In 1973, Wassily Leontief won the Nobel Prize in Economics for developing a method of economic analysis based on the study of sectoral structures. However, he always warned that these divisions are analytic constructions, not economic realities.
In the Spanish public debate on business growth this warning is often ignored and our problems of business growth are attributed to the atomization of the productive fabric as a consequence of an economic model based on “low value-added sectors.” Moreover, advocates of this view propose pushing the economic transition toward a new productive model based on sectors with a high technological component, which allegedly would facilitate business growth.
Sectoral fallacies about firm size
With regard to the first part of the proposition —the alleged small size of Spanish firms— the graphical comparison with other European countries shows that the size of our companies is close to the European average and even above France, Italy, or the Netherlands.
The second part of the approach refers to the structure of the Spanish economy and the excessive prominence of “low value-added sectors.” To test this argument, we propose a simple exercise of econ-fiction (review methodological note). Imagine that the Next Generation EU funds, which entailed a public investment of 4% of GDP, had as their sole objective to converge with the sectoral structure of one of our main European partners, but maintaining our current levels of sectoral productivity. This industrial policy would have had a very limited multiplier effect, increasing our GDP level by between 4% and 6%. In light of this analysis, the sectoral structure does not seem to be the main brake on business growth, especially since the average firm size does not differ much from the European one.
Innovation, productivity and business growth
Let us move forward. At the end of the 1980s, Robert Solow received the Nobel Prize in Economics, among other contributions, for highlighting technological and organizational innovation by firms as a decisive factor for economic growth. This relationship between growth and innovation, widely studied at the macro level, also manifests itself in the microeconomic sphere. Specifically, firms enter the market by exploiting a comparative advantage, which is reflected in a differential product offering, but the progressive loss of this advantage drives firms into a stagnation stage. During this stage, corporate profits only cover maintaining their production structure and limit their growth. This stagnation could only have been avoided through an prior commitment to innovation.
“The distinctive features of our business fabric are more closely linked to productivity and innovation than to the sectoral structure of economies”
Returning to the previous econ-fiction experiment, suppose this time that European funds had been invested in programs to help business innovation, setting a single objective: converge with the productivity levels of our main European partners, but maintaining our current sectoral structure. These programs would have had an impact about five times higher than that of the earlier industrial policy, increasing our GDP level by between 18.5% and 25%. Consequently, it seems that the distinctive features of our business fabric are more closely tied to productivity and innovation than to the sectoral structure of economies.
Determinant factors for business innovation
The innovation of a business can take multiple forms: improving an existing product or process, strengthening the business model, opening a new line of activity, or developing a proprietary technology that grants a competitive edge. However, for this process to activate and mature successfully, several factors must coincide.
The first of these is the financing of innovation, which presents unique characteristics. Innovating implies investing in intangible assets: knowledge, capabilities, business models, algorithms, intellectual property, which generate both private returns and social returns, since technological advances also benefit society at large. On the other hand, financing intangible assets carries high levels of risk, as the return on investment is more uncertain. These factors grant a key role to the public sector as a financier of innovation. From the private financing perspective, Spanish banking regulation rests mainly on real guarantees for long-term lending. Intangible assets do not usually entail this kind of guarantee, which makes bank financing for innovation difficult. Consequently, for financing intangible assets, the development of capital markets is crucial, given that they operate under regulations more flexible than banking to finance without real guarantees.
The second factor is an institutional environment that provides financing and also certainty and legal security, which, far from requiring major legislative reforms, could be realized through two kinds of measures: measures focused on reducing administrative barriers and measures aimed at ensuring a predictable regulatory framework. In relation to regulatory predictability, a possible measure could consist of regulatory authorities committing to establish a minimum period of six years without regulatory changes that affect innovative activities, both to allow companies to plan more securely their investments in intangible assets, and to rigorously evaluate the proposed framework and the long process of business innovation.
“The key does not lie in artificially rethinking their sectoral structure, but in strengthening the pillars that truly drive business innovation”
The third factor is the talent, whose traditional scarcity could be eased by the emergence of artificial intelligence (AI), which is not only transforming access to knowledge, but also the processes of (self)training. This latter issue is deeply disruptive, in that it equips the worker with a tool to enhance productivity and quickly adapt to new environments and productive contexts, without resorting to courses of re-skilling or up-skilling. Beyond knowledge, innovation, as Solow noted, also concerns the design and execution of production processes. In fact, the adoption of AI not only as a technological tool but as a lever for organizational redesign through the integration of advanced algorithms, will be one of the most decisive elements for innovation and business productivity in the coming years.
In short, if Spain aims to solidify a productive fabric that triggers that virtuous circle connecting business growth and productivity, the key is not to artificially redefine its sectoral structure, but to strengthen the pillars that truly drive business innovation, as also emphasized by the Foro de Marcas Renombradas. Only by focusing public policies and business strategies on innovation can we converge with our European partners and open a path to a more prosperous and sustainable economic growth.
Methodological note. The estimation exercise conducted by the author, in which the impact of the Next Generation EU funds is calculated, is based on the 2023 Annual National Accounts data for all CNAE activity branches (two-digit) of Spain, France, Italy and Germany.
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