Debate over improving productivity through innovation

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In 2003, for the third consecutive year, the Dutch economy continues to lag behind the EU as a whole. Attention is increasingly turning to improved labour productivity as a solution, especially as continuing wage moderation does not seem to be having the desired effect. A wave of relocations of high-quality production and research and development from the Netherlands to other countries has fuelled the debate, which has been prominent during 2003. The social partners and government alike see improving the Dutch 'climate of innovation' as one of the most important factors in the drive to raise productivity. However, policy on innovation has yet to crystallise.

The European Commission's 'autumn report' on the economic situation in the European Union, published on 29 October 2003, makes it clear that for the third consecutive year, the Netherlands is lagging behind most other Member States. Average economic growth in the Member States for 2003 amounts to 0.8%, and is predicted to pick up speed in the next two years to 2% and 2.4% respectively. In the Netherlands, however, gross domestic product has shrunk by 0.9% in 2003 and growth of only 0.6% is forecast for 2004.

With respect to increases in labour productivity too, measured over the 1995-2001 period, the Netherlands (along with Spain) finds itself at the bottom of the European league table, with an annual average percentage increase of 0.8% against the European average of 1.2%. In 2001 and 2002, the figure of 0.2% achieved for growth in labour productivity in the private sector in the Netherlands was also extremely low. The Central Statistical Office (Centraal Bureau voor de Statistiek, CBS) ascribes the limited increase in 2001 to the decline in economic growth, coupled with an increase in labour utilisation of 0.7%. Economic prospects worsened in 2002 and employment opportunities diminished too.

The poor state of the economy persists despite the fact that wage moderation - the trusted response to such a situation - continues (NL0310103F). Attention is thus turning to increased labour productivity as a means of improving matters.

Migration of high-quality production and R&D

Research conducted in 2003 by the Dutch Supplier Association (Nederlandse Vereniging van Toeleveranciers, Nevat), shows that the trend within the Dutch business sector to shift production to countries where labour costs less is continuing at high speed.

Furthermore, cheaper labour costs have enticed increasingly complex tasks abroad. For example, electronics giant Philips intends to relocate 600 'white-board' positions to Poland between now and 2006, and services such as insurance and banking will also be shifting to low-wage countries. In June 2003, the banking and insurance group ING opened a central administration office in Hungary. The ABN Amro bank has shifted part of its transaction traffic to India and software development for several banks now also takes place there. Insurers are already looking into whether it will be possible to process claims in low-wage countries in the future. Recently concluded research conducted by Nyenrode University among 288 Dutch companies finds that relocation is not confined to major companies - large numbers of small and medium-sized industrial companies are also moving operations abroad or intend to do so in the future.

Finally, high-quality knowledge-based employment is also threatening to move away from the Netherlands. A 2003 study carried out by the Deloitte consultancy firm among 600 production companies, especially those located in Western Europe and North America, finds that increasing numbers of these companies are migrating their research and development (R&D) functions to low-wage countries. Some 14% of the West European and 22% of the North American companies examined now have R&D activities in China; over the next three-year period, these percentages are set to jump to 20% and 35% respectively.

SER analysis of Dutch innovation climate

Within the framework of a 2002 recommendation on 'Socio-economic policy 2002-6', the tripartite advisory body to the government, the Social and Economic Council (Sociaal-Economische Raad, SER), carried out a 'SWOT analysis' (ie an examination of strengths, weaknesses, opportunities and threats) of the Dutch 'innovation climate' based on the 'European innovation index' and two Dutch studies. This revealed that, while in terms of innovative power the Netherlands scores higher than the European average, this relatively favourable position is threatened by a number of broader developments.

The pros that emerged for the Netherlands include high public R&D expenditure (0.84% of GDP), the good position of life-long learning and the percentage of households with an internet connection. The most important negative aspect relates to the decreasing employment opportunities in the medium- and high-technology industrial sectors. Moreover, private R&D expenditure in the Netherlands is far below the EU average (1.1% of GDP), a difference that in view of the broader developments will not diminish. While taken together, public and private R&D expenditure in the Netherlands does hover around the average EU level, it is still far below the standard of 3% GDP agreed by the governments of the EU Member States at the Barcelona European Council meeting in 2002 (EU0203205F).

It is striking to note that company investments in 'human capital' have, however, displayed a marked increase (NL0212103F). Between 1993 and 1999, the percentage of employees who followed a course or some form of training doubled to 76%. Additionally, the Netherlands possesses important potential in terms of knowledge. Almost 30% of the Dutch population aged 15 years and older was counted among the country’s 'scientific and technological labour potential' in 2000. It should, however, be noted that that there is in fact a shortage of people with a technical education. The quality of the Dutch 'knowledge potential' is high, as is the rate of research productivity calculated for each researcher. By contrast, cohesion between knowledge-producing institutes and innovative companies is weak.

Trade union views

The largest trade union organisation in the Netherlands, the Federation of Dutch Trade Unions (Federatie Nederlandse Vakbeweging, FNV) sees labour productivity and innovation as a difficult issue for unions. For example, statistically, dismissing people leads to greater labour productivity and production process innovation could lead to reorganisations. This means that the unions have to flesh out these themes themselves as they see fit, according to FNV.

In a letter addressed to the Prime Minister in spring 2003, the trade unions highlighted the significance of a long-term perspective in times of economic downturn, criticising wage moderation, the pruning of environmental legislation, the postponement of investment and limiting the budget deficit at whatever cost. They emphasised that more attention should be paid to implementation of the modernisation and employment agenda agreed at the Lisbon European Council in 2000 (EU0004241F). In the same letter, the unions put forward a list of priorities. These are aimed at raising employee qualification levels - including measures directed at education and training, and employability - and at enhancing the quality of labour. However, a large number of measures are mentioned in which the link to innovation is less evident, such as increasing employment opportunities, flexible pension schemes and combating poverty. The unions also assert that socially responsible business practices, sustainability and environmental policy should be integrated into the Lisbon strategy.

In summer 2003, the Christian Trade Union Federation (Christelijk Nationaal Vakverbond, CNV), published a discussion paper on innovation. It singles out collective agreements as an important instrument of innovation. The focus should be far more on increasing labour productivity through investing in employees and the quality of labour, rather than on capping wage costs through wage moderation. CNV emphatically points to the responsibility carried by employers to invest adequately in R&D.

Employers' organisations views

The chair of the Dutch Federation of Small and Medium-sized Enterprises (MKB-Nederland), Alfred van Delft, responded to CNV's paper, stating that it takes account only of employees' interests. Increasing the flexibility of working hours is supported by CNV, but only if this accommodates personal circumstances and needs. More education and training is also desirable in the view of the union federation, but only within the scope of a personal 'lifecycle development plan'. Temporary employment must as far as possible be eliminated, according to CNV, as full-time employees are thought to contribute more towards a company’s innovative power. The MKB-Nederland chair described these proposals as 'pet topics'. Education and increasingly flexible working hours are definitely important, but they must be utilised in serving the interests of the company, he stated. Education and training must be instrumental in achieving greater productivity, while CNV refers to what it perceives as a right to education. Mr Van Delft characterised this as a 'resource fetish'. In terms of the innovation process, companies must maintain a close watch on what will be delivered and at what cost, in his view.

The largest Dutch employers’ association, the Confederation of Netherlands Industry and Employers (Vereniging Nederlandse Ondernemers-Nederlands Christelijk Werkgeversverbond, VNO-NCW), also calls for a powerful innovation policy, in addition to wage moderation. It calls for more government investment and improvement of the knowledge infrastructure, especially cooperation between companies and universities. It also underscores the importance of making choices between research areas, where information and communications technology (ICT) must not be overlooked, and the same applies to biotechnology.

Recent policy developments

Unions and employers have repeatedly called for the establishment of an 'innovation platform' to be headed by the Prime Minister. This platform was established in September 2003 and consists of chief executives from the business community, scientific institutions and government. It will generate ideas directed at the further development of the 'knowledge economy' and converting these into concrete proposals.

Innovation is viewed as a priority by the present government. On 2 October 2003, Laurens-Jan Brinkhorst and Karien van Gennip, the Minister and State Secretary for Economic Affairs, jointly presented an 'innovation letter' to the Lower House of parliament outlining the steps the government intends to take to strengthen the innovative power of the Dutch business sector. In October, the government also requested the innovation platform and the SER to issue recommendations on this issue.

Commentary

All participants in the debate see investment in innovation as a must, but there appears to be some dissention as to who should take the lead. The trade unions and government point particularly at employers, whose investments in R&D fall far below the European average. Employers are calling for the government to invest far more in innovation.

The innovation problem in the Netherlands appears to be mainly a question of unutilised knowledge. The knowledge exists, in people and in the knowledge institutions, but it is not sufficiently utilised in the business sector. It goes without saying that all the parties are calling for an improvement in the transfer of knowledge from universities into practice. It is, however, less obvious why the unions are calling for all sorts of social measures in this area too. A link can actually only be established to innovation in measures directed at improving the quality of labour and directed at education. With respect to the latter, it is noteworthy that while this is certainly a necessary component (in terms of students choosing scientific subjects, technical training of employees etc), a broader call for improving Dutch policy on supplementary or refresher training is less appropriate in this context since there has already been a high level of investment in this particular area. (Marian Schaapman HSI)

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