Technology transfer and productivity growth in the UK

Richard Kneller

Overview

Most firms, workers and regions do not invent the technologies they rely on. Growth and productivity instead depend on how quickly new ideas, technology and practices spread from those who create them to those who use them. This process is known as technology transfer.

UK growth and productivity is therefore not just about new inventions, but also how existing technologies are taken up and used across the economy.

Technology transfer helps explain:

Why some firms and regions pull ahead while others fall behind.
Why productivity gaps persist over long periods.
Why policies that expand access to technology do not benefit all firms equally.

This briefing explores technology transfer, how it works, and related UK issues.

What is technology transfer?

Technology transfer is the process by which technological knowledge is adopted, absorbed and used productively by people, firms or countries that did not invent it.

For technology transfer to succeed, three conditions must be met:

The technology must exist
It must be transmitted from where it was created to where it is used
Users must be able to absorb and apply it effectively

Weakness in any of those conditions can slow, reduce, or in the worst case, collapse the process of technology transfer. This can have various implications for the economy, including lower productivity and economic growth.

Technology creation

The first stage of technology transfer is the creation of new technologies.

Technology can be thought of as applied knowledge. Knowledge has distinct properties compared to most economic goods; it can be used by many people at the same time without diminishing its quality, and once it exists it is often difficult to stop others from using it.

This creates a dilemma:

knowledge is extremely valuable to society
but difficult for firms or individuals to profit from without protection

Modern economies address this through intellectual property rights (IPR), such as patents and copyrights. IPR has a key role in technology transfer, including by giving innovators temporary monopoly ownership to encourage investment in innovation.

Technologies themselves take different forms:

written or codified knowledge, such as patents, designs and blueprints
embodied technologies, such as machinery, equipment and software
tacit knowledge (‘know-how’), such as skills, experience and management practices

These technologies spread through the economy in different ways.

Technology transmission

Once created, technologies are transmitted because they are demanded by the end user. As this location might be different from that of the innovator, geography is important within the idea of technology transfer.

Different types of technology tend to spread through different transmission channels:

codified knowledge often spreads through licensing agreements or intellectual property markets
embodied technologies spread through investment in equipment, machinery and intermediate inputs
tacit knowledge spreads through worker mobility, training, entrepreneurship and management practices

As many technologies are created outside of the UK, these channels operate both domestically and internationally and so include international trade, foreign direct investment and through the movement of people.

The same transmission channel can often be a source of multiple technology forms. For example, foreign direct investment is an important source of technology transfer because the multinational invests in high quality capital goods and because they share their codified and tacit knowledge across their different production locations or branches. There is also evidence that technologies can leak out of multinationals and become adopted by other firms in the same industry, geography and supply chain, either because this information is deliberately shared, or as workers/managers move jobs. These spillover effects of multinationals have been widely documented and are viewed as a particularly important part of the rapid growth and development of Ireland, South Korea and China.

Within the idea of transmission, demand from the end user tends to be stronger when:

demand for the firm’s output is large
they face fewer financial constraints
regulatory barriers are lower
economic and policy uncertainty is low

Technology absorption

Even when technology is widely available, not all firms benefit equally. A central reason is differences in the capacity of firms to absorb technology (‘absorptive capacity’).

Absorptive capacity highlights that it is not just about acquiring technologies, but rather it is about transforming and exploiting them effectively, meaning that firms or individuals with better knowledge, experience and processes are better positioned to benefit from their use.

Absorptive capacity refers to a firm’s or organisation’s ability to:

know the existence of a new technology
recognise its value
understand how it fits their business
implement it effectively

This depends on factors such as:

workforce skills and management capability
prior experience with similar technologies
organisational routines and internal processes
investment in training and research and development (R&D)

Firms with stronger capabilities tend to adopt new technologies earlier, use them more intensively, and extract greater productivity benefits.

By contrast, firms with weaker capabilities may:

delay adoption
use technologies only partially
fail to reorganise work practices to realise productivity gains

This helps explain why the same technologies can widen productivity gaps rather than close them. It also raises a practical question about how much of a firm’s absorptive capacity depends on its own internal choices – skills, management, investment, and so on – how much is shaped by external conditions – competition, regulation or policy, and so on – and how malleable it is to attempts to increase it.

Data from the Office for National Statistics indicates the significant potential of technology absorption for increasing UK productivity.

Technology meets absorptive capacity

Different types of technology tend to be adopted differently, according to the absorptive capacity of the firm:

Written and highly codified technologies are typically adopted only by firms with very high absorptive capacity.
Tacit knowledge, such as management practices, tends to spread among firms with medium to high capabilities.
Embodied technologies, such as new equipment or software, reach the widest range of firms, including those with lower capabilities.

The proportions of people and firms that sit in these high-, mid- and low- absorptive capacity groups differ across industries, regions and time. Measurement here is hard but a generally agreed assessment is that the UK has a relatively large group of the mid- and high-capacity firms compared to many countries, but fewer than the US. For example, a recent attempt at measuring management quality in a consistent way across countries suggests that the average UK firm has a similar management score to those in Australia, Italy and France, but is a little way behind Germany, Canada and Japan and a great way behind the US.

Data on productivity, which is a broader measure than technology transfer, suggests that:

The UK is falling away from the global technology frontier in a number of key sectors including manufacturing, information and communication and financial services.
The low-absorptive capacity group has expanded in the UK and is falling further behind the best UK firms.

A full account of exactly why those trends have occurred is not yet available.

Policy

Domestic and international policy can help or impede technology transfer at all stages.

Supporting transmission

Policies affecting trade, investment, regulation and market size shape how easily technologies move through the economy and how strongly they are demanded.

For example, reductions in foreign investment or trade flows reduce not only capital inflows but also the associated transfer of knowledge and practices. Policy uncertainty can have similar effects by delaying firm investment decisions. The Organisation for Economic Co-operation and Development (OECD) produces measures of the restrictiveness of foreign direct investment and trade policy across countries and time, and has made recommendations to the UK.

Building absorptive capacity

Policies focused on skills, management practices and organisational capability can help firms to benefit from new technologies.

Evidence shows that training and management support can raise technology adoption and improve use. However, the firms that stand to benefit most are often the least likely to seek support, due to lack of information, limited managerial time, or behavioural barriers – even when training is offered for free. Reaching these firms can be a challenge.

Capital incentives versus other interventions

Capital allowances (for example money through subsidies or tax breaks) incentive policies encourage firms to invest in new equipment and machinery. These policies normally benefit firms that are more likely to be in the low-absorptive capacity group. In turn, this can mean that beneficiary firms fail to fully realise productivity gains from the policy.

Such investment enhancing policies are relatively generous in the UK. What might prove more effective are interventions that better enable firms to use the technologies they already own more effectively. Often these interventions are broad – skills, management and worker training – but these may lack insight into the specific needs of businesses with different absorptive capabilities and the unique characteristics of a particular technology. For this reason, experimentation with different ideas to see what works can be valuable.

Acknowledgements 

Professor Richard Kneller is a Professor of Economics and Deputy Director for the Nottingham Centre for Research on Globalisation and Economic Policy (GEP) at the University of Nottingham. POST is grateful to the author for kindly giving their time to produce this briefing.”

Questions about this briefing should be referred to Louisa Beckwith (post@parliament.uk), who acted as parliamentary lead for this work. 