The new New Economy Analyst
Report – May 04, 2002
Juergen Daum’s new New
Economy Best Practice service
©2002 Juergen Daum. All rights reserved.
News categories: the New Economy Economics,
enterprise and business strategy, Information Technology
About
one year ago I wrote for the first time here about the “new wealth of nations”:
I cited a The Conference Board study which
revealed, that the U.S. economy was leading in terms of productivity growth and
was able to translate these productivity improvements into higher per capita
income. The conclusion was, “that the U.S. economy – despite the actual
slowdown – is likely to outpace the rest of the world in the future in terms of
productivity, economic growth and income” (see the new New Economy Analyst report from
June 13, 2001). Today I have to conclude, that this trend seems to
become a sustaining pattern and the question arises: what are the reasons for
the growing difference in economic power between the U.S. and the rest of the
world ? Economists name as the reasons usually: early structural reforms e.g.
in communications and banking industries and larger investments in information
and communication technologies. But it might be more that that: an ever
increasing portion of the U.S. GDP represents “conceptual” as distinct from
physical value added and is reducing cyclical volatility of the economy – as
U.S. Federal Reserve chairman Alan Greenspan recently stated it.
The productivity gap between the U.S. and the
rest of the world has widened even more
In their latest report “Performance 2001 –
Productivity, Employment, and Income in the World’s Economies”, the two The
Conference Board authors Dr. Robert H. McGuck, director of the Economic
Research at the Conference Board, and Bart van Ark, director for The Conference
Board’s international economic research and Professor of Economics at the
University of Groningen in the Netherlands, are stating, that in 2001 the
productivity gap between the U.S. and the rest of the world has widened even
more: Despite the large GDP slowdown, U.S. labour productivity growth remained
relatively high at 1.8 percent for the year (which is only 0.2 percentage
points below than during the boom phase 1995-2000), against 0.9 percent for the
rest of the OECD.
Whereas the European Union was able to continue its employment expansion with a
1.1 percent increase in hours worked, it remained on a track of slower
productivity growth at only 0.6 percent – which is well below the OECD average
of 0.9 percent. Although EU labour productivity in 2001 averaged 87 percent of
the U.S. level (2000: 82 percent), Europe was unable to translate these numbers
into comparable personal wealth. Average per capita income in the European
Union was just 67 percent of the United States (2000: 69 percent). Despite the
recession and the events of September 11th, the U.S. economy
outpaced again the rest of the world.
Per capital income (the basis for wealth of a nation)
is depending on two major factors: on labour productivity and on the portion of
the population that is involved in production (called participation rate). The
U.S. is leading in both areas:
Participation rate: Since the 1970s, the United States has led most other
countries in the OECD in translating productivity gains in to per capita
income. In most countries in Europe the lower translation rate of productivity
improvements into per capita income is due to a lower overall participation
rate. The main reason for it is a demographic disadvantage of the EU: EU
countries dispose of a lower share of the labour force at working age (15-64).
Labour productivity: The United States registered 2.0 percent growth over the
course of 1995-2001, compared to only 1.1 percent over 1990-1995. This 0.9
percent acceleration compares to a 1.2 percent deceleration in the
European Union over the same period.
Especially labour productivity seems to become
the driving factor for the fast growing gap between the United States and
Europe and Japan in terms of economic power (for the first factor –
participation rate – see my report from June 13, 2001). It
measures how much output is obtained per hour of work. It has a direct
connection to living standards as measured by per capita income: the more hours
spent on work and the higher the level of productivity, the higher is per
capital income.
What is the reason for the growing disconnect
between productivity of the U.S. economy and that of the rest of the world ?
The two The Conference Board authors wrote, that
most of the difference in productivity acceleration between the United States
and the rest of the world could be traced to differences in diffusion of
information and communication technology (ICT). In their study “Making the Most
of the Information Age: Productivity and Structural Reform in the New Economy”
(The Conference Board, 2001) they state that most of the acceleration of U.S.
productivity in the second half of the 1990s can be traced to industries that
produce (ICT producing industries) or intensively use (ICT using industries)
information and communication technologies. But the gap in productivity growth
between the United States and Europe is only partly due to the U.S. head start
in developing computer technology: U.S. productivity acceleration in the second
half of the 1990s owes more to ICT use than to ICT production. On the other
hand, in many European countries, limited productivity growth in intensive ICT-using
industries suggest under investment in ICT. As one reason for this under
investment phenomenon, the authors name insufficient liberalization and
impediments to market evolution.
During the 1970s and 1980s, broad U.S. structural
reforms in communications, banking, and transportation liberalized entry and
exit; enhanced the possibilities for a wider range of (differentiated) products
and services; and introduced flexibility and new pricing practices. It was in
these deregulated industries where the producers of information technology
found fertile ground for stimulating ICT sales and most of the demand for their
new products, creating opportunities for profits and productivity improvements.
Many countries now appear to be in a process in
transformation – like the U.S. in the 1970s and 1980s. But Europe and Japan
still have some way to go before they will be able to fully exploit the new
technologies made possible by computer and information technologies.
And investments in information and communication
technologies might be an important precondition to drive productivity, but not
sufficient.
Information / Communication Technologies is not
all it needs to drive productivity of an economy
A yearlong Mc Kinsey research revealed (William
W. Lewis, Vincent Palmade, Baudouin Regout, and Allen P. Webb: What’s right
with the US economy, in: The McKinsey Quarterly 2002, Number 1), that the
source of the productivity gains in the U.S. economy from 1995 to 1999 was not
the growing rate of investments in information technology. Instead, managerial
and technological innovations in only six higly competitive industries
(wholesale trade, retails trade, securities, semiconductors, computer
manufacturers, and telecommunications) were the most important causes. These
six sectors, departing from the norm, experienced in the late 1990s either
extremely large leaps in productivity (e.g. semiconductors and computer
manufacturers) or accounted for a large share of employment (retail and
wholesale).
Many sectors other than these six increased
their pace of IT investment but experienced stagnant or even slower
productivity growth. So investment in IT alone, did not show any correlation to
productivity gains.
Within the six jumping sectors, the most important
cause of the productivity acceleration after 1995 was fundamental changes in
the way companies deliver products and services – that is in their business
concepts or strategies. Therefore the McKinsey authors conclude, that the bulk
of acceleration in productivity after 1995 can be traced to managerial and
technological innovations that improved the basic operations of companies.
Sometimes, the catalysts was a dominant player with a superior business model;
other times, it was managers using new technology to redesign core operations.
In general-merchandise retailing, productivity growth more than tripled after
1995 because competitors started more rapidly adopting Wal-Mart’s innovations –
such as economies of scale in warehouse logistics and purchasing, and
electronic data interchange (EDI) with suppliers. As a result, Wal-Mart’s
competitors increased their productivity by 28 percent from 1995 to 1999, while
Wal-Mart itself raised the bar further by increasing its own productivity by an
additional 22 percent.
Contrary to conventional wisdom, the widespread
adoption of information and communications technology was not the most
important cause of the acceleration in productivity after 1995. In rare cases,
IT can deliver truly extraordinary productivity improvements, expanding labour
capacity by an order of magnitude. In most cases however, IT was just one of
many tools that creative managers used to redesign core business processes,
products, or services. Where IT did play a role, it was a necessary but not a
sufficient enabler of productivity gains. To reap the full productivity
benefits of inventory-management systems or EDI, for instance, a business must
implement operational-process change.
What really drives productivity in the end, are
innovative business concepts and strategies, often underpinned by the use of
new IT solutions. In most cases IT
investments per se, do not provide competitive advantage and large productivity
gains. Instead, it’s the intelligent combination of technology, processes and
new strategies what drives performance of companies in the new economy.
Or to express it with the words of the “guru of
the gurus” Peter F. Drucker:
“For fifty years, Information Technology has
centered on DATA – their collection, storage, transmission, presentation. It
has focused on the “T” in “IT”. The new information revolution focus on the
“I”. […] It is not a revolution in technology, machinery, techniques, software
or speed. It is a revolution in CONCEPTS”. (Peter F.
Drucker: Management Challenges for the 21st century, New York: HarperCollins
Publishers, 1999, p. 97)
The major driver for economic growth and for the
future wealth of nations is the same as for companies: innovation. This
requires investments in knowledge assets. Knowledge is a factor of production
and “change”. Change means that society and business life must always be
prepared to adapt themselves to new markets and technological conditions and to
develop new organizations in support of development and learning. Knowledge as
a new factor of production will help a society or nation as well its
organizations to handle new challenges and ever-changing conditions and to
master innovation.
Investments in human capital, that is in education, represents in today’s
economies one of the first and major drivers for future economic growth and
wealth. Without knowing what is already known and without knowing how to work
with knowledge and in knowledge creating constellations, people can not create new knowledge and a
nation will find itself behind on the continuous innovation and renewal path
required in today’s global economic competition taking place between nations.
So societies will have to invest even more in education in the future.
Information and communication technologies are playing for nations, like for companies,
the role of enablers for knowledge work. And it is not just PCs per household
what is important here. Also how efficiently these PCs are linked into networks
within companies, schools, other public institutions and into the World Wide
Web is an important factor. And this is measured today by bandwidth. The more
installed bandwidth a country has, the greater its degree of connectivity. The
relevant measure is “megabits per capita”, how much installed bandwidth it has,
divided by the number of its potential users. It tells about the rate of
information dissemination within the population and to and from decision
makers.
The national R&D effort, a country’s science and technology policy, is
perceived today by economists as another major driver of economic growth and
wealth of nations. And this is not just total R&D expenditure of a society
that counts. It is also for example the number of researchers in its total
labour force which is an important indicator of a nation’s economic growth
potential. For example the rate of gross domestic expenditures on R&D
(GERD) compared with gross domestic
product (GDP) declined in the large economies of the European Union over the
1990s (Germany, United Kingdom, France, Italy) – in contrast to the United
States, which kept its GERD rate not only higher than the average of OECD
countries, but also more or less stable over the period. This is seen as
another reason for the higher economic growth rate of the U.S. versus the
European Union.
Conceptual
value added versus physical value added
But
economic power will not simply flow to those nations, who educate their people
better, who are the most wired, or who invest most of their GDP in R&D. It
will flow to those who in addition use the most creative concepts for bringing
together firms, governments, capital, information, consumers and talent in
networked coalitions that create value. Some will be corporate-led coalitions
to create commercial value. Some will be government-led coalitions to create
geopolitical value based usually on economic power. And some will be
activist-led coalitions to create, or preserve, human values –such as worker
rights, human rights or environmental preservation.
So in front of today’s knowledge and intangible assets based global economy, nations are facing increasingly similar challenges like companies. They have to create structural capital that better connects their different institutions like enterprises and universities in to value creating constellations. They have to manage “resources” like human capital. And they have to create national brands, attractiveness, that allow it to attract the most talented people, and corporations and institutional investors who invest in their country. And like companies, they need better information about these real national economic value drivers to do this. Some countries have already started to create the conditions that they can get this information. For example Denmark is obliging its enterprises from this year on to report on their Intellectual Capital (through so called Intellectual Capital Statements – see below under “additional resources”) – an important data base for the Danish government to get a national view on the development of intangibles in Denmark.
In the U.S. Alan Greenspan, chairman of the
Federal Reserve, is embracing in his recent
testimony to the Committee on Banking, Hosing, and Urban Affairs of the U.S.
Senate, the idea, that an ever increasing portion of the U.S. GDP
represents conceptual as distinct from physical value added (that is:
Intellectual Capital) and may actually have lessened cyclical volatility which
may allow the U.S. economy to recover
faster from the actual economic downturn than in previous recessions. His
reasoning is, that the fact that concepts cannot be held as inventories means a
greater share of GDP is not subject to a type of dynamics that amplifies
cyclical swings (like it is seen e.g. also in corporate supply chains). On the
other hand he believes, that an economy in which concepts form an important
share of valuation has its own vulnerabilities. For instance, when physical
assets form only a small proportion of a company’s assets base and most of its
value is tied up in intangibles and intellectual capital, its far more at risk
to external perception changes. Trust and reputation can vanish over night, a
factory can not, he states. In essence this means: nations require today for
more developed corporate governance systems than they usually have in place,
and they need better national economic information systems that inform about
the new knowledge based value drivers in order to be able to establish the
right economic policies.
Summary
In 2001 the productivity gap between the U.S.
and the rest of the world has widened even more. This difference is often
traced to differences in diffusion of information and communication technology.
But this view is too narrow. Contrary to conventional wisdom, the widespread
adoption of information and communications technology was not the most
important cause of the acceleration in productivity after 1995. IT can be quite
valuable when deployed as part of a management plan to reorganize specific core
activities of a business. But when generic IT solutions are applied to support
functions, or when IT represents no more than a “me-too” investment, it is
unlikely to move the needle on a company’s productivity. What really drives
productivity in the end, are innovative business concepts and strategies, often
underpinned by the use of new IT solutions.
The major driver for economic growth and for the
future wealth of nations is the same as for single companies: innovation. This
requires investments in knowledge assets. Knowledge as a new factor of
production will help a society or nation as well its organizations to handle
new challenges and ever-changing conditions and to master innovation. But economic
power will not simply flow to those nations, who educate their people better,
who are the most wired, or who invest most of their GDP in R&D. It will
flow to those who in addition use the most creative concepts for bringing
together firms, governments, capital, information, consumers and talent in
networked coalitions that create value.
And
like companies, they need better information about these real national economic
value drivers to do this. Some countries have already started to create the
conditions that they can get this information, such as Denmark, which is
obliging its enterprises from this year on to report on their Intellectual
Capital. In the U.S., Alan
Greenspan, chairman of the Federal Reserve is embracing the idea, that an ever
increasing portion of the U.S. GDP represents conceptual as distinct from
physical value added (that is: Intellectual Capital) and may actually have
lessened cyclical volatility which may allow the U.S. economy to recover faster from the actual economic downturn
than in previous recessions. But he also believes, that an economy in which
concepts form an important share of valuation has its own vulnerabilities.
Therefore nations require more developed corporate governance systems than they
usually have in place, and they need better national economic information
systems that inform about the new knowledge based value drivers in order to be
able to establish the right economic policies.
Additional resources:
William
W. Lewis, Vincent Palmade, Baudouin Regout, and Allen P. Webb: What’s right
with the US economy, in: The McKinsey Quarterly 2002, Number 1 – results
from a study about the reasons for the productivity growth in the U.S. economy
A Guideline For
Intellectual Capital Statements (Result
of a research program of the Danish Agency for Trade and Industry where 17
Danish companies have contributed)
Intangible Assets and
Value Creation – a book from Juergen Daum
In
today’s intangible assets dominated economy companies need new accounting,
controlling und management systems - in an interview with sapinfo.net, Jürgen H. Daum, the director
of program management at SAP AG for mySAP Financials, explains the function of
intangible assets in enterprise management
Corporate Performance
Management: Managing profitability and growth in the new environment – article by Juergen Daum
The new FASB rules for
reporting on Intangible Asset - The European versus the U.S. way - Report about the new US-GAAP rules for Goodwill and
Intangible Assets as the American way to deal with Intangibles. In addition the
new Danish rules are presented, which oblige companies with significant
Intellectual Capital to report about them through a Intellectual Capital
Supplement in addition to its financial reports
Business
Management in the new, New Economy - How to exploit Intangible Assets to
Create Value (Presentation held by Juergen Daum
at SAP's European mySAP Financials
Conference, June 2001, Basel / Switzerland)
Previous new New
Economy Analyst reports related to this topic:
March 06, 2002 –
Interview with Baruch Lev: Accounting, Reporting and Intangible Assets
Nov 13, 2001 - Interview
with Leif Edvinsson: Intellectual Capital: the new wealth of corporations
July 26, 2001 - How
accounting gets more radical in measuring what really matters to investors
July 18, 2001 - Interview
with David P. Norton: "Intangible Assets and the Balanced Scorecard"
March 21, 2001 – The new
New Economy is combining the strength of the old and New Economy
Dec 28, 2000 – Why a
slowing US economy my help to boost productivity again
Oct 26, 2000: Is the New
Economy / The Long Boom dead ?
Aug 23, 2000:
‘e-readiness’ gap in many country threatens worldwide economic growth
I will continue in
future reports to report on new economy economics and issues related to
managing companies in our information and Intangible Assets based economy of
today. To subscribe for my free-of-charge e-mail newsletter click here.
The concept for a new
accounting, controlling, and management system for knowledge and intangible
assets based businesses, that integrates strategy management (strategic
innovation) and product and market development (product and market innovation)
with operations management (supply chain management, customer relationship
management) and resource management (finance, hr, alliances, IT) is described
in detail in my book "Intangible Assets oder die
Kunst, Mehrwert zu schaffen" ("Intangible Assets or the Art to Create
Value ") which is now
available (German versions – English edition still forthcoming).
©2002
Juergen Daum. All rights reserved.
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