Centre for Economic Performance (CEP)


New Technologies and Productivity

electronics engineer

Recent work on New Technologies and Productivity

We have built up a body of work examining the impact of Information and Communication Technologies (ICTs) on productivity. The major impetus for this type of research is the post-1995 'productivity miracle' whereby US productivity growth accelerated, led by the contribution of ICT to capital deepening and total factor productivity growth. The economies of the EU did not experience the same type of acceleration. As a result, the productivity gap between the US and the EU widened. The increased economic importance of ICT raised new questions for governments regarding the best policy frameworks to adopt for encouraging both ICT investment and ICT-led innovation. The rapid diffusion of ICT in the 1990s also introduced new policy issues for consideration, such as the effect of ICT on inequality.

Our work on these topics falls into three main areas:

- Economic Impact of ICT

- Diffusion of ICT

- Technological Change and the Labour Market

  • Economic Impact of ICT

    With support of the European Commission we have built a panel of ICT matched to the population of private and public firms in Europe that tracks the types of hardware and software used. This covers all sectors of the economy and all sizes of company. This has enabled us to analyse the role of ICT in affecting the productivity, profitability and market value of firms. We combined this technology information with our organization and management survey information to show that in badly managed firms the returns to ICT are zero or even negative. We have written a major report on the Economic Impact of ICT led by Mirko Draca.

    Further reading:
    The Economic Impact of ICT (SMART N. 2007/0020) Final Report.

    Productivity and ICT: A Review of the Evidence

    This is part of a broader set of policy-related work on ICT funded by the European Commission - see the EU Digital Agenda for Europe News item: 'Digital Agenda: investment in digital economy holds key to Europe's future prosperity, says Commission report'

    With ONS (funded by BIS) we are separately examining the establishment level impact of hardware and software investments on productivity. We have found a strong association between hardware investments and productivity.

    US Multinationals do I.T. better

    We have also found that IT accounts for a substantial part of the higher productivity enjoyed by US multinationals who appear not only to spend more on IT, but importantly get a much bigger 'bang per buck' of their IT spending. Further, this effect is particularly strong in the sectors that have enjoyed a productivity acceleration in the US since 1995 (the 'ICT intensive sectors' such as wholesale, retail).

    Further reading:
    Americans Do I.T. Better: US Multinationals and the Productivity Miracle - this has subsequently been published in the American Economic Review, 2012).

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  • Diffusion of ICT

    Trade induced technical change

    One factor affecting the diffusion of new technologies may be competition arising from trade. Nick Bloom, Mirko Draca and John Van Reenen (2011) examine the impact of the rise of China to look at 'trade induced technical change'. They find that Chinese import competition had two effects: first, it led to increases in R&D, patenting, IT and TFP within firms; and second it reallocated employment between firms towards more innovative and technologically advanced firms.

    Further reading:
    Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT and Productivity

    Multinationals and the diffusion of new technologies

    Multinational companies play a major role in spreading new technologies. Chiara Criscuolo and Ralf Martin (2009) study the productivity of US owned plants in the UK. They find that UK MNEs are less productive than US affiliates, but as productive as non US foreign affiliates. It appears that the MNE advantage is driven by sharing superior firm level assets across plants and by cherry picking the better plants in a country. The additional superiority of US firms seems entirely driven by their particular ability to take over the best British plants.

    Further reading:
    Multinationals and US Productivity Leadership: Evidence from Great Britain - subsequently published in the Review of Economics and Statistics, 2009.

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  • Technological Change and the Labour Market

    What determines the pattern of ICT diffusion? We have looked at the influence of trade and multinational presence.

    A long-standing focus of CEP is the impact of technological change on the labour market. The increase in inequality in the UK and other countries is closely linked to changing technologies that increase the demand for workers of different types of skills.

    Further reading:
    Inequality, Technology and Trade: 21st Century Evidence

    Has ICT Polarized Skill Demand? Evidence from Eleven Countries over 25 Years - published subsequently in Review of Economics and Statistics, 2014.

    These issues and related working papers are covered in more detail in the Labour Markets Programme.

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