THE EFFECT OF ORGANIZATIONAL INNOVATION AND INFORMATION

Abstract

This paper examines the issue of whether investment in information and communication

technology (ICT), combined with organizational changes and worker skills contribute to

better performance in Canadian firms. We find that Canadian firms have actively

engaged in organizational changes in the areas of production and efficiency practices,

human resource management (HRM) practices, and product/service quality-related

practices. These practices along with ICT use are found to be related to better firm

performance. We find that while ICT is productive on its own, it is more productive in

firms that combine high levels of ICT with high levels of organizational change. The

firms that combine ICT with organizational changes have a high incidence of

productivity improvement and have high rates of innovation. These findings seem to

suggest that to be successful, firms typically need to adopt ICT as part of a “system” or

“cluster” of mutually-reinforcing organizational approaches. We also find that ICT and

human capital are complements in the service sectors. The firms that combine high levels

of ICT and high levels of worker skills have better firm performance.

JEL No. J24, L20, O30

Key Words. Information Technology, Innovation, Organizational Change, Productivity

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“ Information technology is best described not as a traditional capital investment, but as a

“general purpose technology” (Bresnahan and Trajtenberg, 1995). In most cases, the

economic contributions of general purpose technologies are substantially larger than

would be predicted by simply multiplying the quantity of capital investment devoted to

them by a normal rate of return. Instead, such technologies are economically beneficial

mostly because they facilitate complementary innovations”.

(Brynjolfsson and Hitt, 2000, p. 24)

1 Introduction

Do computers contribute to productivity growth? Most of the aggregate-level evidence

shows that investment in information and communications technology (ICT) is making

an important contribution to economic growth and labour productivity growth across

OECD countries (OECD, 2000; Oliner and Sichel, 2000; Council of Economic Advisors,

2000; Jorgenson and Stiroh, 2000). These studies found that technological progress,

particularly the rapid advances in semiconductor technology, and capital deepening are

the primary factors behind the acceleration in the U.S. growth in recent years (Jorgenson

and Stiroh, 2000).1

Harchaoui et al. (2002) describe the similarities between Canada and the United

States in the late 1990s. Like the United States, Canada experienced dramatic increases in

both GDP growth and multifactor productivity growth in the period post 1995. As in the

United States, ICT growth was the largest contributor to the growth in capital services in

Canada. Subsequent studies confirm that Canada shows trends similar to those in the

United States, but in somewhat attenuated form. (Harchaoui et al., 2003; Rao,et al.; 2003;

Gu and Wang, 2003).

Over the last decade, there are many firm-level studies in the US examining the

relationship between ICT investment and firm performance. The evidence is mixed2.

Studies using the 1980s data found no evidence that computers contributed positively to

output growth (see, for example, Loveman, 1994; and Barua et.al., 1995). In contrast,

studies such as Brynjolfsson and Hitt (1995, 1996) and Lichtenberg (1995) employing

more recent data over the 1988-1992 period have found positive relationship between

ICT investment and labour productivity.

A recent study by Brynjolfsson and Hitt (1997) explores the relationship between

computers and productivity growth. The study uses data that included more than 600

large US firms over the period 1987 to 1994. The findings show that computers make a

positive contribution to output growth. More interestingly, the study concludes that, “as a

1 Gordon (2000), among others, has argued that while there has been tremendous productivity growth in

ICT-producing industries, there is only limited evidence of any incremental productivity growth in ICTusing

industries.

2 For a comprehensive literature review of firm-level studies, see Brynjolfsson and Hitt (2000).

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general purpose technology, the pattern of growth contribution appears to suggest that

computers are a part of a larger system of technological and organizational changes that

increased productivity over time”.

Many studies have focused on the services sector firms and examined the

relationship between ICT and firm performance (for a review of the literature, see

Brynjolfsson and Hitt, 2000). While the evidence from these studies seems to be mixed,

Brynjolfsson and Hitt (1995)