Fact of the Week: When the Most Productive Firms in Estonia Have More Access to Broadband Internet Service, Their Productivity Growth Increases Five Times More Than Average

Source: Natia Mosiashvili and Jon Pareliussen, “Digital technology adoption, productivity gains in adopting firms and sectoral spill-overs: Firm-level evidence from Estonia,” Organization for Economic Cooperation and Development, Economics Department Working Papers No. 1638, December 16, 2020.

Commentary: The extent to which adoption of information and communications technologies increases productivity growth is well known, but little work has been done comparing how productivity growth varies amongst firms with different levels of productivity to start with. Two economists from the OECD examined the potential increases in productivity in Estonian firms from adopting office-focused digital technologies, such as computers and broadband Internet. Data was gathered from 2,725 firms with more than 10 employees that participated in the 2016 Community Survey on ICT Usage and E-Commerce in Enterprises. The authors examined the annual percentage change in labor productivity in a given sector based on productivity growth in “frontier” firms—the top 5 percent firms in terms of productivity that adopt digital technologies—and the productivity gap between “frontier” firms and “non-frontier” firms, while controlling for firm age, size, and whether or not the firm is an exporter. The authors found highly significant results in that annual labor productivity growth resulting from a 1 percent increase in broadband Internet for all firms is 20 percent of that of “frontier firms,” and with a 1 percent increase in computer use, non-frontier firms have 23 percent of the productivity gains that “frontier firms” have. However, investment in the average firm increased by 3.7 percent and 3.5 percent, respectively, for a doubling of broadband and the share of employees that use computers, respectively. These results point to continued productivity gains from ICT investment, but divergent productivity growth between the most productive firms and those with average levels of productivity.