While it remains to be seen whether the Covid recession will be especially long-lasting, its impact was nonetheless considerable, not least due to the huge digital transformation undertaken in such a short space of time.

A new paper from the University of Cambridge argues that business model innovation will be key to emerging from the pandemic in the best economic health.  The authors argue that when combined with the adoption of new digital technologies, economies can achieve productivity growth of around 3.5%, versus the 1% that is predicted currently.  This is a growth rate that is comparable with previous high-growth periods throughout history.

“We posit that rapid productivity growth offers the only viable option and that it can reduce the debt to GDP ratio to pre-pandemic
levels much faster than otherwise,” the authors say. “We propose that recent developments in digital technology offers the opportunity to accelerate productivity growth through business model innovation. We propose policies which encourage business model innovation.”

Encouraging innovation

As a result, the authors argue that policymakers should be doing more to encourage business model innovation.  This is likely to mean an extension of the kinds of grants and subsidies that have been traditionally reserved for the adoption of new technologies and also offering them for their business application.

The proposal makes sense, as while technologies are undoubtedly important, they only really drive value when organizational changes accompany them.  The authors believe policymakers could go further than grants and subsidies, however.  For instance, they argue that tax schemes could be designed to encourage firms to jointly apply for finance to encourage coordination within and across industries.

Governments could also provide tax rebates if firms can demonstrate productivity improvements in independent audits.  While it may seem obvious that firms would pursue productivity gains without incentives, the researchers argue that the desire for profit can hinder any attempts to pursue productivity gains.

Developing human capital

The authors also argue that governments should be doing more to provide suitable training and develop the human capital required to fully capitalize on the latest technologies.

Governments could also play a crucial role in establishing and supporting common standards across industry, with a particularly important role being to encourage collaboration across firms and industries to help those standards materialize.

“By emphasizing business model innovation, governments may be able to shorten the time from technological research to commercialization, thereby shortening the negative portion of the productivity J-curve effect,” the authors conclude. “This is now critical, as we may be engaged in a time “race” against the huge debt and their interest payments.”

With the debt from the pandemic likely to be at unprecedented levels, the authors believe these changes cannot come quickly enough if governments are to stay on a sound economic footing.