What's going on?
The president of the European Central Bank (ECB) said on Monday that European companies need to better incorporate innovative technologies into their operations in order to boost productivity – and that’s a suggestion that businesses in all developed economies should heed.
What does this mean?
Productivity measures how effectively companies use their resources (like money, equipment and workers) to make their products or deliver their services. For an economy to prosper, productivity ought to be improving – as we’ve written before, better productivity ensures that everyone’s standard of living keeps increasing since, put very simply, there’s more stuff for everyone. Similarly, improving productivity feeds into long-term economic growth unlike, say, speculative investment “bubbles” that only offer short-term benefits before they pop!
Why should I care?
The bigger picture: Even existing innovative technologies aren’t being as widely adopted as they should be.
One way to improve productivity is for companies to develop innovative technology. However Mario Draghi, the ECB’s president, stressed on Monday that there were plenty of existing technologies that could boost European productivity, but that some European companies were failing to incorporate them into their operations (he partly blamed government regulations that inhibit innovation, as well as bad managerial practices). He didn’t specify which technologies, however – but that’s likely because the ECB, as an impartial central bank, doesn’t want to help or hurt particular businesses.
For markets: Better productivity should lead to higher profits.
In order for companies to improve their productivity they must innovate, either internally (e.g. by being more efficient in production) or by purchasing smaller competitors (see our other story today). A company that is more productive will typically be more profitable because it can produce more of its goods or services at a lower cost than its competitors. However, many companies have been criticized over the past decade for not putting back enough of their profits into further innovative research but instead prioritizing returning cash to shareholders (e.g. dividends).