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Study affirms information technology-productivity link

Madison, Wis. - With the U.S. economy showing alternating signs of strength and weakness, a recent study has given pause to business organizations that might want to slow the pace of information technology investment due to fears of a housing-induced recession.

The Information Technology and Innovation Foundation's recent report titled “Digital Prosperity: Understanding the Economic Benefits of the Information Technology Revolution,” focused on the role information technology plays in the economy. Among its conclusions is that money spent on computing technology delivers three to five times the gain in worker productivity of other types of investments.

The 69-page report complements other recent findings on information technology's link to productivity growth, an often-overlooked economic metric compared to inflation, interest rates, and job creation.

Michael Knetter, dean of the University of Wisconsin-Madison School of Business, cautioned that biases can creep into a study produced by a group that is funded by technology vendors like IBM, Cisco, and eBay, but he did not dispute the productivity benefits of IT.

“I could believe three times [the productivity gain],” Knetter said. “That doesn't strike me as implausible in the right business. That doesn't mean it's going to be three to five times higher wherever you decide to study it.”
Knetter, who spoke on IT-related productivity gains at the 2007 Fusion CEO-CIO Symposium, cited the 2007 economic report of the president as more proof of the IT-productivity connection. That report said the amount that American workers produce has grown by remarkable rates in recent years, and investment in information technology capital and innovative ways of using it have been important sources of productivity growth in industries with high growth rates.

Since 1995, the economic report of the president said productivity growth has averaged more than 2.5 percent per year, compared to the average growth rate of about 1.4 percent per year over the preceding 20 years.

Citing virtually the same statistics during Fusion, Knetter said if the heightened rate of productivity gain can be sustained, “that would be great news for living standards.”


The Information Technology and Innovation Foundation study also concludes that the economic significance of information technology is less in the technology, itself, than in its capacity to transform other economic sectors, and that public policy should focus not on incentives to use technology but on encouraging market forces to accelerate the pace of technology-aided change.

The organization cites healthcare as an industry the federal government, in an effort to promote a national health information network, has prodded to set standards for sharing patient information.

Industry associations also can make an impact, according to Andrew Matter, managing director of Nicewear International, a Milwaukee software developer. Niceware has spun off a healthcare business unit to supply the industry with bar code and Radio Frequency Identification (RFID) technology, but Matter said healthcare is 20 years behind the manufacturing sector in the development of supply chain systems.

The penetration rate of bar coding in hospitals is only about 20 percent, and Matter doubts they would make the leap directly to RFID without some mandate from the Joint Commission on Accreditation of Healthcare Organizations. “Until JACHO says, 'this is our product of choice,' RFID probably won't see much movement,” Matter said. “I think it's an evolutionary process, not a revolutionary process.”

On the topic of financial incentives, Knetter, who is not a fan of temporary investment tax credits, called for a more realistic look at tax policy. He said the U.S. probably taxes labor income and investment income too much, and taxes consumption too little.

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