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The Effect of IT (Information Technology) on Productivity:Economic Planning AgencyIn search of Japan's "New Economy"

This paper uses firm-level survey data in an empirical assessment of whether progress in IT enhances productivity. The survey was conducted on 482 companies, 148 of which are listed or traded over the counter (OTC firms).

1. IT diffusion

Table A shows the percentage of companies responding to our survey which have introduced various kinds of IT-related hardware. High use of personal computers (PCs) was reported by the survey respondents. In the administrative sections, nearly 100% of the companies surveyed were using desk-top PCs. Notebook PCs, cellular telephones and PHSs (Personal Handyphone System) were being used by 80-90% of the companies in our survey. 40-50% of the companies in the administrative sections use cellular telephones with Internet connection capability. In the production sections, more than 50% of the companies were using desk-top and/or notebook PCs. Overall, 80% of the companies surveyed had adopted intra-LAN or electronic boards.

Table B shows the number of employees per PC among the companies surveyed. In the production sections, the most common case was for one PC to be shared by more than six people. In the administrative sections, the average number of PCs per employee was higher. About 1/3 of the companies surveyed from the administrative sections have 2 or 3 employees per PC and about half have more than one PC per employee.

The diffusion of e-mail showed a similar pattern: about 40% of all firms in the administrative sections have more than one e-mail address per employee. In the production sections, the most common case was to have one e-mail address shared by 6-20 employees.

2. Reported Effects of IT

Table C reports the firms' own evaluation of the effects of IT. The most common responses were intangibles such as "improved customer services", "increased intra-firm sharing of information", "enhanced efficiency of tasks" or "larger planning capability". Quantitative effects such as "increased sales", "acquisition of new customers", "introduction of new services" were less common among the responses. Moreover, only small fraction of firms reported "flatter organizational structure" as a result of IT.

3. Hypothesis: The Relationship between IT, Human Capital and Workplace Organization

The basic framework adopted in this paper assumes a close relationship among IT, human capital and workplace organization (see Table D). The diffusion of IT requires employees to have the capacity to use PCs in various fields. Computers can be used to perform low-skill tasks and the introduction of computers increases the need for employees highly skilled in analysis, judgement and negotiation with outsiders. In addition, higher capability to cope with information reduces managerial costs, leading to decentralization and flatter workplace organization. This in turn increases employees' autonomy and teamwork and the need for employees with these skills rises.

4. Correlation of IT, Human Capital and Workplace Organization

Table E reports the results of tests for correlation between IT, human capital and work organization. IT indicators include the fraction of employees using a general purpose computer in the course of their regular work, the fraction of employees using e-mail in their regular work, and the number of PCs per employee. Human capital indicators include the fraction of employees with various levels of education, the percentage of employees receiving off-the-job training and the importance attached to educational background in promotion decisions. Work organization indicators include, inter alia, the flatness of workplace organization, the freedom of initiative allowed to lower-level employees, the importance of teamwork in promotion decisions and the amount of input from employees in setting the pace of work and evaluating the accomplishment of tasks.

The results confirm our hypothesis that firms with relatively more progress in IT also have relatively high human capital and more decentralized organization.


5. Correlation of IT, Human Capital, Work Organization and Productivity

Next, the complementary effects of IT, human capital and work organization on TFP (total factor productivity) are estimated. The test is implemented by combining survey responses from listed or OTC companies with firm-level financial data (Table F). The IT indicator is defined as the number of PCs per employee, the human capital (HK) indicator as the fraction of employees with at least a college degree, and the work organization (WO) indicator as the flatness of workplace organization, taken from the responses to the corresponding question in the survey.

The results show that firms with higher IT and higher HK tend to have higher productivity than those with lower IT and lower HK. The same tendency is observed in other combinations: firms with higher IT and higher WO have higher productivity than firms with relatively lower IT and lower WO and firms with higher HK and higher WO have higher productivity than firms with relatively lower HK and lower WO.

In addition, in most cases, the productivity gains of a firm well endowed in one area but poorly endowed in another are not statistically different from the gains of a firm poorly endowed in both areas. This means that firms adopting IT cannot get the benefit of relatively high productivity unless they have higher human capital and flatter work organization.

This suggests that changes in human capital and workplace organization are needed in order for firms to reap the benefit of higher productivity from IT adoption. Although firms are mainly responsible for such reform, policy measures to make labor markets more flexible and help enhance human capital will greatly complement individual firms' efforts.

Table A : Percentage of companies which have introduced various kinds of IT-related hardware and systems

1. IT-related hardware

Table A-1.IT-related hardware

2. Systems

Table A-2.Systems

Table B : Fractions of employees who use PCs and E-mails

1. PCs per employee

Table B-1.PCs per employee

2. E-mail address

Table B-2.E-mail address

Table C : Reported Effects of IT

Table C.Reported Effects of IT

Table D : Correlations among IT, Human Capital and Work Organization

Table D.Correlations among IT, Human Capital and Work Organization

Table E : Tests of Correlations among IT, Human Capital and Work Organization 1. Correlation between IT and Human Capital 2. Correlation between IT and Work Organization

Table E-3.Correlation between Human Capital and Work Organization

Table F:The Complementarity Effects of IT, Human Capital and Work Organization on TFP

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