A Blog by Jonathan Low


Jul 16, 2015

The Technology Diffusion Process Is Broken - And That's Created a Productivity Problem

Be agile, adaptive, disruptive, and above all, embrace change. 

That has  been the charge to any enterprise, large or small, global or local, since the beginning of the dotcom revolution.

And it worked pretty well for a while. But there has been a well-documented slowdown in productivity for the last decade or so. Further research is beginning to suggest that this is due to a slowing in the adoption of best practices and technologies.

Fault for that appears to lie primarily with the financialization of the economy and its incessant demands for cost-cutting rather than investment in improved processes. The larger point, as the following article suggests, is that you are going to pay one way or another - and that it is more beneficial to pay upfront by investing rather than suffering productivity failures later on. JL

Martin Sandbu reports in the Financial Times:

Innovation has not slowed down but the speed with which it spreads has. "Frontier productivity" - that of the most productive companies - has continued to grow briskly. But companies behind the frontier have become slower to adopt the best practices from leaders.
Knowing our unknowns on productivity Diane Coyle recently reflected on the great productivity debate in an FT blog post. A reminder of the stakes in this debate: across the western world, productivity has been on a slowing trend since the 1970s with particularly poor performance since the financial crisis. We don't understand well why this is (though the rise of finance may be one culprit). Consequently, we don't know how to get productivity growth to recover. Yet getting the answers right matters hugely to other policy areas, especially when to tighten monetary policy. Fed chair Janet Yellen made precisely this point in her testimony to Congress on Wednesday, when she suggested slow wage growth may be related to poor productivity rather than unused capacity in the economy. Gavyn Davies examined how this matters for the Fed in some detail last month.A new OECD report on the future of productivity contributes to doing precisely that, if in a slightly different dimension than the one Ms Coyle focuses on. The OECD researchers found that despite the broad slowdown in productivity growth, "frontier productivity" - that of the most productive companies - has continued to grow briskly. But companies behind the frontier have become slower to adopt the best practices from leaders (the WSJ RealTimeEconomics blog has a simple summary of the argument). The graphs below illustrate how the technological "diffusion machine" is sputtering, with frontier firms adding 30 to 50 percentage points more to labour productivity over a decade compared with the laggards.

The importance of realising the productivity potential within companies is clearly as important as allocating resources to the most productivity-enhancing sectors or even to the most efficient (or efficiency-improving) companies within sectors. In an earlier Free Lunch on productivity, we drew attention to the astonishing research measuring productivity within a single plant producing a simple product. Output per worker rose constantly and steadily without any changes to the production process, and the researchers found that "experimentation, or tweaking, seems to be behind the continual and gradual process of productivity growth". Conversely, the UK's particularly disappointing productivity experience in recent years is partly due to poor productivity growth within companies. The OECD is right to call for revival of the diffusion machine as a matter of urgency.


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