Productivity Growth Through Innovation: Advancing Digitalisation

The coronavirus pandemic has triggered a surge in digitalisation. Technology has enabled many companies to continue operating despite social distancing and hygiene regulations by switching to working from home. At the same time, however, digitalisation deficits have become apparent in healthcare, education and public administration in Germany. In healthcare, a rapid expansion of the use of digital technologies in local public health authorities could create more efficient reporting paths. Challenges in creating digital offerings in healthcare were particularly evident in the development of Germany’s COVID-19 contact tracing app (Corona-Warn-App), which has not yet been able to fully meet the expectations. An improved and targeted use of digital technologies could help to contain further increases in the number of infections.

Public sector lags behind

In the education system digital teaching and learning opportunities need to be in place especially in case of further school closures. There is a risk that a prolonged reduction of access to education will diminish the development of skills and the future employment opportunities of young people, especially those from educationally disadvantaged backgrounds.

The Digital Pact for Schools (DigitalPakt Schule) introduced by the Federal Government before the coronavirus pandemic in 2019 was intended to support and promote the development of digital learning infrastructures in German schools. Of €5 billion in funding provided at the federal level only 5 % has been taken up so far. A key reason for this is the lack of human resource support in creating and maintaining the digital infrastructure, and lack of access for teachers to learning materials on the use of digital equipment.

Increased digitalisation of administration and the expansion of the e-government services could lead to increased productivity in the public sector and a higher demand for digital products and services. The coronavirus crisis has made it clear that there is a lot of catching up to do in the area of digital administration, so it is all the more important to use the crisis as an opportunity to catch up here. The stimulus package could help in this regard. However, the success of these measures will not hinge solely on the amount of funding available. Even more important will be the administrative implementation.

Opportunities for productivity growth through digitalisation

Digital general-purpose technologies, which can be applied in many different economic sectors, can raise productivity and growth across large sections of the economy. Further investment in digital infrastructure and a reduction and removal of red tape are necessary to accelerate the diffusion of digital technologies and enable new business models. The measures planned in the economic stimulus package could help in this regard, but need to be implemented quickly.

European firms are at a competitive disadvantage concerning platform-based business models because the European domestic market remains linguistically, legally and institutionally fragmented and hence firms benefit only from smaller network effects. In order to encourage digital innovation and start-ups, the European digital single market should be deepened and the competition rules should be modified to ensure the competitive openness of digital markets.

Innovation process key to long-term growth

Germany has been well positioned in the development of digital technologies in the past. However, technological progress for example in the area of Artificial Intelligence has been less dynamic as in worldwide leading nations such as the US and South Korea.

In Germany, innovation expenditure is increasingly concentrated on large companies. Compared to other European countries, the contribution of German small and medium-sized companies to innovation activity is modest. An increasing barrier for innovation activity is accessing skilled labour. As small and medium-sized enterprises are particularly affected by obstacles to innovation, their incentives to innovate should be strengthened and existing barriers should be reduced specifically. Both expanding the research allowance for small and medium-sized companies and anchoring innovation criteria more firmly in public procurement could help in this regard.

In accordance with its legal mandate as the national productivity board, the German Council of Economic Experts (GCEE) analyses the factors for productivity growth and the conditions for increasing competitiveness and productivity. The annual national productivity report has been published on November 11 as a chapter in the Annual Report 2020/21. Roughly 65 % of labour productivity growth in Germany can be attributed in the long term to total factor productivity (TFP) growth, which is closely linked to innovation activity. The GCEE’s medium-term forecast predicts that the average annual trend growth rate for TFP over the next five years will be 0.5 % and will thus remain at a low level.