Schumpeter (1939, 1950) presents arguments that innovation's transforming effects on economies is nothing new. In fact, because the macroeconomic benefits from the development and implementation of new technologies are positive and significant, the process he describes as "creative destruction" should be embraced. Railroads, steam power, illumination, cable lines, electricity, air transportation, air conditioning all these inventions, and many more, have contributed to "economic evolution." That is, freemarket economies are in a process of continuous change, where new ideas and new technologies destroy old products and old ways of doing things. This evolutionary process has profound consequences for what is produced, where things are produced, and who will produce them. Intelligent enterprises of the 21st century know and understand this, and work to position themselves to take advantage of new opportunities and new markets in this rapidly changing environment.

Clearly, the process of creative destruction—also referred to as "the churn"—can be upsetting and turbulent, as old industries disappear, existing jobs are redefined, and new industries created. As Cox and Alm (1992) point out, "innovation has always had the direct effect of creating new businesses and industries and the indirect effect of destroying many of the jobs in the existing industries that they eclipsed." As a result, the job mix changes, but the total labor market expands and macroeconomic productivity increases, thereby raising incomes and overall living standards for individuals in the economy.

Today, the churn is at work in the so-called "New Economy"—a view adopted in the late 1990s that is characterized by a higher sustained level of productivity growth brought on primarily by the implementation of new technologies, enabling faster economic growth with less inflation. While some may argue that the New Economy was smoke and mirrors because of misguided claims that the business cycle would end and stock prices for Internet-related firms would rise forever, Formaini and Siems (2003) argue that the reality of the New Economy is a more resilient and flexible economy. Faster productivity growth has led to higher real wages, as well as lower unemployment and lower inflation.

A number of researchers have documented the productivity acceleration of the late 1990s. Oliner and Sichel (2000) calculate that information technology capital—computer hardware, software, and communications equipment—added 0.5 percent per year to economic growth in the 1980s. By the late 1990s, however, the contribution to economic growth from information technology capital grew to 1.4 percent per year. Moreover, the percentage of income earned in the economy from information technology capital more than doubled over this time period, rising from 3.3 percent in the 1980s to 7.0 percent by the late 1990s.

In addition to Oliner and Sichel's research, studies by Jorgenson and Stiroh (2000) and the Council of Economic Advisers (2001) show a large pick-up in labor productivity growth in the non-farm business sector during the late 1990s. Consistent among the studies is the finding that shows the extent to which the rapid accumulation of new information technologies contributed to the rising rate of labor productivity growth. The main message here is that the development and implementation of new information technologies drove a large fraction of the recent productivity acceleration. [1]

While "New Economy companies" in the computer and semiconductor sectors contributed a great deal to the overall acceleration of productivity growth, "Old Economy" (traditional manufacturing) firms also largely contributed. Old Economy companies' demand for new information technologies increased as they found many efficiency-enhancing ways to use the new innovations. DeLong and Summers (2001) suggest that the principal effects of the New Economy are more likely to be "microeconomic" than "macroeconomic," although improvements at the firm level eventually produce macroeconomic gains. Competitive pressures require that successful firms employ information technologies effectively to reduce costs and improve profitability.

Such intelligent enterprises come in all sizes and shapes. They are Internet-related New Economy companies and Old Economy manufacturers. They are new start-ups and 100-year-old enterprises. Baily (2001) uses data from the Bureau of Economic Analysis to show labor productivity growth by industry over two periods: 1989–1995 and 1995–1999. Labor productivity growth is computed by dividing each industry's output as measured by the value added in that industry (gross product originating) by the number of full-time equivalent employees. The results reveal that service industries, particularly wholesale and retail trade, finance, and personal services, have the greatest increases in labor productivity growth from the early 1990s to the late 1990s. The durable goods manufacturing sector also saw a large pick-up in labor productivity growth between the two periods.

Labor productivity growth in wholesale trade increased nearly five percentage points; for retail trade the increase was 4.25 percentage points. Finance labor growth productivity increased more than 3.5 percentage points and the increase was about 2.5 percentage points for durable goods manufacturing.

Perhaps most interesting, the importance of new information technologies in managing industry supply chains and in promoting financial innovations cannot go unnoticed. Higher labor productivity growth can be linked to the implementation of information technologies. Baily (2001) ranks industries by information technology intensity and finds that the most-intense information technology users had more than a 50 percent larger acceleration in productivity growth than the less-intense users. The information-technology-intensive firms increased labor productivity growth by 1.75 percentage points, whereas the less-intensive users increased by 1.15 percentage points. Research findings by Nordhaus (2002) and Stiroh (2002) are also consistent with these results.

In this chapter, this research is consolidated and extended to argue that there are significant macroeconomic benefits from the development and implementation of new information technologies. Specifically, over the past two decades, evidence suggests that firms developing and/or implementing New Economy technologies—operating in conjunction with a more innovative and deregulated financial market—have helped the U.S. economy become more stable. Also, because better information and its improved availability leads to lower transaction costs, it makes sense for intelligent enterprises to focus on specialization and the customization of products and services to an even greater extent than previously. In addition, evidence suggests that the Internet has not been over-hyped, but may, in fact, be under-hyped as new online business solutions like business-to-business (B2B) supply chain management systems and electronic marketplaces (e-marketplaces) greatly help boost productivity and keep prices low. Finally, the U.S. experience offers lessons for other countries. The greatest productivity improvements appear to come from the productive use of new information technologies, as intelligent enterprises seek new ways to deploy them. The competitive environment in the U.S. demands that firms find new ways of conducting business to lower costs, expand markets, and boost efficiency.

[1]Gordon (2000) does not dispute the rise in productivity, but questions the magnitude and importance of New Economy technologies. He finds that the New Economy's effects on productivity growth are largely confined to the durable goods manufacturing sector and are mostly absent in the remaining 88 percent of the economy.

Intelligent Enterprises of the 21st Century
Intelligent Enterprises of the 21st Century
ISBN: 1591401607
EAN: 2147483647
Year: 2003
Pages: 195 © 2008-2017.
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