Lower investment in ICT led to lower productivity in EU than US

Stan Beer
Wednesday, 28 November 2007 08:58

IT Industry - Market

A new report has found that the EU has fallen way behind the US in productivity over the past 12 years because of a significantly lower investment by companies in IT and telecommunications. Among other things, the report found that productivity in the US has grown about twice the rate of the top 15 EU nations since 1995 and now these nations are collectively only a bit more than 90% as productive as the US.

According to the report, titled Boosting European Prosperity Through the Widespread Use of ICT, from not-for-profit washington DC-based pro-technology think tank Information Technology and Innovation Foundation :

"For most of the post-war period, productivity was growing faster in Europe than in the United States. Yet, after 1995 the trend reversed. Indeed, while productivity growth in the United States has accelerated in the last decade, from an average of 1.6 percent per year from 1980 to 1994 to 2.7 percent since then, productivity growth in Europe has gone in the other direction, declining from 2.3 percent per year to 1.4 percent."

As a result of this, the productivity gap has significantly widened verween EU-15 and the US. In 1995, EU productivity was  96% that of the US and by  2002 that had fallen to 92%.

The report states that there have been two major factors why Europe has benefited from the ICT revolution less than some other regions, including the United States.

First, firms in Europe, particularly service firms, have invested less in hardware, software, and telecommunications than their counterparts in the United States. "ICT investment as a share of total non residential investment is almost twice as much in the United States as in the EU-15 (29.9 percent vs. 15.8 percent)," the report states.

Second, European countries have been slower to make the process and organizational changes that would allow them to achieve the full benefits of ICT. According to the report, investments must be accompanied with organizational changes and process reengineering, including new economy management practices such as decentralized decision making.

Recommendations from the report to help turn things around in Europe include using tax incentives and tariff reductions to spur ICT investment; encourage digital literacy and technology adoption so that consumers become digital “prosumers”, consumers who also use ICT to become producers by doing things like paying bills online; not hampering digital growth through over regulation and protections for offline incumbent firms.