A slowdown in productivity growth over the past decade has raised concerns about the long-term outlook for the global economy, but the solution lies largely in the hands of governments, says a new report by the Organisation for Economic Cooperation and Development (OECD).
To relaunch productivity and reduce inequality, governments should thus help firms harness the forces of knowledge diffusion more efficiently, said OECD secretary-general Angel Gurría.
Speaking in Mexico City at the launching of the report titled "Future of Productivity", he added: "(Governments) also need to focus on skills development and facilitate a more effective allocation of human talent to jobs."
Lagging productivity gains are a particular problem for countries such as Japan, where an ageing population and a shrinking labour force make it essential to obtain greater returns from diminishing resources if output is to be maintained.
But countries such as Singapore are also anxious to increase productivity in order to remain internationally competitive.
The report said policy reforms can revive "the diffusion of innovation" and make better use of human talent to clear the path for higher and more inclusive productivity growth.
"Productivity is about working smarter, rather than working harder, and reflects the ability to produce more output by better combining inputs, thanks to new ideas, technological innovations and new business models," it said.
Mr Gurría said: "Slower innovation is not the root cause of the current productivity slowdown.
"The problem is the pace at which innovations spread throughout the economy, which we refer to as a breakdown of the diffusion machine."
OECD research shows that the gap between high-productivity firms and the rest has widened over time, suggesting that there are barriers to the diffusion of new innovations.
Labour productivity among advanced firms rose at an average annual rate of 3.5 per cent in the manufacturing sector over the 2000s; the rise was just 0.5 per cent for other less-advanced firms in the OECD economies.
The report said: "This gap is even larger in the services sector - and is of particular concern since the weight of services in most economies is rising, and services such as logistics, finance and communication are critical to firms' participation in global value chains.
"Diffusion is facilitated by global connectedness, experimentation with new ideas, knowledge-based capital and efficient resource allocation, but comes easier to firms in some economies than others.
"Since the knowledge economy increasingly requires skills that many education systems are struggling to provide, countries will reap greater growth and equity benefits through policies that more effectively allocate skills."
Around a quarter of workers in OECD economies report a mismatch between their existing skills and those required for their job. A better use of human talent supports the growth of innovative firms and could boost labour productivity by up to 10 per cent in some economies, said the report.
It identifies a number of policy types that can help sustain productivity growth:
Product market reforms and bankruptcy laws that do not excessively penalise failure: These improve firms' incentives to experiment with new technologies, allocate resources more efficiently and maximise the benefits of participation in global value chains.
Policies that make labour mobility easier: These include housing market policies that facilitate residential mobility, the promotion of adult and life-long learning and employment-protection legislation that does not impose too heavy or unpredictable costs on hiring and firing.
Greater public investment in basic research: This supports the continued emergence of breakthrough innovations and knowledge diffusion.
Innovation policies that ensure a level playing field between incumbents and new entrants: This is often missing in existing incentive schemes. Research and development tax incentives should be equally accessible and beneficial to incumbent, young firms and start-ups.