ict, corporate restructuring and productivity laura abramovsky rachel griffith ifs and ucl zew –...
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![Page 1: ICT, Corporate Restructuring and Productivity Laura Abramovsky Rachel Griffith IFS and UCL ZEW – November 2007 Workshop on Innovative Capabilities and](https://reader036.vdocuments.net/reader036/viewer/2022062517/56649ebc5503460f94bc4f54/html5/thumbnails/1.jpg)
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
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US productivity growth has far outpaced the EU
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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 ,,,,
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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~
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Empirical approach
itjripartgimneiusiage
iics
igisicikili
partgmneusage
cs
gsckly
)~*~(
~~~~~~
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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
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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
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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
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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)**
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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
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Interpretation of results
level of outsourcing of services
elasticity of output with respect to ICT
25th percentile 0.0006
50th percentile 0.010
75th percentile 0.018
mean 0.020
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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)**
ln (ICT)i *ln (Services)i 0.005
(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)**
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Alternative explanations? Skills
Dependant variable: ln (Gross output) i
ln (S)i 0.171 0.189
Purchased Services (0.006)** (0.006)**
ln (ICT)i 0.026 0.035
ICT (0.004)** (0.004)**
ln (ICT)i *ln (Services)i 0.006
(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%
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Alternative explanations? Allow ICT to interact with all other inputs
Dependant variable: ln (Gross output) i
ln (S)i 0.212
Purchased Services (0.007)**
ln (ICT)i 0.021
ICT (0.002)**
ln (ICT)i *ln (Services)i 0.016
(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%
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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
Purchased Services (0.009)** (0.007)**
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%
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Consistent story across 2-digit industries
Dependant variable: ln (Gross output) i
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%
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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%
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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