Producing Synergy: Innovation, IT, and Productivity

Bringing innovations to market is critical to industrial progress and economic growth. We explore the potential for information technology (IT) to enable innovations, and thus improve productivity. We hypothesize that a knowledge stock of process‐oriented research and development (R&D) increases total factor productivity growth by leveraging traditional forms of capital and labor, and further enhances the ability of IT capital to increase productivity. We estimate these relationships using two broad panels of U.S. industries covering the periods 1987–1998 and 1998–2005. The results indicate qualified support for a synergistic effect of R&D and IT investment in both periods.