The Role of IT in Economic Growth and Financial Success - Research Paper Example

Introduction According to a report, the average income of the poorest country in the world is almost twenty times lower than that of the richest one on this globe. Such differences in the standard of living would put an obvious impact on the quality of human welfare. Surprisingly, the less noticeable elements seem to be the underlying influential factors for such a huge difference. Considering Japan and Bangladesh, what does the start performer ‘Japan’ has, that Bangladesh lacks in. Undoubtedly there are numerous economic factors that result in such wide discrepancies in life styles. Among them, the foremost significant factor must be Japan’s technological advancements. Therefore, it is not quite surprising that governments in all countries, be it developed or developing, have shown huge interest in the modern information technology (Pohjola, 2002). The countries nurture hopes that it would lead to economic prosperity. In fact scientific advancements, innovation and technological changes have become the significant drivers impacting the economic performance. The increasing interactions among the industries and technology have led to the innovation and development of new products as well as new processes, which in turn has shifted the focus to knowledge intensive sectors. The ability to harness such technological knowledge and diffuse the same has already become the new definition of competitive advantage (Organisation for Economic Co-operation and Development, 2001). The companies are now competing as to get the possession of enhanced and dynamic technology. In this intensively competitive business environment, the rapid pace of the technological advancement has encouraged the organisations to produce, distribute and service the market goods at the same time to maintain a proper communication with the customers (Kudyba & Diwan, 2002). As a consequence organisations are more able to align their products as per the customers’ demands. This enhanced trading environment would lead the economy towards prosperity and productivity. This report is an effort to offer an insight into the relationship between the productivity, an economic measurement, and the presiding technological advancements. This segment has been divided into two categories. The first segment considers the ‘Total factor productivity’ and other one takes into account the ‘capital deepening’ as the representation of economic growth. However, keeping information technology in mind, one has to consider the pros and cons of its effects. So the negative impact of technological advancements also has its place in this report. Innovation has always encouraged the advancements in technology and the loopholes in the technology have always led to the new innovations. There is a technological diffusion on innovation. This report also considers the relationship between these two and also takes into account the positive and negative effects of innovative technological growth on the economic growth of any country. Productivity & Information Technology Among the closely watched indicators, productivity is significant as it indicates the long term economic prospects. Rising productivity is one of the key factors which are quite influential to enhance the standard of living. Enhancement of the technology can lead to unswerving increase in productivity. This has proven true and has accelerated the productivity in the United States. Although researches have suggested that there can be some other transient factors which might be somewhat responsible for the unusual growth in the measured productivity. During the period of high demand, enhanced technology and its use enables the firms to attain high return on scale through enhanced productivity. However as per the researchers this effect is not consistent and that is why this needs to be discounted while measuring long term technical changes (National Bureau of Economic Research, 2010). Even the expansion which happened back in 1990s could be distinguished by the large and lasting raise in the business investment. However, employment and participation of labour force, unemployment rates had been equivalent to earlier expansion events. The amount of investment in the technological advancements formed a fundamental three percent of GDP at the end of 1980s to around six percent of GDP by the year 1999. Researchers have suggested that the rapid investment rate may show the way to measurable growth in productivity. Sometimes technological advancements can lead to low productivity. Even rapid and intensive capital investment can disrupt any organisation’s ability to produce goods. For instance, when an organisation advances itself, the workers would need to divert from their regular tasks to install the new equipments and learn to operate them with efficiency. This would incur higher adjustment costs and in turn would reduce the output growth and hence reduce the growth in productivity. Apart from some confounding factors, strong growth in the mid of 1990s had been attributed to the rapid paced technical changes. Researchers have found in the first half of the 1990s, the annual growth rate of technology had been only 1.2 percent which increased to 3.1 percent during the period 1995- 1999. This increased productivity was characterised by its uniformity during these years. Durable manufacturing enjoyed the fastest growth rate in technology. During the second half of the period it experienced its largest acceleration of above 6 percent. In non durable sector, however the growth rate had been quite slow as compared to other industry sectors. Contribution of Information Technology to ‘Total factor productivity growth’ There are several approaches to measure the rates of productivity growth in any country or in any industry. Total factor productivity indices and partial factor productivity indices are majorly used measures in this area (Link, 1992). The ‘Total Factor Productivity’ concept attempts to explore the intensity of technological learning in an industrial environment. The measurement is done by subtracting the contribution portion made by the labour and capital from the value added figures (Lim, 1999). TFP growth rate refers to the change in the competence with which both the capital and labour are summed up to produce the output (International Monetary Fund, 2001). Undoubtedly there was a huge impact of information technology on the growth rate of labour productivity in the United States, mostly by end of 1990s (Board of Governors of the Federal Reserve System, 2002). Almost 0.25 % of the accelerated rate in the labour productivity could be attributable to the total factor productivity growth in the information technology sector. In this case, the significant question raised had been whether information technology was able to deliver an impact on the productivity of the non-IT sectors. The total factor productivity in the other sectors could occur either through the business organisations emerging availing information technology products and services or through the knowledge gain arising from the production of technological products (International Monetary Fund, 2001). Intensified investing in IT was going on as the benefits of technological advancements were realised and had seemed to be significantly responsible for the long term growth in all sectors. However sceptical arguments have also been raised regarding the importance of IT in the accelerated growth of TFP at the end of 1990s. It was significant to know if the benefits are only enjoyed by the computer and other technology production sectors like semiconductor organisations or the benefits were also realised by other sectors. The accelerated growth was majorly possible for the advancements in the technological sectors like semiconductor and computer etc. (Source: Pohjola, 2002). (Source: Harvard University, n.d.). (Source: International Monetary Fund) However subsequent analysis at industry level has revealed that significant acceleration in the labour productivity growth rate has also occurred outside the IT producing sector, although the benefits were confined in the sectors by using the information technology facilities. Industries, which have largely invested in the IT facilities at the starting of 1990s, had enjoyed the accelerated gains in the labour productivity growth. The sector, together with IT producing industries, account for all the accelerated growth in the labour productivity. Estimation has been done using the income rather than the output of the national accounts. It has been noticed that almost half of the raise in the productivity had been contributed by factors outside of the IT sector. The contribution of information technology towards labour productivity is due to the increment in the level of IT capital per employee and total factor productivity in the IT production. Another economy which has seen accelerated labour productivity is the economy in Australia. Back in 1990s the accelerated productivity in the Australian economy can be attributed to the IT related capital deepening and generalised TFP growth (International Monetary Fund, 2001). Capital Deepening and Information Technology Capital deepening can be referred to the change in the labour productivity which can be attributed to the high capital level per worker. The contribution of the IT producing sector and IT intensified sectors towards the economic growth can be explained by the capital deepening within these industries. This is a significant way to appraise the impact of information technology on the productivity. In the long run, capital deepening is stimulated by the technological progress in any region. It can be visible from the below mentioned table that IT related capital deepening had contributed significantly to the growth in a number of countries. During the 1990s, IT related capital deepening had increased rapidly. Recent studies have suggested that accelerated capital deepening has contributed to two third of the productivity growth. One can consider the overall capital deepening by its related sectors rather than the IT related capital deepening by all the sectors. Few researches have discussed the IT related capital deepening. The findings of one such research have been presented in a tabular form below. (Source: International Monetary Fund, 2002) This study suggested that the industries producing information technology equipments and industries which use the IT facilities quite intensively contributed 29 to 57 percent towards the economic growth. In case of the G-7 countries, the contribution of the sectors using IT facilities had been quite larger than by the sectors producing those facilities (International Monetary Fund, 2001). Adverse impacts of Information Technology Technology definitely has an advantageous effect on the productivity and hence on the resultant economic growth. All the pros about IT have been discussed in the previous segments. However, the concept of IT is not without flaw. With the introduction of IT there had been a huge difference among the wages drawn by the people who have technical knowledge and the people who do not possess such knowledge. People, who were not able to keep pace with the ever changing IT environment, had to loose their jobs as companies hardly found any relevant vacancies for them. In this queue, the first were the people who could not learn new things because of their age. The empty vacancies had been filled up with the IT specialists. In UK, in the year 1999 – 2000, the IT revolution enhanced and enlarged the working space by 13 percent in a year. The compensation for the IT people was so high that a huge chunk of population became interested to be educated on this subject. As a consequence there had been a huge enhancement in the IT sector with more and more qualified and intelligent people entering the domain. This resulted in the lack of qualified people in other non IT domain positions. This had, in turn, decreased the productivity there. That is why, back in 1990s, despite of the enhanced investment in the information technology related capital, which was as high as that in United States, there was not any acceleration in the labour productivity. Researches done by International Monetary Fund have suggested that in the aforesaid period both IT related capital deepening and total factor productivity have made significant contributions towards the labour productivity. However the contributions were counterbalanced by the decline in the total factor productivity in the other sectors. Lack of qualified people in non IT domains had lessened the productivity in those sectors. This has encouraged the IT sector to expand and enable it to accelerate the process of innovation. However this aspect can push the related wage and inflation rates. In summary, while there have been evidences which suggest that in the United States there had been certain increase in the labour productivity which can be attributed to the information technology. Evidences have been quite strong that there had been strong technological innovation. Even the effect of capital deepening on the productivity is incontrovertible. Although information technology has both the positive and negative effects on the labour productivity, still the advantages have been much more prominent than the disadvantages of the same. The main issue is surely where and how to use the information technology capital in a more effective way. Innovation as one of the main drivers of technological progress Commercialisation of the IT inventions Information technology has become a major driver to play a big role for the propagation of the business cycle. As IT has increased to be a larger share of the total output, IT related innovations are playing a larger role to offer macroeconomic fluctuations in the economy. No doubt that the innovative information technology has enhanced the usage of inputs and hence resulted in a higher productivity growth, which can be attributed to the total factor productivity growth. The boom in the information technology sector has given rise to a number of IT manufacturing industries. While investment has contributed largely towards the emergence of IT sectors, the supply side has been encouraged by the ever rising demand of the IT products. As a consequence the IT products become cheaper with the passing days. A significant way to evaluate the impact of declining technological prices on the economic growth is to discuss the same by keeping the Gross Domestic Product and demands in mind. The reducing prices of the IT products put a chain weighing effect on the real GDP and at the same time on the real domestic demand. Rapidly falling comparative prices of IT products has boosted the output. As a consequence trade has reached a different level with the transportation of IT products from the IT manufacturing countries to the IT consuming regions. The technological advancements have led to the fall in the prices and rise in the productivity and output. IT producing organisations were banking on the product price, rather than on the quantity of the same. However this has raised another problem. As most of the goods exported were IT products, the exchange of non IT products, which had become very much expensive, could not have much beneficial impact on the real GDP. As a consequence, countries, which used to import IT goods from other countries, were able to attain a continual improvement in their trade terms and hence in their economic conditions. The innovation in the technology has encouraged a circulation starting from the adoption of information technology and in turn further development of the IT tools by the non IT organisations. The enhanced demand of information technology has encouraged the industry to move towards more knowledge based works, rather than having more manual industrial works. The diffusion of IT can improve the inventory management by decreasing the required time lags taking place between collections, transmission and processing of the information (International Monetary Fund, 2001). Consistent with this fact, is the one that despite having a slow growth in 1970s, starting from the year 1980s to the 1990s, economies like Australia, United States and Canada had observed high inventory to sales ratios (Denison, 2003). However researchers worried that since the IT sector is growing so fast with more and more players entering this industry, there can be a problem of over supply. This, in turn, can badly impact the inventory management and in turn over all will increase. In such a situation no one can deny the probability of a decline in the respective productivity. (Source: International Monetary Fund, 2001). How the IT industry is encouraging IT development: The power of IT innovation There is a cyclical connection between the intensity of IT usage in the industries and further development in the information technology. The non IT industries are exercising different IT practices as per their requirements and structure of the businesses. With the decline in the prices of IT products more and more organisations are opting for the same. The demand has soared up compelling the IT producers to further go down with the prices. The IT producers have been also facilitating the usage process of the information technology facilities with the introduction of new technological products. The innovation, in turn, has been encouraging deeper penetration of IT in the industries at a fast pace. At the same time, the loopholes of the technological innovations were prominent which encouraged the IT producers to innovate in a much more innovative way. As the IT using companies were finding out some new requirements, the IT producing organisations were ready to introduce their new productions. Usage of the IT tools has pushed the technological innovations further. Precisely most of the innovation in the IT sector takes place in the wake of limitations in the existing IT practices. (Source: Pilat, 2003) As the IT market is getting enlarged with some exciting opportunities booming in, more and more organisations have started expressing interest on the same. Adding to it, the existing and new market entrants have intensified the competition in this industry sector, leading to enhanced research and development. To meet the customers’ demands, the organisations are trying to introduce new technological innovations in the market. As a consequence, to survive the competition, companies are coming out with products at a very short interval. The products’ life cycles are getting reduced. Although most of the time new innovations encourage more efficiency in the organisation and enhances the productivity, still there can be certain pitfalls of the same. Some of these have been discussed in the previous segments. Here the pitfalls would be discussed considering the innovation of new technology. New technologies sometimes can emerge as shocks to the industries (Christiansen, 2008). People would take more time to understand and grasp the new technologies. As a consequence, till people grasp the knowledge, the productivity would be quite low. For the same reason, many organisations do not move to the new innovations as soon as it hits the market. Rather, they would take some time to adapt the same. Currently even before the pitfalls have come into light, the next generation technology is ready at door. No doubt, this is enhancing the IT sectors, but question arises regarding the non IT sectors. New innovation and creativity have always been desirable. However the issue is, currently the technology is changing in such a short span of time, industries are not able to adapt to the same. As a result, many industries are having low productivity thereby reducing the total factor productivity of the economy. In such a case, where the organisation is a slow learner, capital deepening or investing huge capital in IT can move the situation towards worst. Here also it is not crucial to invest extensively in the IT facilities, rather the industries must consider its usage in a more extensive way keeping the operational, financial and human resource in consideration. Conclusion The truly revolutionary aspect of the last many years is surely the advancement of information technology. The advancements had revealed relevant information to enhance the productivity and encourage the innovation in any region. Introduction of information technology has increased the economic output and hence has considerably contributed to the economic growth of the countries. The accelerated productivity in United States in the year 1990s can undoubtedly be attributed to the technological enhancements taking place there. Though, one cannot deny the existence of other factors, still it will not be wrong to say that technology had been the most significant factor among them. However in some areas, enhancements in the IT producing and IT using industries had led to a declining productivity in the non IT sectors, as most of the qualified people were more interested to fill up the IT positions rather than working in some other domains. A significant example is UK; in UK despite the intensified investment in capital deepening the productivity was quite less. 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