Adverse Effects of IT Innovation in Detail - Essay Example

Adverse Effects of Information Technology Innovations 2009 Introduction The idea of technology as a driver to economic progress is not new and was mooted by early theorists like Schumpeter (1934), who found technology leading to “new combinations of productive means” or Weitzman (1998), who coined the term “recombinants of growth”, and others (cited by Varian, 2001). However, in contrast to earlier revolutionary technologies like the steam engine and automobiles, which took about 30 years to be commercialized and find their linkages across the economy, Information Technology, particularly through the Internet, has changed the parameters of business and economic growth in a relatively far shorter period of time. Since the 1990s, and more since the latter half of the decade, the adoption of IT has been a major differentiator for economic growth among countries; it has given birth to new industries and companies that have overtaken earlier global business giants in terms of revenues, so much so that IT-driven businesses are now referred to as the “new economy” in contrast to the “old economy” businesses that involved creation of physical products. The “new economy”, particularly with the dotcom boom, created euphoria in the 1990s and a resultant investment boom and bust in 1999-2000 (Varian, Farrell and Shapiro, 2004). Even old economy businesses are now finding competitive strength by employing IT in innovative strategies in production and selling. Finally, organizations are increasingly realizing that learning and knowledge are key parameters for growth and can be enhanced by garnering individual knowledge and tacit knowledge in the organization through IT. Although some innovations like the introduction of the steam engine changed the parameters of industrial production thus taking global economic growth to a higher tangent, not all innovations are equally successful in leading to economic progress. Despite the many positive effects, IT innovations have also had adverse effects on the economy and the society in terms of changing the pattern of labor demand, reducing employment and distorting international financial flows that result in skewed economic growth across countries. In this paper, I will discuss such adverse effects of IT innovation in detail. Positive effects of technological innovation For about three decades since the end of the World War II, economic growth in North America and Europe was brought about by fast accumulation of productive capital. Since the 1990s, it is thought that technological innovations – particularly in Information Technology – and knowledge sharing is the crucial factor for progress. Technological development along with addition to human capital result in more products being offered in the market as well as improvement in their quality, thus increasing consumer demand for the same. IT innovations have made companies independent of government policies. A survey by Institute for Policy Studies in 2000 found that the world’s top 200 companies’ sales were greater than a quarter of the world’s economic activity and that their combined sales were more than the combined income of all countries except he top nine (Anderson and Cavanagh, 2000). TNCs have become increasingly independent of governments and have grown through mobility of capital, technology and finance. This has been particularly facilitated by the growth of modern telecommunication and the internet that has meant that location of units are increasingly irrelevant and possibilities of growth unlimited. The positive effects of technological innovation can be reaped by organizations only when there is effective learning and knowledge management. Modern growth theories, too, postulate that there may be various points of market equilibrium as a result of different levels of learning and knowledge sharing across firms. In the endogenous growth models, the initial level of physical and human capital result in divergent growth trends on account of technological innovations. Such theories were developed in the 1980s was based on Arrow’s learning-by-doing theory, according to which technical progress is a function of capital accumulation with elasticity less than 1. So, as labor force expands, technology progresses by internalizing the new technology and the economy grows. Romer (1986) extended this theory by stating that the learning parameter of the technology progress function is at least one, so that growth can occur even when population growth is static. Capital accumulation and technology progress can then lead to economic growth even in a stationary population growth. In the endogenous growth model, technology growth occurs through positive externalities of investment through cheaper inputs, capital goods that are more efficient and suitable, learning and demonstration effects and in general creation of an environment in which knowledge is a public good that may be shared for the common purpose of technical progress. Even when individual firms face constant returns to scale, the aggregate economy grows in a self-sustaining manner. Various endogenous growth models have been theorized on the basis of Romer’s model that link learning (Lucas, 1988), research and development (Grossman and Helpman, 1990) and public infrastructure (Barro, 1990) to technical progress. Negative Effects of technological innovation Divergence of progress between countries: Empirical evidence from various countries shows that technological innovations do not necessarily lead to progress. Especially between 1995-2005 when IT innovation was at its peak, economic growth was widely divergent between countries (Robert). The economies that led in technological innovation had a first mover advantage and have influenced the pattern of development in other regions (Guillen, 2001). Hence, the global balance of power continue to be tilted towards North America and Europe, which led in almost all the early technology innovations, despite growing globalization and financial integration of the world. South Asia, being one of the most densely populated parts of the world (Shackman, et al, 2002), has entered the development and modernization trajectory but has followed the dictums laid out by the western world even in a post-colonial world. While, the sub-Saharan countries continue to remain backward and dependent on aid from the west. Government policies redundant: In an increasingly inter-linked global economy, partly as a result of IT innovations that have made possible global production processes, it is no longer possible for policy makers to manage their individual economies exclusive of what is happening elsewhere. Among the sectors that have taken to IT innovations the most is that of finance. Through networked technologies, financial organizations aim to make customer service more efficient. Internet-based banking and fast telecommunication has made global flows of capital almost instant. However, from a macro perspective, such networked technologies through the internet have not resulted in a democratic flow of capital across countries through which there could be redistribution of capital to locations where it is needed the most and the subsequent economic growth through the multiplier effect. Instead, there is a greater concentration of capital in particular countries and cities. Thus, while the networked technologies increased the number of players in the market for financial capital in terms of investors, global capital has also become concentrated in the hands of the largest investors (Dean et al, 2006). Long term strategy essential for success: Firms that take long term view on adoption of IT innovation are the ones that can reap competitive benefits out of the decision. Although the inevitability of using information technology in the context of the present business scenario, much of it is typically used in companies in fragmented manners, resulting in wastage of resources and limited integration of knowledge and information. As a result, returns on investment in information technology have been less than satisfactory (Boar, 1999). Empirically, it has been seen that ISS is most developed in financial companies while industrial companies lag behind in developing corporate strategies for information technology. However, even in financial companies, information and knowledge collected by different groups are rarely shared and used by all. Most systems are developed on the basis of projects undertaken by each group, say those of Information Technology, Finance or Manufacturing. As a result, each group works like an island, duplicating information collection efforts, devising different hardware platforms involving cost escalations, and devoting more time to collect data than to analyze them. Besides, information technology strategy is usually technology-driven with the focus on acquiring the newest technology without properly analyzing the applicability of the systems and the possibilities of integration with the present system (Wilson, 1989). Therefore the success in the use of IT depends on the prior choices that the company has made and the effectiveness of the management of the strategy. So, the firms that have higher technology capability to begin with and already have a competitive edge in technology use are the ones that benefit out of a new innovation. Changes labor demand: Rapid progress in information technology and communication implies a drastic change in production processes thus changing the labor use. This may have serious consequences on the employment and labor demand situation in a country. In manufacturing industries, IT innovations have enabled the substitution of labor by robots that are crucial in factory automation and computer-aided designing that are very important particularly in the automobile manufacturing industry. In the service industry, technological innovations like the use of video-scanned data or the point-of-sale data in the retail industry, and automated teller machines (ATM) in the banking and securities reduce the need of manpower to perform these functions (Nishimura, 2002). However, such technological innovation may not always be beneficial for organizations and give them competitive advantage. Computers are based on digital technology and software may be copied thus throwing open organizations to the threat of frauds. Transfer of knowledge and tacit knowledge, earlier learned through long experience may be acquired much more easily. For example, Dell Computers, which became a market leader in the 1990s, on the basis of its innovative supply chain and build-to-order business model, has had to face competition from its vendors who themselves have developed capabilities of manufacturing computers and provide competition to Dell Computers. Similarly, countries that gain through increased production as a result of technological innovations lose the competition as other countries too adopt similar technologies. For example, in Mexico, there was an economic boom as a result of the development of the maquiladora, that is outsourced units of US automobile and other manufacturers that came up in the border areas, as a result of innovations in technological progress and intensive use of information technology in communication in designing and management of resources. However, these units were not linked to the domestic economy and there were no multiplier effects. The direct externalities of these units were in terms of waste generation and the indirect externalities were in scarcity of water use. Population explosion in the region resulted in environmental pressures on both sides of the border (Stromberg, 2002). Even the maquiladora units have stagnated since 2000 as other even lower-cost and more efficient destinations of production were found in Asia. Distribution effects: Widespread diffusion of technology has distribution effects as the increased use of information technology and communications require the capabilities of workers to use such technologies. Hence, there is a greater demand for skilled workers in place of low-skill or unskilled labor (Nishimura, 2002). Such shift in labor demand towards skilled labor as a result of technological progress has been seen in advanced economies like the United States (Bresnahan et al, 1998) as in developing countries. Conclusion So, IT innovations do not necessarily bring about economic progress. The management of the innovations, the diffusion of technology and knowledge and the distribution of the innovative capabilities together determine the effectiveness of the innovation in bringing about economic growth. Works Cited Schumpeter, Joseph A. 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