New Economist

Skilled migration boosts innovation

A recent paper by McGill University's Jennifer Hunt to an NBER labour studies programme conference asks whether the increase in foreign-born college graduates has contributed to innovation in the United States. Her paper, How Much Does Immigration Boost Innovation? (PDF), finds that it does:

In this paper I have demonstrated the important boost to innovation per capita provided by skilled immigration to the United States in 1950-2000. A calculation of the effect of immigration in the 1990-2000 period puts the magnitudes of the effects in context.

The 1990-2000 increase from 2.2% to 3.5% in the share of the population composed of immigrant college graduates increased patenting by at least 81:3 = 10:4%, and perhaps by as much as 18%. The increase in the share of post-college immigrants from 0.9% to 1.6% increased patenting by at least 10.5% and perhaps by as much as 24%. The increase from 0.30% to 0.55% in the share of workers who are immigrant scientists and engineers increased patenting by at least 13% but probably by less than 23%.

While I find evidence for the crowding-out of natives in the short run, in the long run there is evidence for the reverse: that skilled natives are attracted to states or occupations with skilled immigrants. The results hint that skilled immigrants innovate more than their native counterparts, especially if they are scientists or engineers. If correct, the result could reflect higher education of immigrants within skill categories, or positive selection of immigrants in terms of ability to innovate. However, the effect of natives is not as well identified econometrically as the effect of immigrants.

These findings suggest there are clear merits in adopting policies to both attract foreign students and to retain them once they have completed their studies (as the UK and Australia, among others, currently do).

It's neuro-economics, stupid

It's taken a while to reach the popular press, but today's Times features a two-page spread on neuro-economics, by Mark Henderson. Surprisingly, it ain't half bad: Why say no to free money? It's neuro-economics, stupid. The piece starts with an account of the 'ultimatum game', which show that people care about fairness:

...Homo sapiens is clearly not Homo economicus, the ultra-rational being imagined by many professional economists. An emerging fusion of economics, evolutionary psychology and neuroscience — neuro-economics in the jargon — is now starting to tell us why this is so.

Scientists yesterday published new evidence in the journal Science, showing not only how the brain makes difficult decisions but also that our choices can be changed when a critical part of the brain is switched off with magnets.

The researchers, Ernst Fehr and Daria Knoch, of the University of Zurich, used a technique called transcranial magnetic stimulation to tire out and thus temporarily suppress a part of the brain called the dorsolateral prefrontal cortex (DLPFC). Functional magnetic resonance imaging scans show that this is particularly active when people play the ultimatum game.

When the right DLPFC is shut down, the way they play starts to change. When given a low offer, they still feel it is deeply unfair. But, instead of rejecting it as they usually would, their selfish, ultra-rational side wins out over their emotional reaction against the other player’s meanness. They accept any amount of cash, however small.

The implication is not that the DLPFC is generating a sense of injustice — that was still there even when the region was knocked out. Rather, it seems to be more like an executive decision-maker, balancing the claims of emotion and reason.

“It is as if it is the referee that enforces fairness, and overrides narrow self-interest,” said David Laibson, Professor of Economics at Harvard University.

The results tend to support a very different theory of human behaviour from that favoured by classical economists. Our decisions seem not to be determined mainly by reason, but by a continuous battle between two sides of our psyches that are rooted in different mental circuits.

For those interested, the Science article by Daria Knoch, et al, can be found here: Diminishing Reciprocal Fairness by Disrupting the Right Prefrontal Cortex

The Times piece goes on to discuss the potential relevance of neuroeconomics:

Technology boosts trade boosts migration

Trade fosters migration (and vice versa), while various technological trends enhance trade, and should thus indirectly foster migration. So argue Jan Hofmann and Marion König at Deutsche Bank in a new paper that investigates the chain of cause and effect that interlinks technology, trade and migration: Technology boosts trade boosts migration: On the interplay of three key globalisation phenomena (PDF). Those interlinkages matter:

All told, our study strongly suggests that to understand and forecast migration (and then population) patterns, we have to scrutinise the complete chain of cause and effect that interlinks technology, trade and migration.

The paper's main policy conclusion?

For those countries that badly need immigration e.g. owing to an ageing own workforce, trade openness should be a priority. Having said that, as more countries will become full-blown knowledge economies in the next decades, the old Ricardian notion of differences in technology (and thus labour productivity) driving migration could get a new meaning: differences in nations’ innovation capacity could take the lead in driving migrant flows. The countries with the most creative juices are likely be the next immigration magnets, rather than the old-school efficiency hunters.

The challenges of globalisation for Europe

Jonathan Dingel at Trade Diversion draws our attention to an excellent set of papers published by the Economic Council of Finland on Challenges of globalisation for Europe and Finland. The papers were launched on 20 September at an event opened by Prime Minister Matti Vanhanen. The press release emphasises that the effects of globalisation are more diverse than estimated - and European competitiveness policy requires a great deal of work:

Globalisation creates much more subtle pressures for the worldwide re-allocation of production and employment than estimated before. Earlier, it was thought that competition from the developing low-wage countries only affected certain branches of industry and mainly low-paid workforce in the developed countries.

Recent research shows that competition may affect work regardless of education level. Moreover, changes in the competition may be very abrupt and hence hard to anticipate. This highlights the importance of economic adaptability and, in particular, the ability of labour markets and education systems to adjust. Provided that we have the ability to adjust and change, globalisation will be a good thing for Europe.

These are some of the conclusions made by Professor Richard Baldwin in his article, which is one of several papers constituting the first part of the study on the challenges of globalisation for Europe and Finland organised by the Secretariat of the Economic Council of Finland, published on Wednesday 20 September.

In addition to Baldwin’s article, the first part of the study includes eleven articles written by acknowledged European experts. Two of these articles are comments that complement Baldwin’s analysis. The remaining nine articles discuss the European competitiveness and structural policies, internal market issues, innovation policies in their broad sense, the European economic policy system and governance of globalisation.

Here are links to all of the research papers contributing to the globalisation project. Also worth reading is the executive summary (PDF):

• Globalisation: the great unbundling(s) by Richard Baldwin  (GIIS, Geneva) 

• Challenges created by the new EU Member States and third countries by Mika Widgrén, (Turku School of Economics) 

• Globalisation challenges for Europe: labour market perspectives  by Torben Andersen (University of Aarhus) 

• Competitiveness and structural policies: where does the EU stand?  by Jean-Philippe Cotis and Jørgen Elmeskov (OECD) 

• Dynamic effects of European services liberalisation: more to be gained  by Henk Kox and Arjan Lejour (CPB, Hague) 

• The liberalisation of network industries in the European Union: where do we come from and where do we go? by Damien Géradin (University of Tilburg) 

• Effective innovation policies for Europe – the missing demand-side by Luke Georghiou (University of Manchester) 

• Education and economic growth: a quick review of the evidence and some policy guidelines by Angel de la Fuente (Universitat Autonòma de Barcelona) 

• Intellectual property rights in Europe–where do we stand and where should we go? by Dietmar Harhoff (Ludwig-Maximilians-University, Munich) 

• Risk capital for growing world-class companies: challenges for European policy  by Markku Maula (Helsinki University of Technology) and Gordon Murray (University of Exeter) 

• The assignment principle and EU economic policy by Sixten Korkman (ETLA) 

• The EU and the governance of globalisation by Alan Ahearne, Jean Pisani-Ferry, André Sapir and Nicolas Véron (Bruegel, Brussels) 

What are the policy implications of this reserach? The press statement continues:

Europe: why offshore when you can nearshore?

In Europe, the main threat of job loss comes not from China or India, but Central and Eastern Europe, which has skilled but cheap labour - and most of it now within the European single market. in the past the main impact has been on manufacturing. But what about services? A new Deutsche Bank publication by Thomas Meyer, Offshoring to new shores: Nearshoring to Central and Eastern Europe (PDF), tells us quite a lot about this phenomenon. Here's the executive summmary:

Central and Eastern Europe (CEE) is an important region for services offshoring. The imports of IT-based services from Central and Eastern Europe into the EU-15 rose by an average of 13% per year between 1992 and 2004. Imports from India, by comparison, increased only slightly faster during the same period at 14% per year.

Close cultural and geographical ties make suppliers from CEE an attractive option. The close ties – in terms of culture, geography and partly language – between the CEE countries and the key Western European markets, the low wages, the high standard of education and stable macroeconomic and institutional environment constitute some of the strengths of the region.

However, CEE cannot boast any IT specialisation in exports or education. IT-based services account for less than 4% of total exports in CEE, whereas the share in India is 17% (see chart). Also, the share of graduates gaining information technology degrees – a key qualification for IT offshoring – is lower in CEE than the Western European and Indian averages. It is therefore unlikely that offshore production of standard IT services will become as important for CEE as is the case for India.

The comparative strength of CEE lies in more complex back-office processes. The cultural background shared by providers and their clients in CEE is particularly important for more complex business processes. Clients from outside English-speaking countries also appreciate the widespread language skills in CEE. Moreover, the lack of IT specialisation in CEE is less significant for typical back-office processes – such as bookkeeping.

Well worth dippping into for anyone seeking a better understanding of what's going on in Eastern Europe. The discussion on educational and science qualifications, for example, is an eye-opener. Who would have thought that the pool of suitable skilled engineers, mathematicians, statisticians and physicists in the CEE-3 (Czech Republic, Hungary and Poland) is on a par with Russia, which has far more scientists? (Figure 14).

Chinese cheating

Pressure in China to innovate seems to be taking its toll. FT journalist Richard McGregor reports that a fake chip storm rocks China’s science elite:

China’s scientific establishment has been shaken by the sacking of a dean at one its most prestigious universities for falsely claiming to have invented a much-praised “indigenous” computer chip.The scandal coincides with a concerted push by the central government to put “innovation” at the heart of an economic development model which has so far relied on imported technology.

...Jiaotong University in Shanghai said late on Friday it had fired Chen Jin, dean of the Microelectronics School, for faking research behind a series of chips for digital signals processing. Mr Chen was also the general manager of the Hanxin Sci-Tech, the company that produced the chips.

...Xinhua, the official news agency, said Mr Chen had “fooled” technical appraisal teams from the university and government ministries that had funded his project into believing that he had developed the chips himself.

“On the basis of the investigation summaries, the university concluded that Chen’s deeds had flouted academic ethical codes and the university constitution, and had brought the research community into disrepute,” the Xinhua statement said. Mr Chen’s chip was neither based on technology he said he had developed himself, nor could it perform the functions he claimed for it, the short statement said.

Business Week's Michael Mandel comments:

Now the question is whether this is an isolated instance, or whether it reflects a systemic pattern of Chinese leaders trying to push their country up the technology ladder faster than it can go. The Chinese economy has already made a stellar leap, clearly moving from 'developing' to 'low industrial' status. But can it go 'high industrial' or even "innovative" status in one big push? I don't think so.

New book: 'The Wealth of Networks'

Via Crooked Timber and Brad DeLong comes news of Yochai Benkler’s The Wealth of Networks: How Social Production Transforms Markets and Freedom, just published by Yale University Press. CT's Henry Farrell writes:

There’ll be more about this book on CT soon – for the moment, suffice to say that I think that this is a really important book, not only for people interested in the politics of technology, but for people interested in left or liberal politics more generally. It fizzes with ideas.

Yochai Benkler is professor of law at Yale Law School.  He argues that:

..the rise of peer production ...presents a stark challenge to conventional thinking about the economics of information production.

...It is important to see these phenomena not as exceptions, quirks, or ephemeral fads.. It is a mistake to think that we have only two basic free transactional forms—property-based markets and hierarchically organized firms. We have three, and the third is social sharing and exchange. It is a widespread phenomenon—we live and practice it every day with our household members, coworkers, and neighbors. We coproduce and exchange economic goods and services. But we do not count these in the economic census. Worse, we do not count them in our institutional design.

He argues that while the strength and domain of copyright, trademarks and patents have expanded, social trends in the past few years "are pushing in the opposite direction." Benkler's vision is a utopian one, seeing a networked information economy as "an opportunity to change the way we create and exchange information, knowledge, and culture". This will "offer individuals greater autonomy, political communities greater democracy, and societies greater opportunities for cultural self-reflection and human connection."

Cynics will snort. Business will wonder how to profit from it. Politicians will see it as a threat. But anyone interested in these issues should certainly take the time to read this book.

Benkler has posted the whole book and individual chapters on a Wiki, under a Creative Commons noncommercial sharealike license, with "an invitation to collaborate".

British designers, your country needs you!

The UK government is kidding itself if it thinks designers can revive the economy, writes Kevin McCullagh of Plan Strategic on Sp!ked today. His piece, Creative economics, argues that it's not a shortage of ideas that's the problem - its a lack of business interest in capitalising on them:

The predicament of Britain's 'innovation gap' is framed as a paradox - as it has been for decades. How can it be that we have so many star designers and great inventors, but our industry seems incapable of capitalising on them? The truth is that it is neither an accident, nor a paradox that Britain is internationally renowned for both its creatives and its industrial decline. The former is largely a result of the latter.

The same few designers and inventors are trotted out time after time: Jonathan Ive, the Newcastle Polytechnic-educated design director at Apple in California; Paul Smith, the self-taught fashion entrepreneur who has built an international brand and retail chain over the past 20 years; and James Dyson of the eponymous Dual Cyclone cleaner.

One of the main reasons why Britain's creatives are internationally renowned, and so many of them work for foreign companies, is that British industry is awful at innovation. This is not due to a shortage of ideas, but to a lack of the investment needed to bring ideas to market.

Britain fell behind its major competitors on this measure over a century ago and has steadily slid down the R&D investment charts ever since. If you discount spending on pharmaceuticals, aerospace and biotechnology, British investment in innovation is pitiful. This steady industrial decline coincided with the blooming of British design. As opportunities within industry dried up, more designers either worked for foreign firms or for consultancies that had to chase work overseas.

Either way, British designers were therefore forced to promote themselves on the international stage. As a London-based consultant designer of stylish consumer electronics, I've had little choice but to work for foreign companies like Apple. Dyson got his first cleaner manufactured in Japan in 1985 after failing to license it to a manufacturers closer to home.

Why is Europe so anti-science?

Business Week's Michael Mandel posts some interesting charts on his Economics Unbound blog. looking at public attitudes towards science, they show firstly that a majority of Europeans believe that astrology or fortune-telling is scientific (compared to around a third in the United States and only one in nine in China).

Second, fewer Europeans supporting funding of research by the government. Third, only half (52%) of Europeans believe that the benefits of science outweigh the harm (52%), compared to more than fourth-fifths in the US.

Add to that the large and well known pay disparities between what European scientists get compared with those in the United States, and we have at least a partial answer to why Europe has been falling behind in innovation and R&D. Even in a country with a very strong science tradition like Britain, it is is alarming how easily luddites and the populist press can hijack scientific and medical debates.

British R&D: too much competition?

Private sector R&D spending in Britain has been pretty lacklustre in recent years. Why? A new Oxford University economics working paper by Mark Rogers, R&D and Productivity in the UK: evidence from firm-level data in the 1990s, provides at least a partial explanation. Its not shortahge of talent or capital, argues Rogers. But intense competition may be dragging down reurns on innovation:

The UK`s business R&D (BERD) to GDP ratio is low compared to other leading economies, and the ratio has slowly declined over the 1990s. This paper uses data on large UK firms to analyse the link between R&D and productivity over the 1989-2000 period. Using a production function approach, and a sample of up to 719 firms, various different samples and estimators are used to assess the elasticity of, and rate of return to, R&D.

The results indicate that UK returns to R&D are similar to returns in other leading economies. Furthermore, the returns to R&D have been relatively stable over the 1990s. There is no evidence to suggest that stock market listed firms, or firms with higher past profitability, have significantly different returns.

Overall, the results suggest that the low BERD to GDP ratio in the UK is unlikely to be due to direct financial or human capital constraints (as these imply finding relatively high rates of return). Instead, the low BERD to GDP ratio appears to reflect low (perceived) opportunities by firms and the inability of firms to manage R&D to generate value. The paper provides some, tentative evidence, that high rates of competition in the science-based sector are associated with low returns to R&D.