The perplexing impact of technology on productivity

Many see technology as the way out of the lagging global productivity crisis — but its results so far have been murky at best. However, digitization and artificial intelligence — along with broader economic adjustments — are seen as the best hope for moving productivity in the right direction.

In the years following the financial crisis of 2008-2009, “investment fell sharply and persistently, failing to create anything to take its place,” a recent analysis, published by the McKinsey Global Institute, reports. “But today, targeted investments in areas such as digitization, automation and artificial intelligence could fuel new waves of productivity growth.” Only genetic AI could add an extra boost of more than 0.5 percentage points, they add.

But the effects of these technological initiatives can quickly fade, warns the report, written by Jan Mischke and a team of McKinsey co-authors. And while there were notable increases in productivity in the information, computing, telecommunications (ICT) sector, it did not trickle down to other industries.

Four reasons may account for this, say the co-authors:

• The benefits of technology and digitization are long term. “Digital and technology adoption is a long-term phenomenon,” they report. Consider the lag between electricity development and its effects on productivity. The early years of a new technology may even “cause a slowdown in productivity growth before it can be beneficially adapted.”
• Overlapping parallel processes reduces the benefits. “Digitalization has also led to an overlap of online and offline channels, giving customers more choice, but providing productivity benefits only when offline channels are streamlined or discontinued.”
• Returns are diminishing. A second proposed reason is that the digital and other innovations of the past decade may simply be less transformative than previous innovations.
• Productivity metrics are outdated. It is likely that “current measures of productivity do not capture the increases in value added that these technologies promote,” the McKinsey co-authors report. “Many new benefits are built into products or services for free, for example, which means productivity statistics don’t capture them. The best available evidence suggests that poor measurement can explain up to 10 percent of the overall slowdown in productivity growth, a relevant but relatively small effect.”

It takes more than simply putting technology into an organization to produce results — the organization itself must adapt to changing realities. The technology’s productivity benefits will come “only through faster creative destruction, market share shifts, and adoption of technologies, ideas, and best practices,” they say.

Specifically, “several AI applications have significant productivity potential, and there are indications that they could scale faster than previous technologies,” the McKinsey authors add. “While the direction and impact of AI is uncertain – and grand claims for any new technology solution are often exaggerated – several proven productivity-enhancing use cases have already emerged,” boosting performance in functions such as sales and marketing, operations customer and software development.