How IT matters in, and for, India

Three years ago, Nicholas Carr argued, in a Harvard Business Review piece with that title, that ?IT Doesn?t Matter.? What he meant specifically was that IT (information technology) was being oversold as a source of competitive advantage. Instead, IT had become commoditised, making imitation easy. To drive this point home, Carr compared IT to electric power a century earlier, when it was new, scarce and required specialised management. None of that is true any more.

Some of the reaction to Carr?s argument was predictable. IT firms didn?t like it. ?Hogwash!? said Steve Ballmer, CEO of Microsoft. Carr was ?dead wrong? said Carly Fiorina, then CEO of Hewlett Packard. A lively and nuanced academic debate ensued about the strategic role of IT, with both sides marshalling various case studies in support.

Meanwhile, the data in industrialised countries were revealing something interesting. Initially, paraphrasing economic Nobel laureate Robert Solow, computers were supposedly everywhere but in the productivity statistics. Later studies found, instead, that IT was making an important contribution to aggregate productivity growth in industrialised countries.

The microeconomic studies were even more illuminating. They found that at the firm level, there was solid evidence for the benefits of IT in terms of productivity and profitability, provided that certain organisational innovations took place. Not surprisingly, relatively more skilled labour, organised in a more decentralised manner, was important in realising the gains from IT investments: the two kinds of inputs are complementary. Countries for which such studies exist include, besides IT-leader the United States, Australia, Canada and several European nations, all highly developed economies.

For the developing world, the data has been less encouraging. At the macroeconomic level, the evidence is mixed, and mostly finds no productivity gains from IT, while detailed firm level analysis has been absent, even for large economies such as India.

Of course, there have been case studies, ranging from the phenomenal success of India?s software and IT services firms (which use IT as well as produce it) to the promise of rural IT for reducing transaction costs and improving market access and functioning (see my May 2005 column). However, the immediate interest lies in between these two extremes, where most of India?s modern economy functions.

An ongoing project (in which I am involved) headed by Subhashis Gangopadhyay at the India Development Foundation is tackling the question of the role of IT in this economic space. Using data from the Annual Survey of Industries, and an additional detailed firm-level survey, the project examines the questions of impacts of IT, determinants of IT investment, and policy implications. It is too soon to provide definitive answers, but the preliminary results are striking, suggesting that IT matters positively for productivity, for profitability and for employment (both skilled and unskilled). Note that this contrasts with aggregative results for developing economies, and the results are in some ways stronger than those for industrialised countries.

Some reflection suggests that both observations have a common root. Unlike in developed countries, IT use in India is still limited. There are a high proportion of Indian firms (especially small firms) that have no IT investments at all?this is a far cry from what obtains in the West.

Thus (as would be the case for developing countries in general), aggregate data would tend to wash out the impacts that IT has in sectors and firms where it is being implemented. This is what happened in early macroeconomic studies with US data. Also, the firms that are adopting IT are in a position similar to early adopters in the US?for them, IT may indeed be an important source of competitive advantage.

Of course (as in developed country studies), it is not IT alone that matters. Management and organisational innovation are also likely to be critical, and the causal relationships are probably too complex to be fully teased out from the existing data. Nevertheless, IT does seem to matter, even when it is commoditised in some dimensions. In fact, that may help Indian firms in the present, as they avoid the past mistakes of their Western counterparts in the early days of IT implementations.

The policy implications must also wait on further empirical analysis, but the positive correlations of unskilled and skilled employment with IT use are intriguing. Even if IT use leads to a substitution of skilled for unskilled labour, the positive output effects through better productivity performance may be a tide that lifts all boats. Of course, the danger is that as more firms take this route, the aggregate impacts will moderate, as early adopters? competitive advantages erode.

IT use will not substitute for policy reforms that make it worthwhile to employ more labour. IT use by itself will not help, if policies to expand the skilled labour force through education are not put into place. IT is not a magic bullet. But understanding the impacts of IT use on Indian firms will provide insight into how these and other firms can be more productive and competitive.

Another area where the analysis may have policy consequences is in understanding the benefits of clustering. The data will permit us to examine clustering in IT use and performance, with possible implications for the new Special Economic Zones and for regional policy in general. As I have argued before, Indian policymaking has too much of a ?seat-of-the-pants? flavour. Detailed, careful empirical analysis can help change this.

?The writer is professor at the University of California, Santa Cruz