How Does Information Technology Affect Productivity? Plant-Level Comparisons of Product Innovation, Process Improvement, and Worker Skills

Abstract

To study the effects of new information technologies (IT) on productivity, we have assembled a unique data set on plants in one narrowly defined industry—valve manufacturing—and analyze several plant-level mechanisms through which IT could promote productivity growth. The empirical analysis reveals three main results. First, plants that adopt new IT-enhanced equipment also shift their business strategies by producing more customized valve products. Second, new IT investments improve the efficiency of all stages of the production process by reducing setup times, run times, and inspection times. The reductions in setup times are theoretically important because they make it less costly to switch production from one product to another and support the change in business strategy to more customized production. Third, adoption of new IT-enhanced capital equipment coincides with increases in the skill requirements of machine operators, notably technical and problem-solving skills, and with the adoption of new human resource practices to support these skills.

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