ICT, Corporate Restructuring and Productivity Laura Abramovsky Rachel Griffith IFS and UCL ZEW – November 2007 Workshop on Innovative Capabilities and.

ICT, Corporate Restructuring and Productivity

Laura AbramovskyRachel Griffith

IFS and UCL

ZEW – November 2007Workshop on Innovative Capabilities

and the Role of Consultants in the Information Economy

US productivity growth has far outpaced the EU

Technology diffusion

• A lot of attention to knowledge production– but technology and knowledge diffusion probably more important

for productivity

• Information and Communication Technology (ICT) has been one of largest technological advances

Investment in ICT in the US has continued to accelerate

Investment in ICT/GDP

0%

1%

2%

3%

4%

5%

6%

7%

19

80

19

85

19

90

19

95

20

00

US

UK

EU-15

Austria

Gross fixed capital formation in software divided by GDP, both in 2000 pricesSource: Timmer, Ypma and van Ark (2003), updated June 2005

US productivity growth driven by ICT using sectors

US EU-15

ICT-producing sectors

+ 1.9% + 1.6%

ICT-using sectors

+ 3.5% - 0.1%

other sectors - 0.5% - 1.1%

Change in annual growth in output per hour from 1990–95 to 1995–2001

ICT and productivity - focus of literature

• Allows firms to restructuring internally– more optimal structure of the workplace – change decision authority– change workers’ tasks

• Improves organisational efficiency and productivity

• Adjustment process, requires complementary investments – in skills – in organisational capital

ICT adoption also facilitates corporate external restructuring

• Transactions previously conducted face-to-face can now be conducted at arms-length

• Feasible to outsource and off-shore activities that it was previously not possible to– optimal boundaries of the firm change– transactions can more cheaply be carried out over large distances

How can outsourcing affect productivity?

• Specialised providers of intermediate goods and services can exploit economies of scale/scope

• Improving suppliers incentives to innovate

• Purchasers of services can become more productive in core activities by outsourcing non-core activities if previously overloaded

Rapid growth in business service providers

• Consistent with one of the biggest recent changes to the US and UK economies - business services have been very fast growing– in 1980 business services very small sector– employment in UK business services grew by 92% or 1.9m jobs

from 1984 to 2001– accounted for over half of the total growth– from 1995-2001 accounted for 1/3 of growth– in 2002, 4m people employed in this sector– accounting for around 1 in 7 jobs in the whole economy

Business services in the UK

0%

5%

10%

15%

20%

25%

Rentin

g of

mac

hinery

Comput

er se

rvice

s

Lega

l acti

vities

Accou

nting

Mark

et re

sear

ch

Mana

gem

ent c

onsu

ltanc

y

Archit

ectura

l & e

ngine

ering

Technic

al te

sting

Adver

tising

Human

reso

urce

s ser

vices

Inve

stiga

tion &

sec

urity

Indus

trial

clean

ing

Other

serv

ices

% o

f to

tal e

mpl

oym

ent

in B

usin

ess

Ser

vice

s

Source: ABI 2001

Is there evidence for this?

• Does ICT facilitate corporate external restructuring in the form of outsourcing of intermediate services

• Is this correlated with productivity growth?

• Econometric study– use large nationally representative data for the UK

• firms that use more ICT are more productive• firms that outsource more services and use ICT are

even more productivity

Empirical approach

• Estimate production function

• allow the way that ICT affects productivity to depend on amount of outsourcing of services

• measures the extent of complementarities between purchased services and ICT

Empirical approach

• Establishments face a production function of the form

i: establishments j: industry

Y: outputL: employment K: total capitalC: information and communication technologiesS: purchased servicesG: purchased goodsA: total factor productivity

iiiiijii GSCKLFAY ,,,,

Empirical approach

• Estimate in deviations from the industry mean, all variables take the form:

• allows us to control for unobserved industry specific factors (including price deflators)

• without imposing too many restrictions on the production technology

jii YYy lnln~

Empirical approach

itjripartgimneiusiage

iics

igisicikili

partgmneusage

cs

gsckly

)~*~(

~~~~~~

Correlations, not causal relationship

• We estimate by ordinary least squares (OLS)– problem if firms anticipate future shocks

• Decline in price of ICT exogenous to the firm– leads to increased investment in ICT

• Increased levels of ICT mean that it is now feasible to outsource many more business processes– leads to further ICT investment

• Heterogeneity across firms arises due to adjustment costs; we use this to identify complementarity between ICT and outsourcing in production from cross-section data

Data

• UK Annual Census of Production (ARD-ABI)

– Collected by the Office of National Statistics (ONS)– Establishment level (firm line of business)– Random stratified sample– Legal obligation to reply– Cross-section 2000-2003 (few repeated observations)– Manufacturing and services industries– 70,044 observations; median size 48 employees

Data

• Outsourcing of services (s)– intermediate expenditure on services

(legal and accountancy, marketing, renting of machinery, telecommunication and transport, etc.)

– on average 15% as a share of gross output

• ICT (c) – software capital stock (purchased and developed by own staff) – only partial measure of ICT investment– on average 1.25% as a share of gross output

How does ICT affect productivity?

Notes: from Table 2 in paper; each column is a separate regression with 70,044 observations;** significant at 1%

Dep variable: ln (Gross output)i

ln (L)i 0.344 0.342 0.341

Labour (0.005)** (0.005)** (0.005)**

ln (K)i 0.214 0.207 0.210

Capital (0.005)** (0.005)** (0.005)**

ln (S)i 0.165 0.165 0.182

Purchased Services (0.005)** (0.005)** (0.005)**

ln (G)i 0.248 0.249 0.250

Purchased Goods (0.005)** (0.005)** (0.005)**

ln (ICT)i 0.010 0.020

ICT (0.001)** (0.002)**

ln (ICT)i *ln (Services)i 0.005

(0.000)**

Interpretation of results

• Positive coefficient on interaction of ICT with outsourced services– Firm that do both more ICT and more outsourcing (compared to

their industry) are more productive

• Coefficient is elasticity of output with respect to ICT

– an establishment that has 1% more ICT than the average in its 4-digit industry (and outsources services at its 4-digit industry average) is 0.02% more productive and

• if outsources services by 1% more than average has 0.025% higher productivity

• if outsources services by 1% less than average has 0.015% higher productivity

Interpretation of results

level of outsourcing of services

elasticity of output with respect to ICT

25th percentile 0.0006



mean 0.020

Alternative explanations? Multinational establishments

Notes: from Table 2 in paper; each column is a separate regression with 70,044 observations; ** significant at 1%

Dep variable: ln (Gross output)i

ln (S)i 0.165 0.185

Purchased Services (0.005)** (0.005)**

ln (ICT)i 0.010 0.020

ICT (0.001)** (0.002)**


(0.000)**

USi 0.187 0.140

(0.016)** (0.017)**

USi*ln(ICT) i 0.008 -0.013

(0.006) (0.006)*

MNEi 0.125 0.080

(0.009)** (0.009)**

MNEi*ln(ICT)I 0.001 -0.021

(0.003) (0.004)**

Alternative explanations? Skills

Dependant variable: ln (Gross output) i

ln (S)i 0.171 0.189


ln (ICT)i 0.026 0.035

ICT (0.004)** (0.004)**


(0.000)**

ln(SK)j 0.101 0.094

Skills (0.010)** (0.010)**

ln(ICT)i* Ln(SK)j 0.009 0.007

(0.002)** (0.002)**

Notes: from Table 4 in paper; each column is a separate regression with 61,135 observations;** significant at 1%

Alternative explanations? Allow ICT to interact with all other inputs


ln (S)i 0.212

Purchased Services (0.007)**

ln (ICT)i 0.021

ICT (0.002)**


(0.002)**

ln (ICT)i *ln (Labour)i -0.020

(0.002)**

ln (ICT)i *ln (Capital)i 0.008

(0.002)**

ln (ICT)i *ln (Goods)i -0.003

(0.002)Notes: from Table 2 in paper; each column is a separate regression with 70,044 observations;

** significant at 1%

Consistent story across manufacturing and servicesDependant variable: ln (Gross output)i

Manufacturing Services

ln (L)i0.321 0.341

Labour (0.008)** (0.006)**

ln (K)i0.185 0.217

Capital (0.008)** (0.007)**

ln (S)i0.164 0.178


ln (G)i0.317 0.238

Purchased Goods (0.010)** (0.005)**

ln (ICT)i0.017 0.022

ICT (0.002)** (0.002)**

ln (ICT)i *ln (Services)i0.005 0.006

(0.001)** (0.001)**

Observations 20,785 44,539Notes: from Table 3 in paper; ** significant at 1%

Consistent story across 2-digit industries


Mean2-digit industry

ln (L)i 0.324

Labour

ln (K)i 0.198

Capital

ln (S)i 0.176

Purchased Services

ln (G)i 0.272

Purchased Goods

ln (ICT)i 0.020

ICT

ln (ICT)i *ln (Services)i 0.004Notes: from Table 3 in paper; ** significant at 1%

Composition effect?

• Split industries by mean labour productivity in business services– coefficient on ICT*services is:

• high labour productivity: 0.005 (0.001)**

• low labour productivity: 0.006 (0.000)**

• Also split by average wage,– coefficient on ICT*services is:

• high average wage: 0.007 (0.001)**

• low average wage: 0.005 (0.000)**

Notes: from Table 3 in paper; ** significant at 1%

Conclusion

• Has ICT played an important role in productivity growth by facilitating corporate external restructuring, via outsourcing intermediate services?

• We find that ICT increases productivity (the elasticity of output with respect to ICT is higher) for firms that make greater use of outsourced services than other firms in their industry

• This is consistent with complementarities between ICT and outsourced services

ICT, Corporate Restructuring and Productivity Laura Abramovsky Rachel Griffith IFS and UCL ZEW – November 2007 Workshop on Innovative Capabilities and.

Documents