Digitalisation and productivity

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Digital technologies are transforming our economies and seem to offer a vast potential to enhance the productivity of firms. However, despite ongoing digitalisation, productivity growth has declined sharply across OECD countries over the past decades (figure 1).

 The productivity slowdown has multiple and partly interlinked causes, some related to the global financial crisis and its aftermath (e.g. reduced credit availability affecting investment) and some more structural, such as a decline in business dynamism and the poor performance of low-productivity firms.  The aggregate productivity gains from digitalisation have not been sufficiently large to offset these headwinds, at least not to date.

New OECD research suggests this results from shortfalls in key complementary factors and policies.

 Indeed, digital technologies are characterised by strong complementarities

 (i) between technologies themselves,

 (ii) with firms’ capabilities and assets, such as technical and managerial skills, organisational capital, innovation and financing capacity, and

 (iii) with policies that promote competition and an efficient reallocation of resources in the economy. Shortfalls in these complementary factors have slowed the diffusion of digital technologies and reduced the associated productivity benefits.

Due to these shortfalls, gains from digitalisation did not spread evenly across firms. Firms having better access to key technical, managerial and organisational skills have benefitted more than other firms. These firms already tended to be more productive than average and digitalisation has contributed to increase their lead (Figure 2).  

In addition, the nature of certain digital activities has given rise to a small number of highly productive “superstar” firms, which other firms increasingly struggle to compete with. Even in relatively low-tech industries, the growing availability of online user ratings and reviews tends to shift demand towards the more productive firms. Looking ahead, new technologies, such as artificial intelligence, that require complex skills, large intangible investments (e.g. in R&D, algorithms and data) risk further increasing the edge of the most productive firms relative to less productive ones.‌‌

Policy implications

Policies have a key role to play to promote an efficient and inclusive digital transformation, by ensuring that the necessary complementary factors are in place. This involves a range of priorities: 

• upgrading skills by enhancing initial education and training systems’ ability to provide the cognitive, technical and managerial skills that are crucial to strive in digital economies;
  ensuring adequate access to high-speed internet by incentivising infrastructure investment to improve coverage in rural and remote places, and via pro-competitive reforms in telecommunication sectors to bring prices down;
• promoting an efficient reallocation of labour and capital across and within firms by reducing administrative barriers on start-ups, facilitating job transitions and improving the efficiency of insolvency regimes;
• dealing with new competition challenges such as winner-takes-all dynamics on online platform markets, by strictly enforcing existing competition policy tools and reassessing regulations to reduce switching costs between platforms and to ensure a level playing field between different types of service providers (platform-based or not);
• reducing financial constraints hindering digitalisation, by addressing market failures in the financing of young innovative firms and eliminating the bias against equity financing existing in most tax systems;
• transitioning to more digital government services, by broadening the range of public services accessible online and making more government data available to the public.

These policies have complementarities between themselves, suggesting that a whole-of-government approach is necessary. In addition, broader issues related to digitalisation, such as taxation, labour relations, consumer protection, privacy, trust and cybersecurity also need to be addressed.

Finally, as a non-inclusive digitalisation can undermine equality of opportunities and exacerbate income gaps, policymakers should strive to bridge “digital divides” and create the conditions to help lower-skilled workers and less-productive firms to catch up with best performers. Enhancing skills is a key priority in this respect.‌

Detailed underlying analysis

This chapter summarises the main findings of five underlying studies, which provide more detailed analytical evidence and granular recommendations for public policies:

• Digital technology diffusion: a matter of capabilities, incentives or both?  (Dan Andrews, Giuseppe Nicoletti and Christina Timiliotis) which assesses the structural and policy drivers of the adoption of digital technologies and concludes that both firms’ capabilities and incentives contribute to explain digital adoption; 
• Like it or not? The impact of online platforms on the productivity of incumbent service providers (Alberto Bailin, Peter Gal, Valentine Millot and Stéphane Sorbe) which builds a new indicator of the development of online platforms (Figure 4) and finds that the development of certain platforms supports productivity of service firms in the corresponding industries, especially when platform markets are contestable.
• Digitalisation and productivity: In search of the holy grail – Firm-level empirical evidence from EU countries  (Peter Gal, Giuseppe Nicoletti, Theodore Renault, Stéphane Sorbe and Christina Timiliotis) which assesses the productivity implications of the adoption of digital technologies by firms and finds a positive link between adoption and productivity, especially among high-productivity firms and in presence of the relevant skills;
• Digital Dividend: Policies to Harness the Productivity Potential of Digital Technologies (Stéphane Sorbe, Peter Gal, Giuseppe Nicoletti and Christina Timiliotis) which summarises the main policy options to stimulate the adoption of digital technologies and the associated potential productivity gains;
• Gig economy: boon or bane (Cyrille Schwellnus, Assaf Geva, Mathilde Pak and Rafael Veiel) which reviews the existing evidence on the development of gig economy platforms and discusses the economic and policy implications of this development.

Further reading:

• OECD Going Digital project: Making the transformation work for growth and well-being
• OECD Skills Outlook 2019: Thriving in a Digital World
• OECD Jobs Strategy 2018: Good Jobs for All in a Changing World of Work
• OECD Employment Outlook 2019: A transition agenda for a Future that Works for all”