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Stronger productivity growth in the US than the EU over the late 1990s is widely attributed to faster, more widespread adoption of information and communication technology (ICT). The literature has emphasised complementarities in production between ICT and internal restructuring as an important mechanism. We investigate the idea that increased use of ICT has facilitated outsourcing of business services, and that these are complementary activities in production because they allow firms to focus on their core competencies. This is consistent with evidence from the business literature and aggregate trends, and we show evidence from microdata that is consistent with this idea.

In this paper we use new data to describe how firms from 15 European countries organise their innovative activities. The data matches firm level accounting data with information on the patents that those firms and their subsidiaries have applied for at the European Patents Office. We describe the data in detail.

In this paper we use new data to describe how firms from 15 European countries organise their innovative activities. The data matches firm level accounting data with information on the patents that those firms and their subsidiaries have applied for at the European Patents Office. We describe the data in detail.

A common approach to measuring price changes is to look at the change of the expenditure needed to purchase a fixed basket of goods. It is well-known that this approach suffers from problems and creates several biases in the measurement of price changes faced by consumers. Substitution and outlet bias, two commonly studied concerns, are both driven by consumer choices of what and where to buy. However, consumers also make other choices, including how much and when to buy. We discuss the implications of consumers' timing and quantity decisions have on standard practices of computing of computing a price index. We use household-level data on quantities purchased and prices paid to construct a measure of the savings made by consumers' optimizing behaviour in the purchase of food. In particular, we compare the prices actually paid by the consumers to various alternatives that do not allow for substitution. Our analysis suggests that the average consumer makes significant, and comparable in magnitude, savings from the four dimensions of choice that we study. Furthermore, our data suggests significant heterogeneity in consumer behavior, and that this behavior is correlated with demographics. Our findings suggest that ignoring timing and quantity decisions, when computing a price index, can generate biases on the order of magnitude of substitution and outlet biases.

A common approach to measuring price changes is to look at the change of the expenditure needed to purchase a fixed basket of goods. It is well-known that this approach suffers from problems and creates several biases in the measurement of price changes faced by consumers. Substitution and outlet bias, two commonly studied concerns, are both driven by consumer choices of what and where to buy. However, consumers also make other choices, including how much and when to buy. We discuss the implications of consumers' timing and quantity decisions have on standard practices of computing of computing a price index. We use household-level data on quantities purchased and prices paid to construct a measure of the savings made by consumers' optimizing behaviour in the purchase of food. In particular, we compare the prices actually paid by the consumers to various alternatives that do not allow for substitution. Our analysis suggests that the average consumer makes significant, and comparable in magnitude, savings from the four dimensions of choice that we study. Furthermore, our data suggests significant heterogeneity in consumer behavior, and that this behavior is correlated with demographics. Our findings suggest that ignoring timing and quantity decisions, when computing a price index, can generate biases on the order of magnitude of substitution and outlet biases.

We use hedonic prices and purchase quantities to consider what can be learned about household willingness to pay for baskets of organic products and how this varies across households. We use rich scanner data on food purchases by a large number of households to compute household specific lower and upper bounds on willingness to pay for various baskets of organic products. These bounds provide information about willingness to pay for organic without imposing restrictive assumptions on preferences. We show that the reasons households are willing to pay vary, with quality being the most important, health concerns coming second, and environmental concerns lagging far behind. We also show how these methods can be used for example by stores to provide robust upper bounds on the revenue implication of introducing a new line of organic products.

Traditionally, the UK has been regarded as good at innovation - with many inventions and scientific breakthroughs. So, can this nation rest easy? No. Based on extensive research by the Advanced Institute of Management Research (AIM), it would appear that the agenda for keeping Britain competitive is a demanding one. Six AIM authors report on what the UK needs to know. And do. © 2008 London Business School.

Many papers have documented wide variations in productivity even in narrowly defined industries. Some have argued that this primarily reflects measurement problems due to, for example, comparing across different products. Others argue this reflects persistent differences in performance due, for example, to management. This paper looks at productivity differences not within an industry but within a firm. We use data on productivity of different branches within lines of business of a major UK-based wholesaler. Using these productivity data for comparisons is, we argue, more likely to compare like with like than comparing between firms. We document sustained differences in productivity even between branches within the same line of business. We also discuss to what extent they are correlated with differences in management and find that differences in management "account" for around 40% of the difference in productivity.

This paper exploits a quasi-experimental setting to estimate the impact that a multi-dimensional group incentive scheme had on branch performance in a large distribution firm. The scheme, which is based on the Balanced Scorecard, was implemented in all branches in one division, but not in another. Branches from the second division are used as a control group. Our results suggest that the balanced scorecard had some impact, but that it varied with branch characteristics, and in particular, branches with more experienced managers were better able to respond to the new incentives.

This paper examines the impact of fiscal incentives on the level of R&D investment. An econometric model of R&D investment is estimated using a new panel of data on tax changes and R&D spending in nine OECD countries over a 19-year period (1979–1997). We find evidence that tax incentives are effective in increasing R&D intensity. This is true even after allowing for permanent country-specific characteristics, world macro shocks and other policy influences. We estimate that a 10% fall in the cost of R&D stimulates just over a 1% rise in the level of R&D in the short-run, and just under a 10% rise in R&D in the long-run.

We examine the “home bias” of international knowledge spillovers as measured by the speed of patent citations (i.e. knowledge spreads slowly over international boundaries). We present the first compelling econometric evidence that the geographical localization of knowledge spillovers has fallen over time, as we would expect from the dramatic fall in communication and travel costs. Our proposed estimator controls for correlated fixed effects and censoring in duration models and we apply it to data on over two million citations between 1975 and 1999. Home bias declines substantially when we control for fixed effects: there is practically no home bias for the more “modern” sectors such as pharmaceuticals and information/communication technologies.

This paper exploits a quasi-experimental setting to estimate the impact that a multi-dimensional group incentive scheme had on branch performance in a large distribution firm. The scheme, which is based on the Balanced Scorecard, was implemented in all branches in one division, but not in another. Branches from the second division are used as a control group. Our results suggest that the balanced scorecard had some impact, but that it varied with branch characteristics, and in particular, branches with more experienced managers were better able to respond to the new incentives.

This paper investigates the determinants of vertical integration. We first derive a number of predictions regarding the relationship between technology intensity and vertical integration from a simple incomplete contracts model. Then, we investigate these predictions using plant-level data for the UK manufacturing sector. Most importantly, and consistent with theory, we find that the technology intensities of downstream (producer) and upstream (supplier) industries have opposite effects on the likelihood of vertical integration. Also consistent with theory, both these effects are stronger when the supplying industry accounts for a large fraction of the producer's costs. These results are generally robust and hold with alternative measures of technology intensity, with alternative estimation strategies, and with or without controlling for a number of firm and industry-level characteristics.

This paper exploits a quasi-experimental setting to estimate the impact thata multi-dimensional group incentive scheme had on branch performance in a largedistribution firm. The scheme, which is based on the Balanced Scorecard, wasimplemented in all branches in one division, but not in another. Branches from thesecond division are used as a control group. Our results suggest that the balancedscorecard had some impact, but that it varied with branch characteristics, and inparticular, branches with more experienced managers were better able to respond tothe new incentives. This paper exploits a quasi-experimental setting to estimate the impact thata multi-dimensional group incentive scheme had on branch performance in a largedistribution firm. The scheme, which is based on the Balanced Scorecard, wasimplemented in all branches in one division, but not in another. Branches from thesecond division are used as a control group. Our results suggest that the balancedscorecard had some impact, but that it varied with branch characteristics, and inparticular, branches with more experienced managers were better able to respond tothe new incentives.

European Union countries have implemented widespread reforms to product markets in order to stimulate competition, innovation and economic growth. We provide empirical evidence that the reforms carried out under the EU Single Market Programme (SMP) were associated with increased product market competition, as measured by a reduction in average profitability, and with a subsequent increase in innovation intensity and productivity growth for manufacturing sectors. In our analysis we exploit exogenous variation in the expected impact of the SMP across countries and industries to identify the effects of reforms on average profitability, and the effects of profitability on innovation and productivity growth.

This paper considers how competition can affect aggregate innovative activity through its effects on firms' decision whether or not to vertically integrate. A moderate increase in competition enhances innovation incentives, too much competition discourages innovative effort. These effects generates an inverted-U relationship between competition and innovation and between competition and the incentive to vertically integrate. Preliminary evidence finds that there is a non-linear relationship between competition and the propensity of firms to vertically integrate. These results seem to be more consistent with the Property Right Theory (PRT) of vertical integration than with the Transaction Cost Economics (TCE) approach.

This paper considers the impact that information and communication technology (ICT) has on firms' choices over organisational form. In particular, the decision over whether to produce in-house or outsource services, and the decision over the location of activity. ICT reduces the transaction and adjustment costs of moving activity outside the firm, and of carrying it out at greater geographic distance. We find that more ICT-intensive firms purchase a greater amount of services on the market and they are more likely to purchase offshore than less ICT-intensive firms.

This report analyses the impact of product market reforms, in the form of the EU Single Market Programme, on the extent of product market competition and the subsequent effects of competition on innovation activity and productivity growth.The report first summarises the main messages from the existing theoretical and empirical literature on the relationship between competition and innovation and uses this to inform the subsequent empirical analysis. The theoretical literature on competition and growth emphasises the importance of economic profits, or rents, in providing incentives for firms to innovate to compete for market position or in order to enter new markets. Increased competition may increase incentives for firms to increase efficiency or to innovate in order to protect or enhance their market position. However, competition may reduce the rewards to innovation or entry into a market and thus discourage these activities.

HERE is a long-standing interest in the effects of entry, which are widely recognized as major drivers of economic growth. Entry can induce reallocation of inputs and outputs, trigger knowledge spillovers, and affect innovation incentives in incumbent firms. The desire to induce entry by foreign firms has spurred widespread policy reforms, particularly in countries or industries behind the technology frontier. However, empirical studies of the effects of market liberalizations and inward direct investment from foreign firms provide mixed results on incumbent reactions. 1 In this paper we explore systematic variation in the response of incumbent firms to entry. We are motivated by the following empirical regularity—we see substantial heterogeneity in the correlation between greenfield foreign firm entry and incumbent productivity growth when we look across industries in the United Kingdom. In industries close to the technology frontier there is a strong and positive correlation, while a weak or even negative one is found in industries that lag behind. This is illustrated in figure 1, where we plot the annual rate of greenfield foreign firm entry in each industry-year against the respective average of subsequent total factor productivity growth in incumbent establishments. The sample is split at the median distance to the technology frontier, as measured by a labor productivity index that relates incumbents in U.K. industries to their U.S. industry equivalent. Our explanation for this variation follows from Schumpeterian growth theory—threat from frontier entrants induces incumbents in sectors that are initially close to the technology frontier to innovate more, and this triggers productivity growth, but entry threat reduces the expected rents from doing R&D for incumbents in sectors further from the frontier. In the former case, incumbent firms close to the frontier know that they can escape and survive entry by innovating successfully, and so they react with more intensive innovation activities aimed at escaping the threat.

We examine whether discretionary government grants influence the location of new plants. Grants have a small effect in attracting plants to specific geographic areas, but their effectiveness increases with agglomeration externalities, measured by the number of other plants in that location in the same industry. We also find evidence that regional industrial structure affects the location of new entrants: firms in more agglomerated industries locate new plants near to others in the same industry, and firms are also attracted to industrially diversified locations. Foreign multinationals locate new plants near to other foreign-owned plants in the same industry.

This paper considers the impact that information and communication technology (ICT) has on firms' choices over organisational form. In particular, the decision over whether to produce in-house or outsource services, and the decision over the location of activity. ICT reduces the transaction and adjustment costs of moving activity outside the firm, and of carrying it out at greater geographic distance. We find that more ICT intensive firms purchase a greater amount of services on the market and they are more likely to purchase offshore than less ICT intensive firms.

This paper considers the impact that information and communication technology (ICT) has on firms’ choices over organisational form. In particular, the decision over whether to produce in-house or outsource services, and the decision over the location of activity. ICT reduces the transaction and adjustment costs of moving activity outside the firm, and of carrying it out at greater geographic distance. We find that more ICT-intensive firms purchase a greater amount of services on the market and they are more likely to purchase offshore than less ICT-intensive firms. (JEL: D21, F23, L23)

This paper investigates the relationship between product market competition (PMC) and innovation. A Schumpeterian growth model is developed in which firms innovate ?tep-by-step? and where both technological leaders and their followers engage in R&D activities. In this model, competition may increase the incremental profit from innovating; on the other hand, competition may also reduce innovation incentives for laggards. This model generates four main predictions which we test empirically. First, the relationship between product market competition (PMC) and innovation is an inverted U-shape: the escape competition effect dominates for low initial levels of competition, whereas the Schumpeterian effect dominates at higher levels of competition. Second, the equilibrium degree of technological ?eck-and-neckness' among firms should decrease with PMC. Third, the higher the average degree of ?eck-and-neckness' in an industry, the steeper the inverted-U relationship between PMC and innovation in that industry. Fourth, firms may innovate more if subject to higher debt-pressure, especially at lower levels of PMC. We confront these four predictions with a new panel data set on UK firms' patenting activity at the US patenting office. The inverted U relationship, the neck and neck, and the debt pressure predictions are found to accord well with observed behavior in the data.

Book description: This indispensable Handbook examines both economic and legal aspects of competition policy and industrial organization. It provides a scholarly review of the state of the art regarding economic theory, empirical evidence and standards of legal evaluation. The book aims primarily at furthering our understanding of the interplay between economic reasoning and legal expertise by concentrating on the fundamental issues and principles underlying competition policy.

How much does US-based R&D benefit other countries and through what mechanisms? We test the "technology sourcing" hypothesis that foreign research labs located on US soil tap into US R&D spillovers and improve home country productivity. Using panels of UK and US firms matched to patent data we show that UK firms who had established a high proportion of US-based inventors by 1990 benefited disproportionately from the growth of the US R&D stock over the next 10 years. We estimate that UK firms’ Total Factor Productivity would have been at least 5% lower in 2000 (about $14bn) in the absence of the US R&D growth in the 1990s. We also find that technology sourcing is more important for countries and industries who have "most to learn". Within the UK, the benefits of technology sourcing were larger in industries whose TFP gap with the US was greater. Between countries, the growth of the UK R&D stock did not appear to have a major benefit for US firms who located R&D labs in the UK. The "special relationship" between the UK and the US appears distinctly asymmetric.

This paper investigates the determinants of vertical integration using data from the UK manufacturing sector. We find that the relationship between a downstream (producer) industry and an upstream (supplier) industry us more likely to be vertically integrated when the producing industry is more technology intensive and the supplying industry is less technology intensive. Moreover, both of these effects are stronger when the supplying industry accounts for a large fraction of the producer\\\'s costs. These results are generally robust and hold with alternative measures of technology intensity, with alternative estimation straegies, and with or without contraolling for a number of firm and industry-level characteristics. They are consistent with the incomplete contract theories of the firm that emphasize both the potential costs and benefits of vertical integration in terms of investment incentives.

This Briefing Note considers recent trends in specialisation, outsourcing and offshoring of business services. Specialisation within a firm happens when a firm organises an activity in a specialised unit, for example, when a firm moves payroll activities out of the back office of a factory, and into a specialised payroll office. Outsourcing is specialisation outside the firm. This occurs when firms opt to ‘buy’ rather than ‘make’ in-house. Outsourcing involves greater specialisation as firms switch from sourcing inputs internally to sourcing them from separately owned suppliers. Offshoring occurs when firms move production overseas - either its own specialised unit or outsourced services. Business Services are services that are provided to other business, rather than directly to the public. They include Computer Services, Professional Services (Legal, Accountancy, Market Research, Technical, Engineering, Architectural, Advertising and Consultancy), Research and Development, as well as other services such as Labour Placement Agencies and Call Centres. The findings in this Briefing Note, which are significant for thinking about business practice and public policy, are

How much does US-based R&D benefit other countries and through what mechanisms? We test the "technology sourcing" hypothesis that foreign research labs located on US soil tap into US R&D spillovers and improve home country productivity. Using panels of UK and US firms matched to patent data we show that UK firms who had established a high proportion of US-based inventors by 1990 benefited disproportionately from the growth of the US R&D stock over the next 10 years. We estimate that UK firms’ Total Factor Productivity would have been at least 5% lower in 2000 (about $14bn) in the absence of the US R&D growth in the 1990s. We also find that technology sourcing is more important for countries and industries who have "most to learn". Within the UK, the benefits of technology sourcing were larger in industries whose TFP gap with the US was greater. Between countries, the growth of the UK R&D stock did not appear to have a major benefit for US firms who located R&D labs in the UK. The "special relationship" between the UK and the US appears distinctly asymmetric.

Value-added per capita in EU countries has lagged behind the US. This is despite widespread reforms to product markets across EU countries aimed at increasing growth. This study analyses the macro-economic impact of product market reforms undertaken in the European Union over the 1980s and 1990s by examining a large number of regulations and reforms across EU countries.

We examine whether discretionary government grants influence the location ofnew plants, and how effective these incentives are in the presence of agglomeration andurbanisation externalities. We find evidence that regional industrial structure affects thelocation of new entrants. Firms in more agglomerated industries locate new plants near toothers in the same industry. Firms are also attracted to industrially diversified locations.Foreign multinationals locate new plants near to other foreign-owned plants in the sameindustry. Fiscal incentives in the form of grants are found to have some effect in attractingplants to specific geographic areas eligible for such aid. We examine whether discretionary government grants influence the location ofnew plants, and how effective these incentives are in the presence of agglomeration andurbanisation externalities. We find evidence that regional industrial structure affects thelocation of new entrants. Firms in more agglomerated industries locate new plants near toothers in the same industry. Firms are also attracted to industrially diversified locations.Foreign multinationals locate new plants near to other foreign-owned plants in the sameindustry. Fiscal incentives in the form of grants are found to have some effect in attractingplants to specific geographic areas eligible for such aid.

This paper describes tax reforms in OECD countries over the last 20 years and how they are related to tax competition. Both individual countries' reforms and multilateral initiatives and developments are covered. This is followed by an overview of the empirical evidence on tax competition. Our conclusion is that the evidence for some interdependence in tax setting behaviour is strong, although the exact process driving this remains unclear. While the most basic tax competition models fail to explain the development in OECD countries, there is more than one possible explanation for the reforms undertaken if more advanced models are considered. The multilateral initiatives that were implemented however do not seem to be related to resource-based tax competition, instead they are about taxing rights.

This paper describes tax reforms in OECD countries over the last 20 years and how they are related to tax competition. Both individual countries? reforms and multilateralinitiatives and developments are covered. This is followed by an overview of theempirical evidence on tax competition. Our conclusion is that the evidence for someinterdependence in tax setting behaviour is strong, although the exact process driving thisremains unclear. While the most basic tax competition models fail to explain thedevelopment in OECD countries, there is more than one possible explanation for thereforms undertaken if more advanced models are considered. The multilateral initiativesthat were implemented however do not seem to be related to resource-based taxcompetition, instead they are about taxing rights. This paper describes tax reforms in OECD countries over the last 20 years and how they are related to tax competition. Both individual countries? reforms and multilateralinitiatives and developments are covered. This is followed by an overview of theempirical evidence on tax competition. Our conclusion is that the evidence for someinterdependence in tax setting behaviour is strong, although the exact process driving thisremains unclear. While the most basic tax competition models fail to explain thedevelopment in OECD countries, there is more than one possible explanation for thereforms undertaken if more advanced models are considered. The multilateral initiativesthat were implemented however do not seem to be related to resource-based taxcompetition, instead they are about taxing rights.

We analyse a puzzle in the UK corporation tax: by both historic and international standards corporation tax revenues have been high while the statutory rate has been low. Possible explanations include the following: changes in tax law that may have increased effective tax rates; other factors such as higher profitability or different macro-economic conditions may have led to higher effective tax rates; and finally the size of the corporate sector may have increased. We find evidence for all three explanations, although none would be sufficient in itself. To the extent that higher profits, particularly financial sector profits may have led to high revenues, there are doubts as to whether revenues will continue to be so strong.

This paper investigates the relationship between product market competition and innovation. It uses the radical policy reforms in the UK as instruments for changes in product market competition, and finds a robust inverted-U relationship between competition and patenting. It then develops an endogenousm growth model with step-by-step innovation that can deliver this inverted-U pattern. In this model, competition has an ambiguous effect on innovation. On the one hand, it discourages laggard firms from innovating, as it reduces their rents from catching up with the leaders in the same industry. On the other hand, it encourages neck-and-neck firms to innovate in order to escape competition with their rival. The inverted-U pattern results from the interplay between these two effects, together with the effect of competition on the equilibrium industry structure. The model generates two additional predictions: on the relationship between competition and the average technological distance between leaders and followers across industries; and on the relationship between the distance of an industry to its technological frontier and the steepness of the inverted-U. Both predictions are supported by the data.

We analyse a puzzle in the UK corporation tax: by both historic and international standards, corporation tax revenues have been high while the statutory rate has been reduced. We consider explanations based on changes in the tax law and in economic factors. Changes in the tax law, such as base-broadening measures through reductions in capital allowances, can explain only part of the puzzle. Among the economic explanations, an increase in the size of the corporate sector, mainly caused by expansion of the service sector and improvements in profitability of the financial sector, seems the most likely. To the extent that higher profits, particularly financial sector profits, may have led to high revenues, there are doubts as to whether revenues will continue to be so strong.

This Briefing Note considers recent trends in specialisation, outsourcing and offshoring of business services. Specialisation within a firm happens when a firm organises an activity in a specialised unit, for example, when a firm moves payroll activities out of the back office of a factory, and into a specialised payroll office. Outsourcing is specialisation outside the firm. This occurs when firms opt to ‘buy’ rather than ‘make’ in-house. Outsourcing involves greater specialisation as firms switch from sourcing inputs internally to sourcing them from separately owned suppliers. Offshoring occurs when firms move production overseas - either its own specialised unit or outsourced services. Business Services are services that are provided to other business, rather than directly to the public. They include Computer Services, Professional Services (Legal, Accountancy, Market Research, Technical, Engineering, Architectural, Advertising and Consultancy), Research and Development, as well as other services such as Labour Placement Agencies and Call Centres. The findings in this Briefing Note, which are significant for thinking about business practice and public policy, are: -Business services have accounted for over 50% of job growth in the UK over the past two decades. In the 1980s, business services were not very significant as a separate industry. Employment in UK business services grew by 92% or 1.9m jobs between 1984 and 2001. This accounted for over half of the total growth in jobs. In 2002, a total of 4m people were employed in this sector, accounting for around 1 in 7 jobs in the whole economy. -UK production of business services also grew significantly faster than the rest of the economy over the last two decades. This has been driven mainly by increased demand from UK companies for UK-produced business services. The business service sector is now substantially bigger, in terms of value added, than it was two decades ago. -More business services are purchased from the UK than the UK purchases from overseas; i.e. we have a trade surplus in business services, and it has been growing. -The growth in demand for UK-produced business services has come mainly from UK-based firms. UK businesses are now outsourcing a substantially greater proportion of service activities than they did two decades ago. This domestic outsourcing has played a more important role in the growth of business services than demand from foreign-based businesses. -While there has undoubtedly been an increase in UK-based firms sourcing business services offshore, it is small relative to the increase in total output of business services. This shows up in the trade statistics: although the UK has rapidly increased both its imports (UK firms buying foreign-produced services) and exports (foreign firms buying UK-produced services), export growth has outstripped import growth. The UK has a substantial trade surplus in all business service sectors except one small industry. Figures for the latest 12 months suggest that the rate of growth may have slowed. -Between 1995 and 2001, exports of business services grew from £11.7bn to £31.7bn in nominal terms while imports grew from £6 bn to £14 bn. This has given the UK and increasing trade surplus in business services. This contrasts with an increasing deficit in trade in manufactured goods over the last two decades. But while trade in business services is increasing, it is still very small compared with trade in manufactured goods. -Most Business Service industries in the UK have experienced continued job growth. The fact that UK firms are increasingly sourcing business services offshore and foreign firms are increasingly sourcing business services in the UK may affect the total number of jobs in the UK, the type of jobs, the skills needed to do these jobs and the distribution of these jobs across regions and across people. The highest profile concern has been about job losses from sourcing IT software and services in India. It is hard to get precise numbers of jobs relocated abroad, and thus to tell how important this is for the UK economy. But looking at UK job growth, particularly in call centres, in combination with the number of jobs in India serving foreign clients shows that potential UK job losses from sourcing business services abroad are pretty small compared with total job creation in business services. The fastest growing sectors were Computer and related activities, which more than tripled in size between 1984 and 2002, and Other business activities, which doubled. Renting of machinery and equipment grew by 59% and Legal, technical and advertising grew by 71%. Research and development was the only sector not to grow, with employment declining slightly, by 4% between 1984 and 2001. Growth in the most recent years has slowed down somewhat. This growth has included in call centres, where the latest figures show that over half of the UK call centres sampled have increased the numbers of staff employed. The UK currently employs around 400,000 people in call centres. -UK productivity in Business Services has caught up with other G5 countries. We have substantially closed the productivity gap between the UK and the US, Germany and France in business services. This occurred while employment in the sector grew. Between 1984 and 2001, the difference between UK and US labour productivity (the productivity gap, as measured by value-added per hour worked) in two high-skilled sectors - Computer Services and Professional Services – was effectively eliminated. In 1984, US productivity in Computer Services was over twice as high as in the UK, while in 2001 it was only 10% higher. In Professional Services it was 80% higher, and is now at the same level. This simultaneous increase in employment and productivity contrasts with an earlier productivity improvement in manufacturing, which was achieved in large part through employment cuts.

How does entry affect productivity growth of incumbents? In this paper we exploit policy reforms in the United Kingdom that changed entry conditions by opening up the U.K. economy during the 1980s and panel data on British establishments to shed light on this question. We show that more entry, measured by a higher share of industry employment in foreign firms, has led to faster total factor productivity growth of domestic incumbent firms and thus to faster aggregate productivity growth. (JEL: L5, L10, O31, O4)

Many writers have claimed that research and development (R&D) has two faces. In addition to the conventional role of stimulating innovation, R&D enhances technology transfer (absorptive capacity). We explore this idea empirically using a panel of industries across twelve OECD countries. We find R&D to be statistically and economically important in both technological catch-up and innovation. Human capital also plays an major role in productivity growth, but we only find a small effect of trade. In failing to take account of R&D-based absorptive capacity, existing U.S.-based studies may underestimate the return to R&D. © 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

The UK's poor productivity performance relative to the US has been a focus for government policy and analysis in recent Budgets and Pre-Budget Reports. US business sector labour productivity (value-added per worker) was just over 40% higher than the UK level in 2001, about the same as it was at the beginning of the 1990s. The labour productivity gap fell over the early 1990s, when the UK experienced relatively faster growth in business sector labour productivity than the US, but it has since increased again as productivity growth slowed in the UK and accelerated in the US. This aggregate picture hides considerable variation at the industry level. In some industries the gap has narrowed substantially over the past decade, while in others it has widened. As a result, although the total size of the productivity gap did not change very much over the 1990s, the industries that account for the majority of the gap have changed considerably. An understanding of where the productivity gap arises is essential to be able to target policy effectively. Yet to date most work has considered the aggregate performance of the UK, or has focussed on the manufacturing sector despite the fact that most employment is in the service sectors. In this briefing note we document changes in the gap over the 1990s and variations within the productivity gap in 2001. After documenting these facts we consider some of the reasons that might explain this relatively poor performance. We then outline some of the areas that we plan to investigate over the next three years under the AIM programme. Among other issues, we plan to look at: whether the dispersion in productivity within sectors is unusually high in the UK; how productivity vary across UK regions; whether rates of entry and exit in the UK are lower than in other countries; whether outsourcing has been a significant driver of productivity growth; what the joint impact of management practices and public policies have on productivity.

In this Briefing Note, we document and disentangle the trends in UK research and development (R&D) over the period 1981-2000, and compare the UK's performance with that of the USA.

This paper describes the characteristics of manufacturing establishments in Britain overthe period 1980 to 1996. Particular attention is paid to differences between plants ofdifferent ownership nationality. The findings suggest that establishments that are alwaysforeign-owned have significantly higher labour productivity than those that remainunder domestic ownership. In addition, labour productivity improves faster over timeand faster with age in foreign-owned establishments. The difference in labourproductivity is matched by an equivalent difference in levels of investment peremployee. Establishments that change ownership nationality do not seem to experiencevery large changes in labour productivity levels. The proportion of skilled workers inthe workplace, and wages for both skilled and operative workers are higher in foreignownedestablishments than domestic-owned, in line with differences in labourproductivity.