Wednesday, October 12, 2005

"It ain't what you do, it's the way that you do I.T." :: Finfacts Ireland
Why US multinationals win the productivity race

Finfacts reports on research* by John Van Reenen, Nick Bloom and Raffaella Sadun of the Centre for Economic Performance (CEP) at the London School of Economics:

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.
. . .
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.
. . .
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.

(emphasis added)
Finfacts Ireland does a nice job of reporting on the research. Read the whole thing.

*It ain't what you do, it's the way that you do I.T.: testing explanations of productivity growth using US affiliates (download (pdf)).

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