Economic Performance and Tertiary Education

1. Economic Performance and Tertiary Education Shahid Yusuf DRG World Bank EU Conference on Quality of tertiary education and the economic policy agenda, Ljubljana, April 2nd, 2008.

2. Sources of Growth • Middle and high income countries are deriving most of their growth impetus from relatively few urban centers. • With populations stabilizing or on the verge of decline and investment rates stagnating, most of the growth will have to come from increasing total factor productivity (TFP).

3. Geography of Productivity Two major, and interrelated sources of productivity growth are: • Urban agglomeration effects (doubling the density of economic activity can raise TFP growth by 0.42 percent p.a. doubling distance from metro centers reduces productivity by 15 percent); and • Innovation of all kinds (product, process, services related or with respect to organization). Innovation as measured by patenting or the introduction of new products/services, is greater in the larger cities and cities with higher employment intensity (96 percent of U.S. patents from metro areas and the 25 largest cities with 12 percent of the population, accounted for 20 percent of patents). However, there are exceptions e.g. Turku in Finland and Cambridge U.K.- where universities and local authorities have created innovative industrial clusters.

4. Role of the Urban Environment Large urban centers (or a sub-national region where scale effects are achieved through the networking of smaller cities) confer several advantages: • Scale and diversity of local market; • Urbanization economies (from industrial diversity); • Localization economies (from specialization, often in satellite or edge cities in a metro area, or in polycentric sub-national regions with multiple interlinked cities); • Concentration of universities; • Density of labor market; • Quality of infrastructure and international connectivity; • Services providers (finance, legal, engineering, managerial) (Business services tend to concentrate more in urban centers.); and • Concentration of company HQs.

5. Human Capital and Urban Capital • Within urban settings, technical skills and R&D are important keys. • Knowledge is the principal driver of productivity. Urban environment, infrastructure, and services determine knowledge spillovers and multiplier effects. • Investment in the quality of primary/secondary education linked with economic performance. Quality of education, including tertiary education, affects innovativeness. • Tertiary education attainment associated with high earnings premium and low unemployment rates.

6. Elements of a virtuous growth spiral Knowledge producers, intermediaries and firms. • New basic research/tacit knowledge diffuses slowly, hence universities and research institutes generating ideas are at the core of the productive urban economy. • Translating innovation into commercial products/services is the function of entrepreneurial firms doing applied research and development. • Promoting an uptake of university research is a function of intermediaries- and also firms.

7. Urban Knowledge System: the University • Universities with research capabilities are a necessary ingredient. • They produce many of the ideas. Education levels of an urban region correlated with entrepreneurship, and can stimulate R&D by firms. • The best research universities depend on strong graduate programs, large R&D budgets and effective allocation mechanisms, competitive pressures, and autonomy. • Special programs catering to firms as pursued by Stanford and MIT, help raise funds from the business sector, leverage talent in firms and build local partnerships.

8. Urban Knowledge System: the University (Contd.) • Specialization in core areas and departments and networking among second tier universities, a means of building technological capabilities in the absence of large world class universities. Such networking which allows differentiation and specialization among providers of tertiary level training, can build spheres of excellence and needed critical masses of complementary skills. Medicon Valley (Copenhagen and the Skane region of Sweden an example). • Multidisciplinary programs are increasingly important for raising productivity of scientists and engineers. • Networking and knowledge circulation among universities via formal and informal channels, a big plus e.g. co-authorship, multi-university research teams, the EU’s Erasmus program etc.

9. Urban Knowledge System: The Intermediaries • Municipal governments determine business environment, quality of services, tax incentives and attractiveness of amenities for knowledge workers. Through inter-jurisdictional coordination, they can build, integrate and maintain infrastructure. • University technology licensing offices (TLOs) can serve as matchmakers between researchers and potential users. • Regional, industrial bodies and other institutes can provide incentives and mechanisms for universities and firms to link-up and pool research assets (TAMA Association in Japan, TEFT program in Norway, Georgia (USA) Research Alliance of six major universities, UCSD CONNECT, the IC2 Institute at UT Austin and ITRI in Taiwan). SPINNO/TEKES (Finland) assists new starts. • Venture capitalists and angel investors can provide start-up capital, coaching and contacts. • Developers work with local public authorities to create infrastructure and affordable housing for urban industry and knowledge workers. • Other services providers underpin efforts of firms.

10. Urban Knowledge System: Firms • Bulk of applied research done by firms (between 50 and 80 percent). Access to universities advantageous because open innovation more fruitful. However, research intensity depends on industry; services and resource based industries do little research. Most R&D and patenting in few industrial categories. In the EU, 42 percent is by electronics, engineering, vehicles and telecom. • Proactive firms with own (exploratory) R&D programs and strategies based on innovation, better able to seek out ideas and work with universities. Major firms can serve as anchors for a regional innovation system (within a country as in the US, or across countries as with the Medicon Valley). Examples are Novo Nordisk and Astra Zeneca, in Medicon. • Firms headed by those with tertiary education likely to hire skilled and technical workers and encourage innovation. • Firms operating in an urban region with significant industrial/technological breadth, more likely to diversify into new fields, once old ones are commoditized and rents squeezed.

11. Sustaining Growth • National objective is not a brief spurt in growth, but a system that maintains growth via productivity increase, fed by innovation. Tax incentives, an education strategy, public support of R&D and IP (intellectual property) institutions can assist. • Quality and research intensity of national universities and openness to international students and competition (national as well as regional), is a way of sustaining flow of ideas. However, early foundation of creative and STEM (science, technology, engineering and math) skills forms the basis for gains from higher education and the utility of lifelong learning programs. • Urban capabilities and diversity can attract large firms and new entrants, and promote innovation. • Urban innovativeness can create linkages to and energize agro-based industries, especially food processing and industrial agriculture.

12. Share of Government R&D Budget allocated to Universities, and Total Patents (2006)

13. “For most countries today, human resource development and human capital formation is either extremely important, absolutely vital or a matter of life or death”. (Prime Minister of Malaysia’s Address to Association of Commonwealth Universities 2006)