between firms. Local intermediaries, such as regional development agencies, employer associations, universities, and research institutions, can facilitate this exchange.
Significant gaps in the strength of innovation diffusion channels persist among OECD regions, particularly among small and medium enterprises (SMEs). For example, the share of SMEs with innovation cooperation activities in the TL2 region of the Basque Country was 128% higher than the national average, while it was 50% lower in the Canary Islands.
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