Fact of the Week: Software Is the Best Capital Investment Low-Productivity Firms Can Make to Spur Labor Output

Luke Dascoli November 22, 2021
November 22, 2021

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Source: Borowiecki et al., “The Impact of Digitalisation on Productivity: Firm-Level Evidence from the Netherlands,” OECD Economics Department Working Papers, September 2021.

Commentary: Big businesses aren’t the only ones that benefit from implementing digital tools—small and low-productivity firms do, too. They can cast a wider and more accurate net to reach consumers by maintaining a digital presence, and they can conduct operations more efficiently by implementing labor-saving digital tools and services.

In a recent working paper with the Organization for Economic Cooperation and Development (OECD), researchers analyzing firm investments and performance in the Netherlands produced econometric evidence on the relationship between labor productivity and digital adoption among firms. They corroborate other econometric literature on this subject by showing strongly positive and statistically significant associations between labor productivity growth and modes of investment varying in ICT infrastructure, intangibles including software and skills, and digital technologies. High-productivity firms experienced greater rates of labor productivity growth due to additional ICT hardware investment than did low-productivity firms, likely because these investments require other productivity-enhancing capital or a more highly skilled workforce to maximize the benefits. Low-productivity firms, conversely, enjoyed higher rates of productivity growth due to additional software investment than already-productive firms.

This OECD research demonstrates the potential for economic growth and the equalizing power that digitalization via software investment provides in the modern economy. Low-productivity firms that may find themselves lagging in today’s economy have the opportunity to catch up to frontier firms by increasing their investments in software to build a digital presence for consumers and to digitally streamline workplace operations. Policymakers seeking to grow the economy should commit to supporting this kind of enterprise digitalization at all levels of the economy.