ICT, Corporate Restructuring and Productivity

1. ICT, Corporate Restructuring and Productivity Laura Abramovsky Rachel Griffith IFS and UCL ZEW – November 2007 Workshop on Innovative Capabilities and the Role of Consultants in the Information Economy

2. US productivity growth has far outpaced the EU

3. 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

4. Investment in ICT in the US has continued to accelerate Gross fixed capital formation in software divided by GDP, both in 2000 prices Source: Timmer, Ypma and van Ark (2003), updated June 2005

5. US productivity growth driven by ICT using sectors Change in annual growth in output per hour from 1990–95 to 1995–2001

6. 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

7. 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

8. 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

9. 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

10. Business services in the UK Source: ABI 2001

11. 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

12. 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

13. Empirical approach • Establishments face a production function of the form i: establishments j: industry Y: output L: employment K: total capital C: information and communication technologies S: purchased services G: purchased goods A: total factor productivity

14. 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

15. Empirical approach

16. 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

17. 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

18. 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

19. How does ICT affect productivity? Notes: from Table 2 in paper; each column is a separate regression with 70,044 observations; ** significant at 1%

20. 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

21. Interpretation of results

22. Alternative explanations? Multinational establishments Notes: from Table 2 in paper; each column is a separate regression with 70,044 observations; ** significant at 1%

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

24. Alternative explanations? Allow ICT to interact with all other inputs Notes: from Table 2 in paper; each column is a separate regression with 70,044 observations; ** significant at 1%

25. Consistent story across manufacturing and services Notes: from Table 3 in paper; ** significant at 1%

26. Consistent story across 2-digit industries Notes: from Table 3 in paper; ** significant at 1%

27. 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%

28. 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