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News : International Last Updated: Dec 19th, 2007 - 13:17:15

"It ain’t what you do, it’s the way that you do I.T." - Why US multinationals win the productivity race
By Finfacts Team
Oct 6, 2005, 18:17

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John Van Reenen , Professor in the Department of Economics, London School of Economics Director Centre for Economic Performance. Expertise: Innovation, productivity, Industrial organisation, labour economics, public policy, competition policy
Research published in the UK on Thursday, show that the US productivity miracle of the past 10 years is not explained by the US business environment being better; rather, US companies are simply better at using computers and other technology to drive productivity higher. The effect explains most of the gap in productivity growth between the US and the UK and other European countries over the past decade.

US output per hour grew by 2.5 per cent a year on average between 1995 and 2004 compared with 1.5 per cent in the 15 members of the EU before enlargement.

Professor John Van Reenen together with Nick Bloom and Raffaella Sadun of the Centre for Economic Performance (CEP) at the London School of Economics, have published a joint investigation with the UK Office for National Statistics (ONS), sponsored by the Department of Trade and Industry (DTI). The research paper titled It ain't what you do, it's the way that you do I.T.: testing explanations of productivity growth using US affiliates indicates that investment in new information and communications technologies (ICT) improves the productivity of UK businesses.

Work by research institutions such as the US National Institute of Economic and Social Research and the US Conference Board confirmed that the lead in US productivity was accounted for almost exclusively in sectors of the economy that used technology intensively. Retail, wholesale and finance sectors were most important.

US multinationals such as Starbucks operating in Europe, have higher productivity than European firms because of the intensive use of technology combined with evidence for significant differences in the “organizational capital” of US firms relative to European firms
The researchers investigated whether the growing productrivity gap was explained by the US enjoying specific advantages, such as better regulations, less intrusive planning laws or more physical space, or was there something special about the way US companies operated?

John Van Reenen, CEP director, says that the explanation is a combination of better US management, use of information technology and corporate practices.

The CEP researchers say that one of the most startling economic facts of the last decade has been the reversal in the longstanding catch-up of European countries’ productivity with the US. Labour productivity growth in the US accelerated after 1995 following a long-term slowdown after the 1970s Oil shocks. Decompositions of this productivity growth show that the great majority has occurred in those sectors that either intensively use or produce IT. EU countries had similar productivity acceleration in IT producing sectors but failed to achieve the spectacular levels of productivity growth in the sectors that used IT intensively. These sectors include retail, wholesale and financial intermediation. Britain has done better than France or Germany in this respect, but not as well as the US. Given the common availability of IT throughout the world at broadly similar prices, it is a major puzzle to explain why these IT related productivity effects have not been more widespread.

The CEP researchers used detailed data held by the Office for National Statistics about the performance of more than 7,000 private sector establishments in Britain. The researchers were able to demonstrate that US-owned establishments in the UK managed to increase productivity pretty much like their parent companies at home.

The researchers say that productivity growth in sectors that intensively use information and communication technologies (ICT) appears to have accelerated faster in the US than in Europe since 1995.

If this was partly due to the superior management/organization of US firms (rather than simply the US geographical or regulatory environment) we would expect to see a stronger association of productivity with IT for US multinationals located Europe than for other firms. We examine a large panel of UK establishments from all business sectors and provide evidence that US owned establishments have a significantly higher productivity of IT capital than either non-US multinationals or domestically owned establishments. Indeed, the differential impact of IT appears to fully account for almost all the difference in total factor productivity between US-owned and all other establishments. Further, this finding is particularly strong in the sectors that intensively use information technologies: the very same ones that account for the US-European productivity growth differential since the mid 1990s.

The paper shows that the big productivity differences were in industries that used IT intensively. US-owned multinationals in the UK, such as Asda or Starbucks, got more productivity from their workforce than other multinationals, such as Tesco, and much more than purely domestic companies. Output per employee in US-owned establishments was 40 per cent higher than domestic ones, and the amount of IT capital used was 17 per cent higher than multinationals with non-US owners.

New data enabled researchers to estimate what proportion of the productivity difference was because of US establishments having more IT, and what proportion was down to them using it better.

Professor Van Reenen has said that almost 80 per cent of the difference came from the use of computers. "The higher return to IT is seen only in US multinationals; non-US multinationals look like domestic UK firms in terms of getting the most out of IT."

Van Reenen says that US companies in the sample, were managed differently from non-US companies in two important respects. They had more "aggressive" human resources practices, promoting good performers quickly and getting rid of weaker performers and they de-volved greater managerial autonomy in the implementation of IT systems to local plants rather than trying to run everything centrally.

Authors: Nick Bloom,  Raffaella Sadun,  John Van Reenen

Download (PDF, 348Kb)


© Copyright 2007 by Finfacts.com

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