Technological Policy And Its Competitiveness Enhancement Role Economics Essay

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This section of the paper describes technological policy and its role to enhance EU competitiveness. The extract is composed of three parts presenting historical background, economic explanations and future perspectives. According to Center for Strategic and International Studies, the main issue of Technology Policy is to understand how technological change might affect security and economic growth [1] . In order to discuss technological policy it is necessary to clarify what technology means. "Technology is the practical application of knowledge so that something entirely new can be done, or so that something can be done in a completely new way". [2] It is worth mentioning that technology policy (embracing research and innovation) is deeply connected to industrial policy mentioned above. "Research is essential for the definition of industrial strategy, especially in high-technology sectors, by offering a common reference basis for technology forecasting and development" [3] - it reflects the relation between these two discussed policies.

Historical background

The technological policy has been undergoing some modifications within the years.

The Treaty of Rome from 1957 that became a fundamental document for a future creation

of the European Union did not specify technology policy. At that moment the nuclear dimension prevailed. It was European Atomic Energy Community (Euratom) that was perceived as a crucial one in terms of science and technology. Starting from the 1960's

a 'technology gap' is observed between the United States and Europe [4] . As a response

to the challenge of foreign competition, the European Community implemented European Strategic Programme for Research in Information Technology (ESPIRIT) primary for five years (1984-1988) and later for another five (1989-1993). The condition to obtain a financial support was to conduct research and development work from minimum two European countries, universities or institutions [5] .

In 1986, Research was legally named as a Community policy on the bases of the Single European Act. The Maastricht Treaty putting into force the creation of the European Union stressed the need for consistency and coordination of the research and technological activities. A few years later, in 1993, a White Paper entitled "Growth, Competitiveness, Employment" suggested focusing on "society based on knowledge" and "intelligence society" [6] . The year 2000 was a breakthrough regarding a scenario for competitiveness of the EU. The study shows that the USA overtakes the EU economically basically on the ground of information technology. Therefore, The Lisbon Strategy was launched in 2000

in order to allow the EU "to become the most dynamic and competitive knowledge-based economy in the world by 2010 capable of sustainable economic growth with more and better jobs and greater social cohesion and respect for the environment" [7] .

How can we economically explain the relation between technology and production?

According to Mankiw and Taylor the production function presents as below:

Y = AxF (L, K, H, N),

where Y means the quantity of output, L - the quantity of labour,

K - quantity of physical capital, H - the quantity of human capital, N - quantity of natural resources. A is a variable and denotes technology and F - production function. This equation describes the inputs of production in relation to its outputs [8] . "Many production functions have a property called constant returns to scale" [9] . In other words, the increase of all of the elements from the right side of the equation causes the increase

of the total output. If the increase is described as 1/L, the final result would be:

Y/L = AxF (1, K/L, H/L, N/L).

Y/L is output per worker what Mankiw and Taylor mention as "a measure of productivity" [10] . Physical capital per worker (K/L), human capital per worker (H/L) and natural resources per worker (N/L) are the factors stimulating productivity. We could also presume that the output per worker (thereby an efficiency of a worker) is dependent on technology (A) [11] . Efficiency and productivity are strictly connected with competitiveness.

Another economic explanation of the importance of technology for economy

is a neoclassical model of economic growth pioneered by Robert Solow. Briefly speaking,

it explains the growth process in advanced countries underlining the importance

of technological change to stimulate the equilibrium (the moment when investment is equal

to the capital depreciation) and to shift upward the aggregate production function [12] . In other words the production increases due to an advance in technology what enhances efficiency.

Future perspectives

Nowadays, the European Union is still under the financial crisis. It implicates budget constraints, many jobs loss and decrease of standard of living. The European countries at these hard times have to find solutions in order to sustain Europe's competitiveness in the future. Basing on a document called "Europe 2020 Flagship Initiative. Innovation Union" we could find that: "in times of fiscal constraints, the EU and Member States need to continue to invest in education, R&D, innovation and ICTs" to be capable of enhancing competition [13] . According to its analysis, the annual EU expenditures on R&D are 0,8% of GDP lower than in the USA and 1,5 % less than in Japan. The major technological gaps are visible in business R&D and venture capital investments [14] . In order to prove the statement that innovation are needed for reaching competitiveness the NEMESIS model by Paul Zagamé (incorporating ideas both from Luc Soete's assumptions and the European Commission officials, etc.) is going to be shortly presented. It is an econometric model constructed for 27 Member States, USA and Japan to predict the possible interdependences of different sectors in economy like development, competitiveness, employment, RTD or environment. The estimates coming from this model are the following: if 3% of EU GDP was spent on R&D by 2020, it could create up to 3,7 million jobs increasing also GDP by around 800 billion euro by 2025. According to Zagamé, hypothetically a removal of The Framework Program for Research and Development 8 leading to stop researches would cause a drop of 0,7% of GDP and 380.000 jobs in 2025 in the European Union [15] . Below, there is the table indicating all his simulations:

Table 1: FP suppression after 2013 consequences, cumulative effects in 2025

2015

2020

2025

GDP (%)

-0,10

-0,32

-0,63

Employment (thousands)

-262

-125

-382

Source: Paul Zagamé , The costs of a non-innovative Europe: What can we learn and what can we expect from the simulation works, 2010, http://ec.europa.eu/research/social-sciences/pdf/demeter-costs-non-innovative-europe-zagame_en.pdf, p. 12.

The conclusions emerging from this model show that there is a significant need for innovation and research in terms of achieving an increase of GDP.

"Europe 2020. A strategy for smart, sustainable and inclusive growth" outlines a vision for the 21st century Europe. One of the key targets for the EU is to invest 3% of GDP in R&D. Together with that, the Commission highlighted seven flagship initiatives where we could find "Innovation Union". This priority is about to improving financing and coordination

of a research and innovation areas to boost economic growth and create jobs [16] . "A greater capacity for research and development as well as innovation across all sectors of the economy, combined with increased resource efficiency will improve competitiveness and foster job creation. Investing in cleaner, low carbon technologies will help our environment, contribute to fighting climate change and create new business and employment opportunities" [17] .

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