ABSTRACT
The fundamental source of competitiveness which can enable rapid growth in the long run is investment and innovation. The most widely addressed type of investment is in ‘fixed’ capital-plant and machinery, buildings and vehicles. But labour is also obviously of considerable importance in the productive process. Improving labour’s efficiency requires investment in education and training. It is well known that ‘innovation’ can enhance product quality and also improve the efficiency with which labour and fixed capital combine. Many factors influence innovation, but investment in ‘intangibles’ is one of the main sources, and promotional expenditure, education and training, and research and development (R&D) are the three most often discussed. Promotion abroad of UK goods and services is an increasingly important aspect of international competitiveness, but has yet to receive the empirical back-up which it undoubtedly warrants. The same is not true of R&D, which is seen as vital in the process of innovation by increasing the stock of ‘research’ capital, or of spending on education and training which can raise the stock of ‘human’ capital. This chapter explores aspects of investment and innovation over the last twenty-five years. The traditional inputs into the productive process are of course capital and labour. Yet much evidence over a long period of time suggests that these play a far smaller part in economic growth than ‘other’ inputs, the contributions of these often being aggregated into a single entity labelled the ‘residual’ or ‘technical change’.1 Innovation has arguably been an integral contributor to this. In view of its historical importance and its likely accelerating role in the future, innovation is given central attention here, although fixed capital and labour are not forgotten. Indeed they cannot be since both labour and fixed capital are key vehicles in the introduction of innovation. This chapter therefore begins with a comparative analysis of an important input into technological change-R&D-and of technological output-royalties. It then turns to expenditure on fixed capital and finally to inward investment, the extent to which investment by overseas companies in human capital contributes to the economy.
