The Impact Of Information And Communication Technologies

Published Date: 02 Nov 2017

Discuss the possible ways in which the adoption of information and communication technologies (ICT) in production processes has an impact on productivity, and some of the possible explanations for why these positive effects on productivity have taken a long time to appear in productivity statistics, presenting some examples. Will the impact of ICT on productivity continue in the future?

The impact of information and communication technologies on productivity has been an issue that several researchers have studied about, some of these concluding that the result was a negative impact while others concluding that the result was a positive one. The differences in these results can be attributed to different measures of how productivity was calculated and whether the results were seen from a short term or a long term point of view. Also the effect of ICT on productivity can be attributed to several factors.

An increase in productivity should not be credited to working more to produce more products as in that way, to get more output you have to give more input. Productivity growth should be seen as working smarter with the technologies you have thus getting more output with the same amount of input as before. Information and communication technology and the impact on productivity varies between different firms, sectors and countries. Taking into consideration the macro-level, one can notice from the below figure that developed countries have increased their investment in ICT with the United States and Japan being the highest investors in ICT as compared to the total country's gross domestic product.

Not only did the share of investment affect the GDP growth but also the contribution of investment in ICT capital led to an increase in the GDP growth as can be seen in the next figure. One can notice that a similar trend, like that of the previous figure, is visible where the United States is still at the top of the list even if the percentage is smaller than 0.9% of the growth.

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One cannot mention how ICT affected productivity growth without mentioning the factors that led to the impact of ICT on firms. Some of these factors are the employees skills, organisation factors, and innovation. The size of the firm and its age together with ownership, competition and management also play an important role. There have been various studies in several countries about the skill of workers and how much it affects productivity. Most of the studies concluded that the skill of workers shows a positive relationship to the productivity and also that the demand for highly skilled workers is increasing while unskilled workers are finding it hard to work in companies that implement ICT). For example, in studies carried out by Baldwin et al. (1995) in Canada, it was found that advanced technology usage requires a higher level of skill. A similar result was found in studies held in France by Entorf and Kramarz (1998) where they concluded that computer-based technologies are more likely to be used by workers who are highly skilled. Similarly, in the UK, Caroli and Van Reenen (1999) found that organisation change, technology and human capital are complementary and that the former reduced the need for unskilled workers. This can also be seen on a national level as shown by the following figure taken from an OECD report in 2003.

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Apart from the skill of the workers, organisational change has to be taken into account. Structural change, new business practices and processes and new strategies are more likely to give greater productivity growth. Teamwork and the ability to do different tasks is nowadays considered as an asset and these two factors are more likely to increase the productivity growth. Black and Lynch conducted several research in the US and concluded that productivity can be increased by implementing human resources practices (2001) and also by re-engineering the workplaces (2000). ICT and innovation are also highly related as shown by Hempbell (2002) . His studies concluded that a firm is more likely to succeed in ICT if it had experienced innovation in the past. Apart from that, studies show that there is a link between countries that invest in ICT and countries with patents related to ICT as shown in the following figure:

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Ownership, competition and management are also seen as important factors for productivity growth. Studies show that firms that have changed owners are more likely to improved productivity after the changeover. Bertschek and Fryges (2002) came up with the results that if there is international competition, a firm is more likely to start using business to business electronic commerce. Apart from this, studies show that the adoption of advanced technology such as ICT increases if the size of the firm is large. Evidence from the United Kingdom showed that the large firms have a higher probability of implementing network technologies such as the internet and intranet than small firms and also these companies have a higher chance of having their own website. The age of the firm also leaves an impact on ICT with newer firms more likely to invest in new technologies.

There are several reasons why these positive effects on productivity took a long time to appear in productivity statistics. One of the main reasons is that the input and output were not measured correctly thus the effect of the output was not seen. According to Erik Brynjolfsson and Lorin M. Hitt in their paper in 1998, productivity is a simple concept which is easy to define however it is hard to measure. They argue that to accurately measure the output, the value created for the customers should also be taken into consideration not just how many lines of code were produced or how many physical products were manufactured. They continue that just like output, the input should be calculated correctly with not only taking into consideration the labour hours but also what equipment was used and how efficiently it was used, the materials and resources consumed, the education and training given to the employees and also the structure of the organisation. Brynjolfsson and Lorin in the below figure show the productivity of ICT investment over time. The vertical axis shows the percentage estimates of how the IT capital contributed to the productivity growth while the horizontal axis shows the number of years. The statistical methods are represented as following: blue line (OLS) represents the ordinary least squares, cyan line (SRF) represent the semi-reduced form which is similar to the OLS but does not include the list of inputs so that there are less biases on the IT estimates and the green line (IV) represent the instrumental variables regression.

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Another reason why the positive impact did not show was because of technological interdependencies. An argument put forward is that the manufacturing and services production industries are closely related and the outputs of one and the other are very difficult to separate. Some authors of research work have argued that an increase in productivity in the manufacturing industry is caused by an increase in the productivity in the services industry and this is due to investments in ICT. The below figures taken from a study done by the OECD entitled ICT and Economic Growth shows the close relationship between firms that produce ICT goods and services and their productivity growth. One can notice that for most of the countries, the productivity growth on a national level was seen more between 1996 and 2001.

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The same cannot be said for ICT-using services as some countries such as Mexico, the United States, Australia and United Kingdom experienced productivity growth while others like Austria, Korea, Italy, Japan and Germany experienced a decline in productivity growth in the ICT-using services.

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One of the other reasons why the positive effect on productivity took a long time to kick off is because of complementary organisational innovations. In order for a firm to maximise its technological investments, staff have to be trained and some organisation restructuring has to take place. This is a risky, expensive and time consuming change which can either be beneficial for the company as more productivity is achieved or can lead the company to bankruptcy and its closing down. One of the problems why productivity wasn't showing was because even though companies invested in new technologies, they were not being used as supposed to.

Several researchers have done studies to prove whether productivity and ICT are correlated, both on a firm level and also on a country level (Dedrick and Kraemer, 2001). Brynjolfsson and Hitt together with Lichtenberg found evidence that, on a firm level, more output was produced when investing in IT. On a country level, Kraemer and Dedrick found out that the Gross Domestic Product growth and spending money on IT were also correlated. In a study by Kraemer and Dedrick carried out in 1994 on 12 Asia-Pacific countries it was found that the investment in IT increases the GDP and the productivity growth on a country level. In a similar study carried out by the same two researchers in 2001 on 43 countries, it was found that the growth in IT investment increased productivity however level of IT investment did not show a relationship to the productivity growth. Another study carried out by Dewan and Kraemer in 1998 and 2000 on 36 different countries showed that although IT capital did not show any relationship with productivity in the developed countries that were studied, it resulted in an increase in labour productivity. Kraemer together with Gurbaxani and Melville carried out another study in 1998 on 1694 firms. The conclusions showed that the networking structure of the employees resulted in an increase in the firm output. Kraemer and Gurbaxani together with Tallon after analysing 150 firms in 2000 came up with the findings that the more IT was aligned with business strategy results the greater the IT payoff will be. In Lichtenberg's study in 1995 where he analysed US firms, he found out that each information systems employee can be substituted for 6 non-information systems employees without affecting the final output. Hitt and Brynjolfsson in studies done in the year 1997 for 600+ large US firms concluded that the firms which adopt IT and have decentralised organisations are 5% more productive than firms who adopt IT and have a centralised organisations or firms who do not adopt an IT infrastructure but have decentralised organisation. The results for another study by Brynjolfsson and Yang in 1998 for Fortune 1000 US firms show that the market value of $1 of IT capital is the same as $10 of other capital stock.

According to Gordon (2012) in his article about the U.S. economic growth, the productivity increase is not going to last forever. He states that each of the three industrial revolutions left an impact on the economy, but only some of them led to an increase in labour productivity. The below figure shows the average growth rates of US labour productivity over selected intervals, 1891 - 2012.

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In the above figure, Gordon shows that between 1996 and 2004, that is, when the impact of ICT on productivity started to be seen, the productivity growth rose to 2.46% each year. However from 2004 onwards the productivity rate has gone down to 1.33% which is almost similar to the 1.38% productivity growth between the years 1972 and 1996. He argues that the role of robots taking over manufacturing processes have increased but the time of human labour being taken over by computers was over.

After taking into consideration several studies carried out by researchers and the impact that ICT left on productivity, one can conclude by saying that if a company realises how to make the utmost use of the information and communication technology then it will succeed however if massive investments are made on the system but the same business practices and processes are used and little or no innovation takes place, then that company is more likely to fail.

Discuss the possible ways in which the adoption of information and communication technologies (ICT) in production processes has an impact on productivity, and some of the possible explanations for why these positive effects on productivity have taken a long time to appear in productivity statistics, presenting some examples. Will the impact of ICT on productivity continue in the future?