7 Concluding comments
Skills and knowledge contribute in complex ways to a firm’s pursuit of efficiency, innovation and market opportunities. Much remains unclear. This review of literature has explored the three main ways whereby raising skill levels will affect firm productivity. Higher skills can raise a worker’s own productivity, the productivity of tasks that they perform with capital or technology, and can directly affect the productivity of other workers and other firms. This section draws out the key insights identified, the areas where further work seems likely to be productive, and some implications for policies around work based skills.
There is general agreement that workforce skills are important for growth. Entrepreneurial and managerial skills are clearly important. Given that technical change is broadly skill-biased, the relative demand for technical skills has increased with technological change. Firm dynamics studies point to technology uptake being associated with firms having a skilled workforce. On the other hand, the factors like investment in R&D and access to venture finance are also important in driving technology adoption. From this evidence, the importance of increasing skill levels, relative to other policies, is hard to gauge. For example, recent Australian studies suggest that increases in skills had only a limited role in Australia’s productivity surge during the 1990s. Greater weight was attributed to the increased openness of the Australian economy, increased R&D, and a rapid uptake and use of ICT. Nevertheless, they suggest that the accumulation of human capital in previous decades laid a long term foundation for the productivity growth that is now occurring (for example in ICT uptake). Different evidence comes from the detailed comparisons of manufacturing plants and service sector firms in the UK and European countries, which point to large differences in shop floor, supervisory and managerial skill levels, with significantly lower levels of plant productivity in the UK.
7.1 Skills as determinants of firm productivity
A range of skills is required for a firm to make productivity improvements. Entrepreneurial ability is needed to identify and respond to market and innovation opportunities. Managerial capability is essential to provide the leadership and organisational skills to oversee the effectiveness of production processes. Employees’ technical skills improve the effectiveness of production processes, and allow advantage to be taken of technological improvements.
Entrepreneurship performs a number of functions, including the recognition of market opportunities, risk taking, R&D and innovation, the re-allocation of resources amongst firms, arbitrage, and market coordination. Two broad types of entrepreneurial activity have been identified. Breakthrough inventions are contributed disproportionately by smaller independent entrepreneurs, while cumulative, incremental improvements are undertaken by larger firms with substantial R&D activities. These types are complementary, but require different skill sets. Smaller entrepreneurs tend to be generalists who require a range of competencies. They need innate skills such as imagination and attitudes to risk, competencies that can be acquired like analytical abilities and technical knowledge, and skills that are obtained through experience like sound judgment. In contrast, the large firm’s R&D activity requires researchers to be highly equipped, with a mastery of current technical knowledge and analytical methods.
Policy settings have a major influence on the extent and direction of entrepreneurial activity. Regulatory “rules of the game” affect the structure of payoffs that entrepreneurs face, and determine whether they act in productive or unproductive ways. Pro-competitive regulations improve productivity by providing more scope for entering firms to explore new business opportunities and disseminate new technologies, allowing resource re-allocation through firm dynamics, and limiting rent-seeking and slack in the use of inputs. Policies that affect firm entry and exit costs, such as employment protection legislation and administrative barriers around firm registration and bankruptcy, allow new firms to enter to respond to market opportunities, and the threat of that entry constrains the behaviour of incumbent firms. Access to financial resources is also important to support firm creation and entrepreneurial activity.
Managerial capabilities are also central to raising firm productivity. It is the role of managers to choose production processes, to ensure that these are implemented effectively, to remove inefficiencies, and to move the firm outwards towards its production frontier. Management hierarchies allow talented individuals to hold more senior positions and exert more influence. A wide skill set is required, including the strategic ability to adapt to a changing environment, the organisational and supervision skills to run the business, people and communication skills, and an appreciation of information acquisition and learning processes. Managers are also involved in the design and operation of human resources management practices. These provide a coherent incentive system which enhances workers’ contribution to the productivity of the firm. They include work in teams, flexible job assignments, training, and incentive pay, but also pledges of employment security which helped the adoption of change, and good communication that identifies worker concerns and opportunities for productivity improvements. The firm’s knowledge management processes appear to contribute positively to firm innovation and productivity, as does its ability to find, assimilate and utilise new external knowledge. Management has a key role in the development of these knowledge bases and structuring the knowledge held within the firm into operating routines that guide “business as usual”, and dynamic capabilities which enable firms to respond to change.
The range of technical skills and abilities that are required in the workplace are only partly formed within the education/training system. There is a robust and positive relationship between an individual’s education and their earnings, and in response to subjects taken. However, formal education explains a relatively small amount of the overall dispersion of earnings. Returns to years of work experience imply the accumulation of skills on the job. Other cognitive capacities and behavioural traits, such as motivation, trustworthiness, and industriousness, seem to have an influence on earnings outcomes equal to formal education. Adaptability, problem solving, and inter-personal skills are also thought to be important in responding to technical change. Thus, the linkage between the education/training system and firm productivity is weaker where a significant sub-set of the skills required are formed inside the firm, or where the cognitive abilities sought are innate.