IT and Productivity

If companies learn to make strategic decisions based on rigorous data-driven experimentation and analytics, not only will they see larger profits but they could drive the next great boom in productivity—which is in turn key to national wealth and standard of living, says Erik Brynjolfsson, a professor at MIT’s Sloan School of Management and director of the MIT Center for Digital Business.

It’s not simple to tease out the relationship between IT investment and labor productivity, or economic output per hour of labor worked (see “U.S. Labor Productivity Growth”). Between 1973 and 1995, productivity grew by only 1.4 percent annually. But it jumped much more from 1996 to 2003, and economists recognized that IT investment had taken time to pay off.

The new productivity jump was due partly to surging investments in IT starting in the late 1980s (see “Dollar Value of Total U.S. Corporate IT Stock” and “Rising Share of Infotech Investments by Companies”). Reduced productivity between 2004 and 2006 can be attributed in part to a drop in IT investment from 2001 through 2003, after the dot-com bubble burst, Brynjolfsson argues.

Evidence that greater IT-driven efficiencies lie ahead can be found in analyses of profitability data (see “Profit Gap Widens”). Brynjolfsson notes something remarkable about profit trends in industries that intensively use IT, including Internet companies and consumer-electronics firms, during the early 2000s, when productivity growth was high. He finds a widening gap between profits at the most profitable of these firms (the leaders) and the least profitable (the laggards).

This occurred, Brynjolfsson says, because the profit leaders had learned to exploit the inherent potential of IT far more effectively than had the laggards. The gap remained modest among companies in other industries because they had less IT to exploit. Brynjolfsson predicts that as businesses learn to use IT and analytics to innovate and drive change—in processes, product development, incentives, and just about everything else they do—a new era of sustained growth and higher living standards will follow.

Charts by Mark McKie