US-owned firms better placed to take advantage of IT developments

Nicholas Bloom, Raffaella Sadun, John Van Reenen, 13 May 2007

The US has experienced a sustained increase in productivity growth since the mid-1990s which has not been mirrored in Europe. The majority of this growth has occurred in sectors that either intensively use or produce IT, but while the IT-producing sectors in Europe have matched the growth of their US counterparts, the IT-using sectors (particularly retail, wholesale and financial services) have not.

Using perhaps the richest micro-dataset on Information Technology and productivity ever constructed, the authors of CEPR DP6291 examine whether the superior exploitation of IT by US firms is due to any natural advantage of being located in the US (geographical, institutional or otherwise), and discover that this is not the case.

They find that US-owned multinationals in the UK benefit more from an intensive use of IT than non-US owned multinationals in the UK by 10%. They also find that UK domestic firms that double their IT stock experience a 1% increase in productivity, this rises to 1.9% for non-US multinationals, but jumps to 3.9% for US-owned multinationals. In addition, a sample of 4,888 firms taken over by other firms during the sample period reveals that a UK firm taken over by a US multinational would enjoy significantly higher IT-related productivity that a similar establishment taken over by a non-US multinational.

So why are US firms able to get much more out of their IT investments? The authors find that US-based firms and US-owned multinationals in Europe tend to be more decentralized than their non-US owned counterparts, and the use of IT intensifies when the firms decentralize. US firms and US-owned multinationals also have the ability to change organizational structure quicker thanks to the flexibility of the US economy (in particular labour regulations), which allows them to adapt to and exploit new developments in IT quicker.

The authors conclude with the observation that the productivity advantage enjoyed by US firms is temporary and as Europe also adapts to major changes in IT, it will start to catch up with the US. However, the flexibility of the US economy means that US firms will continue to have an edge over their European counterparts in the presence of future IT developments.

DP6291 Americans Do I.T. Better: US Multinationals and the Productivity Miracle

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URL: http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=6291.asp
Topics: Productivity and Innovation
Tags: information technology, multinationals, productivity

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