Productivity - why can't the UK keep up?

We must look to US methods to make most of IT

Gordon Brown and British business leaders alike have jealously eyed the US "productivity miracle" for more than 10 years - after 1995 US output per hour growth doubled compared to the previous 20 years.

The US continues to lead in productivity, the measure of output per employee. According to the Office of National Statistics, GDP per worker in the US was 27% higher than in the UK in 2005.

Yet the UK is showing little sign of catching up. For the past 10 years, output per hour has grown at about 2%, while the US has enjoyed long periods of productivity growth above 3%, although it has dropped to about 2% in the past couple of years.

Many see the rapid adoption of IT in the US as the main cause for its lead in productivity, but by now the UK should have caught up on IT usage. So what explains the productivity gap?

Improving organisation

There are two possible explanations. First, there are some "natural advantages" in the US which help companies get more from IT investment. These could be tougher competition, lower regulation, better access to risk capital, a larger market, more space and so on.

The second explanation is that it is not just the US environment that matters, but rather the internal organisation of US firms that has enabled better exploitation of IT.

For example, US firms may be better managed or have adopted organisational features - such as decentralisation - that are better at exploiting IT.

It is an important question because the answer will have implications for IT management alignment to business processes in the UK.

To get an answer we looked at plants in the UK owned by US companies, and compared their performance to UK-owned companies and others owned by non-US multinationals.

We found US companies in the UK got significantly more productivity out of their IT than the other firms, even in the context of a UK environment.

Management and timing

This suggests that part of the IT-related productivity gains in the US may be due to management and organisation, rather than simply the "natural advantages" of the US environment.

We still have to find out why US firms are able to achieve these "IT friendly" organisational forms and their European counterparts cannot. It could be due to timing - US firms are closer to the development of the new technology and can learn about them first.

Maybe US firms are intrinsically quicker to adapt to new technologies because of more intense competition in their home markets.

Whatever the cause, there is no reason why firms in the UK cannot learn from the US example. There is a lot of evidence that IT spending increases productivity and that can help justify IT budgets. But it is not just IT spending alone. It is about spending smarter and making changes to the rest of the business.

John Van Reenen is a professor and director of the Centre for Economic Performance, London School of Economics

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