Catching up or getting stuck? Europe's troubles to exploit ICT's productivity potential

In this paper we extend our previous analysis of the comparative productivity performance of Europe and the U.S. to 2004, thereby covering the latest full business cycle. Our main finding is that the slower contribution of ICT to productivity growth in the EU compared to the U.S. has persisted into the early part of the 21st century. The growth differential even increased since 2000, as the U.S. shows strong labour productivity advances in market services. This may be related to a more productive use of ICT in the U.S.. However, at industry level we find no support for significant TFP (total factor productivity) spillovers from ICT investment, neither in the U.S. nor in European countries. In the 1980s we even find that ICT investment and TFP growth are negatively related, with at best normal returns in the 1970s and 1990s. We speculate that this U-shaped pattern is driven by “hard savings” from ICT investment that first lead to earning normal returns, followed by a period of experimentation during which ICT and TFP growth are negatively related. Ultimately, “soft savings” lead to productivity gains from ICT in line with the marginal cost of ICT. We argue that the realization of productivity effects from soft savings is highly dependent on the competitive process that stimulates complementary innovations and weeds out inefficient users of ICT technology. Europe risks getting stuck in an environment where the productivity gains from soft savings from ICT remain unrealized