Investment in new information and communications technologies (ICT) improves the productivity of UK businesses, according to new research from the Centre for Economic Performance (CEP) at LSE.
But how businesses are organised and managed seems to be a key influence on how strong the impact of ICT use is on productivity. In particular, US-owned firms operating in the UK not only use more ICT than both domestic firms and other multinationals, but they also use it more effectively.
The CEP study, led by Professor John Van Reenen, is part of a joint investigation with the Office for National Statistics (ONS), sponsored by the Department of Trade and Industry (DTI). Looking at data on over 7,500 private sector establishments located in the UK, the research finds that:
Investment in computer hardware and software are associated with significantly higher output per worker, a standard measure of productivity.
American establishments located in the UK spend more on ICT. These US multinationals use about 40 per cent more ICT capital per worker than average whereas non-US multinationals use only about 20 per cent more and purely domestic firms use much less than the average.
But this difference in ICT usage is only one part of the story. The US firms also seem to get more out of each dollar spent on ICT than domestic UK firms or multinationals from other countries.
A doubling of the ICT stock is associated with an increase in productivity of 5 per cent for a US firm but only 4 per cent for a non-US firm. US firms simply get more productivity out of the same amount of ICT (which is not true of other forms of capital investment).
The bigger returns to ICT usage for US firms are only found in certain sectors of the economy, notably those industries that intensively use ICT - such as retailing, wholesaling and publishing. These are exactly the same 'ICT-using' sectors that account for most of the US 'productivity miracle', the surge in productivity growth since the mid-1990s.
Why are the returns so much higher for US firms? Evidence from a separate CEP study - which compares managerial 'best practice' in the United States, the UK, France and Germany - suggests that what gives US firms an advantage is that their organisational and managerial structures are conducive to getting the most out of ICT. American subsidiaries in Europe appear to be better managed than European firms and the subsidiaries of other multinationals.
So why do European firms not adopt more efficient forms of business organisation? There is some evidence that they are doing so. For example, the Walmart model has been imitated by some of the UK's largest supermarkets. It has also been transplanted directly as Walmart has acquired Asda, the UK's second largest supermarket.
But organisational changes are large and costly upheavals, so change is often slow and difficult. What's more, there are regulatory and cultural constraints to adopting US business practices in Europe. But these should not be overstated as according to the CEP study, subsidiaries of US multinationals located in Europe are significantly better managed than purely domestic firms and non-US multinationals.
Click here to download a PDF of the report It ain't what you do it's the way that you do I.T. - Testing explanations of productivity growth using US affiliates
For further information: contact CEP director Professor John Van Reenen on 020 7955 7048, email: firstname.lastname@example.org
The CEP study - It ain't what you do it's the way that you do I.T. - Testing explanations of productivity growth using US affiliates by Nick Bloom, Raffaella Sadun and John Van Reenen is available on the ONS website - along with three other studies that form part of the project.
The analysis has been carried out in the ONS microdata laboratory, which stores and links survey information on individual businesses under conditions of strict confidentiality. The laboratory is used for research on business behaviour and performance, by approved researchers, bound by security and non-disclosure conditions to protect data.
'Red tape as bad, if not worse, in America' claims study (28 Feb 06)
A LSE study conducted in 2005 showed there was no reason for UK firms to be less productive than US firms, which have about the same level of regulation. It also found the main difference comes in terms of management style and practice rather than government regulations.
Management: can the UK catch up with US and European productivity? (16 Feb 06)
UK productivity lacks competitiveness. A report by LSE in October 2005 showed that the productivity gap between the US and the UK is about 40 per cent, and between the UK and France and Germany it is about 20 per cent - to our disadvantage. Nick Bloom, professor of economics at LSE, says the US growth rate appears to be linked to the use of IT.
UK's output lags in retail and financial services (25 Oct 05)
Studies have put a large part of America's strong productivity performance down to an IT-driven surge in efficiency in retailing. A study by the Centre for Economic Performance at LSE suggested that 80 per cent of the performance gap was down to the effectiveness with which IT was used.
US outsmarts UK in ICT stakes (17 Oct 05)
Research by the Centre for Economic Performance at LSE, suggests UK-run US providers have the advantage due to organisational and managerial structures 'conducive to getting the most out of information and communications technology'
Retailers must adapt to evolving markets (17 Oct 05)
New research from John Van Reenen of the Centre for Economic Performance at LSE shows that 80 per cent of the performance in business gap is down to the effectiveness with which IT was used. US managements were simply better at this.
US firms get more for their IT bucks (14 Oct 05)
Businesses that invest in IT reap significant productivity gains, according to researchers at LSE, but how the technology is used, and how the business is organised is just as important. The study, led by Professor John Van Reenen from the LSE's Centre for Economic Performance, was carried out in tandem with the Office of National Statistics, and was sponsored by the Department of Trade and Industry.
BCC issues red alert on manufacturing (14 Oct 05)
Under the section Cost of bad management, a new study on UK business productivity by LSE shows almost a quarter of all working time in British firms is wasted because of poor management, at huge economic cost.
IT's business value endorsed (12 Oct 05)
Technology investment has a substantial, quantifiable impact on business productivity, according to the Office of National Statistics ONS and LSE.
Businesses win with ICT (10 Oct 05)
Information and communication technologies (ICT) can significantly boost the productivity of UK businesses, according to three separate reports by the Centre for Economic Performance at LSE.
US firms get more out of IT than UK rivals (10 Oct 05)
The first paper, It ain't what you do it's the way that you do IT from the Centre for Economic Performance at LSE, found that US multi-national enterprises in the UK are eight per cent more productive than their UK counterparts.
Information & comms technology can help boost business (10 Oct 05 )
It's the way you do IT (10 Oct 05)
Europe is failing to keep pace with US productivity growth over the last decade. Researchers from the Centre for Economic Performance at LSE have found that output per hour in US-owned plants in Britain was almost 40 per cent higher than in British-owned ones. Some of the difference could be attributed to the greater use of information technology by US subsidiaries and a higher return from their IT investment.
ICT helps to boost business says new research (10 Oct 05)
Information technology boosts UK productivity but US-owned firms do IT better (7 Oct 05)
US firms make better use of IT (6 Oct)
US firms are 40 per cent more productive then those in the UK largely owing to the better use of IT, according to the Centre for Economic Performance at LSE.
FinFacts Business News
It ain't what you do, it's the way that you do I.T. - Why US multinationals win the productivity race (6 Oct 05)
US firms make better use of IT (6 Oct)
Use of technology key to higher productivity (6 Oct 05)
With regard to the better US productivity performance compared to Europe, John van Reenen, director of the Centre for Economic Performance at the London School of Economics, says that the reason is 'almost a slam dunk' in favour of better US management, use of information technology and corporate practices.
ICT & Productivity (6 Oct 05)
6 October 2005