Technical Change and Productivity In industrial countries, mill new information and communication technologies produce tremendous gains in productivity? A look at the role of institutional change Christopher Freeman Emeritus Professor of Science Policy, Science Policy Research Unit, University of Sussex

Wthoy is it that when computers proliferate Some economists have been so impressed technical change—that is, the introduction, and scientists constantly emphasize new by this anomaly that they have concluded that diffusion, and efficient exploitation of these discoveries and inventions, rates of measured the measurement system must be at fault. discoveries and inventions, has not pro- productivity growth have been lower in the This is too complex an issue to discuss in the gressed as fast. 1970s and 1980s, in most industrial countries, space available here. The assumption will be In analyzing the causes of changes in than in the 1950s and 1960s? In Denmark, for made in what follows, however, that there productivity, this article focuses entirely on example, productivity growth has been zero has been a real slowdown in the growth of technical change, and not on the effects of or negative over the last few years even productivity in most industrialized countries. macroeconomic policies, which themselves though computerized machinery has been Can the productivity decline be explained have an important influence on productivity. widely diffused in Danish industry and offices. by a falling-off in the outputs of research and In the United States, the growth of both labor development work, or of other sources of Change in paradigm and total factor productivity slowed down scientific discovery, invention, and innova- A change in "technoeconomic paradigm" markedly in the 1970s and early 1980s and tion? The evidence generally shows no such takes place when new technology systems although manufacturing productivity has recov- trend. Indeed, the microelectronics revolu- change the dominant pattern of production ered somewhat, services productivity con- tion has led to an upsurge of inventions and and management throughout the economy. tinues to stagnate. innovations which affects not only manufac- The introduction of steam power or electric turing but most service industries as well. power are examples. Change of this kind not The explanation seems more likely to lie only gives rise to new ranges of products, This article is drawn from a longer paper, "Techni- in the processes of structural change and the services, systems, and industries in its own cal Change and Long-term Economic Growth, " new investment and training that are needed right; it also affects the costs and nature of October 1988, prepared for a 1988 World Bank seminar on Technology and Long-term Economic to diffuse radically new technologies. Thus, production and distribution throughout the Growth Prospects, and available from the author. it may be that the rate of technological change, economy. See also "Technological Change in Industry in in the sense of output of potentially useful The very big productivity gains of the > Developing Countries, " by CarlDahlman in Finance discoveries and inventions, has been increas- 1950s and 1960s were achieved by scaling j & Development, June 1989. ing during the 1970s and 1980s, while up the use of flow and assembly-line technol- :

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©International Monetary Fund. Not for Redistribution ogies and, in the European Economic Com- munity and Japan, by catching up with the Factors affecting the rate of diffusion of four technologies United States, which pioneered these technol- (5 = most favorable; 1 = least favorable) ogies. Gains from these sources have by now Nuclear Space Information been largely exhausted. During the 1970s the technology technology technology Biotechnology Electric Civil Electronic Drug emphasis in the development of industrial power Other communication Other industry Other industry Other technology began to shift away from mass and flow production, intensive in its use of energy Profitability 2 2 2 2 5 2-5 2 1 2 and materials, to a much more flexible, Competition pressure 2 2 3 5 5 4 2 Scale of investment 1 1 2 1 2-5 1-5 2 2 information-intensive pattern of production, Environmental impact 2 1 4 3 5 4 4 3 associated with computerized control and Safety 3 2-4 4 2 5 4 4 4 communication systems. The slowdown in Technical reliability 2 3 4 3 5 4 4 3 productivity over the 1970s and 1980s seems Public attitudes 2 2 4 3 5 4 4 3 likely to reflect, to a large extent, the Change agents problems of structural and institutional adjust- Government 3 4 4 3 5 5 2 2 ment to a new technoeconomic paradigm, Multinational corporations 2 2 3 3 5 5 3 3 based on information and communication Other business 2 2 2 3 5 4 3 3 technology (ICT). Military strategy 4 5 1 5 5 5 1 2 The four technologies illustrated in the Potential range table are all sometimes described as "gener- of applications 3 2 3 2 5 5 3 4 ic" or "enabling" technologies, since they Source: OECD, The Challenge of New Technologies, by Christopher Freeman, for the OECD 25th Anniversary Symposium, offer scope for innovations and productivity Paris, 1986. improvements not just in one product or process but in many. The table suggests that, because of its potential influence on productiv- ity, information and communication tech- ers, wholesalers, and retailers, permits big manufacturing, procurement, sales, adminis- nology will prove to be by far the most savings in inventories at all levels in the tration, and technical service in any enter- important and pervasive of the generic system, and a far more rapid and sensitive prise has had significant effects on the skill technologies in the 1980s and 1990s. response to even daily changes in consumer profile of industry, affecting drawing offices Characteristics of ICT demand. and designers as well as clerical labor and Third, with the advances in the transmis- machine shops. While undoubtedly displacing Both within the ICT industries and in a sion of information, industries, services, and some labor, these developments also gener- wide range of applications of these technol- markets are becoming much more integrated ate a demand for new skills, which are ogies, technical change is very rapid. Under- internationally. Faster international transfer everywhere in short supply, and for new lying this rapid change is the continuing of technology and more mobility in the service types of information within firms and from dramatic improvement in the large-scale industries are among the consequences. The specialist firms in the provision of business integration of electronic circuits, and the financial services industry is already showing and computer services. continuing fall in costs that this permits. In the far-reaching effects of this enhanced Given all these characteristics, it is clear communications technology, fiber optics has mobility and many countries and regions will both that the new technoeconomic paradigm made possible similar drastic improvements ultimately be affected by major changes in the differs from that prevailing in the 1950s and in costs and performance and, together with international division of labor. 1960s in many important respects, and that computerized telephone exchanges, is leading Fourth, in many types of machinery and it entails revolutionary changes in the capital to a new telecommunications infrastructure, electronic goods, the redesign of products stock, in the skills needed by the economy, permitting very cheap worldwide image, data, and processes permitted by ICT makes and in management systems. How are voice, and other types of communication. possible a reduction in the number of electro- different industries adapting to this change? The advances in information and commu- mechanical components and a telescoping of Productivity in industry nication technology have consequences for some of the stages of component transforma- the integration and control of production as tion. This permits substantial savings in Labor productivity has been growing well as for the use of materials and labor. materials and energy. It also promotes a fastest in the electronics industries, espe- First, for example, ICT makes possible process of structural change, involving the cially the computer industry and the elec- greater flexibility and speed in changing loss of jobs in some metals and metal goods tronic component industry. These are the tooling and dies, and hence in changing industries and an increase in jobs in parts of industries that make greatest use of their own product models and designs. This means that the electronics components industry, elec- technology for design, production, stock small production runs become more economic tronic products, and producer services. control, marketing, and management. They than before. Since economies of scale are still Fifth, the use of ICT to communicate and are also the only industries to show a very important in marketing, finance, and store vast amounts of information on sales, significant rise in capital productivity. design, the rise of ICT is unlikely to displace inventories, and financial transactions has had In industries—such as scientific instru- large firms from their dominant position, but very far-reaching effects on banks, insurance ments, telecommunications, and watches it is leading them to surround themselves companies, retail chains, and supermarkets. —that have already been heavily penetrated with a penumbra of nearby specialized satel- It has made possible savings in capital and by microelectronics, both in their product and lite firms. materials as well as labor-saving organiza- process technology, labor productivity has Second, the use of ICT to link firms with tional and technical changes. risen considerably and recently even capital their suppliers of inputs, and to link produc- Sixth, the use of ICT to integrate design, productivity has advanced.

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©International Monetary Fund. Not for Redistribution technology. Their resistance to technical Institutional change and productivity growth in Japan change can be overcome only by a prolonged process of social change. What is involved is Japan's productivity, in both manufacturing and services, has continued to grow faster than that of the transformation of the skill profile of the most other OECD countries. It is no longer possible to attribute this growth to the gains from workforce, the renovation of the capital imitation: for a long time Japan has itself been the acknowledged leader in consumer electronics; stock, the redesign of innumerable products it is now pulling ahead in electronic components, telecommunications equipment, and office and processes, a vast new international equipment and is close to world frontiers in computers and software. The increasing strength of infrastructure and many changes in stan- Japanese research and development, as measured in patent statistics and technical innovations, is dards, regulation systems, and government only part of the story. At least equally important is the institutional adaptation of the Japanese institutions. economy to the new technoeconomic paradigm. It is not surprising that despite a high rate First, technology policy has long been a central feature of Japanese industrial policy, and even before the oil price rise of 1973, ICT was explicitly recognized as crucial to Japan's long-term future. of invention and innovation, there should be Many measures were taken to strengthen the performance of the Japanese computer and electronic some slowdown in productivity growth asso- component industries and to diffuse the new technology throughout other parts of the economy. ciated with the introduction and assimilation Second, Japanese firms have proved quite flexible in adapting their organization and management of these institutional and social changes. Nor systems to the potential of ICT. One of the most important institutional changes has been the is it surprising that there should be greater horizontal integration of information flows between research, development, design, production, caution in undertaking investment. In most and marketing. This leads to shorter lead times in Japanese firms than in comparable US firms, in industrial countries, the process of adaptation which vertical integration is still more typical, and there is increasingly strong evidence that it also is likely to take decades. There are long lags raises the quality of new products. in the adaptation of the educational system, Third, though the Japanese are themselves critical of their educational system and there are and even longer lags in producing the many proposals for its reform, it is clear that the high level of general education for a very large proportion of the total workforce, combined with the intensive training given in the main legislative and infrastructural support for enterprises, has given Japan a strong capability for introducing and assimilating technical change. these changes. It has also made possible a rather high level of participation in decision making at all levels of the Shortages of skills are the most critical work force, despite the essentially hierarchical and deferential modes of organization. Other major bottleneck in the diffusion of the new technol- social changes in post-war Japan, such as the elimination of status distinctions between manual and ogies. A recent survey of more than 20 professional workers, have contributed to this widespread participatory approach, which has had research projects in all the major OECD very beneficial results in such areas as quality control and incremental innovation. member countries showed great differences Institutions adapt to new technological possibilities in ways that depend heavily on cultural and in conclusions about the employment effects political factors, so it would be unwise to presume that the Japanese model should be followed by of ICT, but universal agreement as to the other countries. In Europe, Sweden and Finland have shown' the capacity to make institutional critical importance of education, training, and changes that effectively exploit the new technoeconomic paradigm while preserving a level of social services and public sector involvement more characteristic of European countries. retraining of the labor force. New skills are needed everywhere, both for the rejuvenation of old industries and the growth of new ones. Without enough skilled people it is impossible to embark on the design and redesign of products and pro- In industries still dominated by older plants, can enable these industries to resume cesses needed to use ICT efficiently; invest- technologies, some firms have achieved high their productivity advance as well as improve ment in new capital equipment may lead to a productivity increases, rejuvenating them- the quality of their products and control over fall in both capital and labor productivity, selves through innovations in processes and inventories. because of an inability to maintain the through redesigning their products. In other In most service industries, ICT has been equipment, use it to full capacity, or integrate firms productivity has stagnated or declined. diffused relatively little and productivity gains it with other parts of the system. It is not In many cases ICT is introduced piecemeal, have been small or nonexistent. A group of just a question of high-level skills, critical and not yet as part of an integrated system. service industries completely based on ICT, though these are, but of the transformation Under these circumstances productivity may however, are among the fastest-growing of the skill profile of the labor force at all fall temporarily, for lack of the necessary industries in the world economy. They levels. skills in design, software, production engi- include especially the software industry and It is not clear what patterns of institutional neering, maintenance, and management gen- computerized information services and data and social change will ultimately be the best erally. banks. In financial services and insurance, match with ICT. Nor is it yet clear whether Industries such as petrochemicals and where ICT is now extensively used, there is the new national and international systems of plastics, producing standardized commodities evidence of significant gains in labor productiv- regulation that are emerging, or, in many on a flow production basis in rather large ity. This is important because it has often industrial countries, current educational pol- plants, have made considerable use of informa- been thought that the service sector of the icies and practices, will bring back the world tion technology in their process control economy could not achieve such rapid labor economy to the very high rates of growth systems and in various management applica- productivity gains as manufacturing. achieved in the 1950s and 1960s. This article tions. This has helped them to save energy has argued that the potential for high rates and materials, but in general their capital Institutional changes of technical change and productivity growth productivity has declined. They also have The advances in information and commu- is there and is likely to last for many decades. suffered from a decline in product innovation. nications technology call for many organiza- There is no slowdown in science and tech- Rationalization and closure of low-productiv- tional and institutional changes. Older man- nology. But whether social and political ity surplus capacity, combined with further agement systems, whether in industry or systems prove capable of adapting to this process innovation in the more advanced government, are geared to older types of potential is still an open question. •

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