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: email@example.com
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.
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