Belgium is doing extremely well as far as innovation and R&D are concerned. In fact, the country is one of the best performing in Europe in this area. This is precisely why it is strange to note that Belgian productivity growth is so low, especially considering that we are living in a period of rapid technological change. The Belgian economy is therefore characterised by a productivity puzzle: strong innovation efforts go hand in hand with declining productivity growth. The reasons for this are multiple and complex.

This article focuses on one part of the puzzle, namely technological diffusion. This is the diffusion of innovation from innovative businesses to other firms. Four different diffusion channels were studied. The findings suggest that innovation is diffused between competitors in the same industry (sectoral diffusion) and between suppliers or customers (economic diffusion). In contrast, no evidence was found for diffusion amongst neighbouring firms (geographic diffusion).

In addition, the more tenuous the link between the innovator and other firms, the weaker technological diffusion will be. In other words, productivity appears to be boosted only by a firm’s own innovative efforts and those of firms with which it interacts.

These insights are important because many firms receive public subsidies to encourage innovation. Innovation increases a firm's productivity and thus strengthens its competitive position. However, from an economic perspective, it is important that innovative firms are not the sole beneficiaries of R&D efforts. Indeed, public funds are better spent if other firms – and the rest of the economy - also benefit from innovation. In this way, government subsidies can help raise innovation efforts to an economically optimal level.

Interested readers can find more information on this topic in the Economic Review article "With a little help from my friends: patents, technological diffusion and firm productivity", published by the National Bank of Belgium.