Study: Effect of changing technology use on plant performance in the manufacturing sector

According to a new study, manufacturing companies that increased their use of advanced technology during the mid-1990s also experienced greater growth in labour productivity during the same period.

The study also found a significant link between productivity growth and growth in market share. In other words, advanced technology use led to growth in labour productivity, which in turn led to growth in market share.

Productivity growth measures the efficiency with which labour is employed in the production process. It is an essential contributor to the prosperity of Canadians over the long run.

This study investigated the extent to which the adoption of advanced technologies by manufacturing plants between 1993 and 1998 was associated with superior growth and productivity performance.

The study linked data from the 1993 Survey of Innovation and Advanced Technology and the 1998 Survey of Advanced Technology in Canadian Manufacturing so that the technology profiles of manufacturing plants could be compared over time.

These two surveys made it possible to not only profile the technology use of each plant, but to also examine whether or not plants perform research and development, or whether they are foreign-owned. The surveys also showed the emphasis that plants place on several competencies, from human resources to implementing new technology.

Investment in advanced technology key for productivity growth

Adoption of advanced technology can result in gains in labour productivity for a number of reasons. Use of these technologies can result in improvements in production efficiencies, as firms are able to produce more with less. Or they may allow firms to produce higher quality products. Furthermore, they may even result in an increase in the capital intensity of the firm.

This study found that growth in capital intensity was the single most important factor contributing to growth in labour productivity between 1993 and 1997, which is consistent with previous studies. The more capital-intensive a firm is, the greater the productivity growth.

However, this was partly the result of the ever-increasing share of capital coming from investments in information and communications technologies (ICTs). Plants that had invested heavily in advanced technologies were more likely to enjoy higher productivity growth.

Between 1993 and 1998, the use of advanced manufacturing technologies in Canadian manufacturing plants increased dramatically. Plants using network communications technologies increased from 18% to 47% of the population. Plants using integration and control technologies increased from 24% to 49%.

The study finds that Canadian manufacturing plants that increased their use of these advanced technologies during this period had higher productivity growth than those plants that did not increase their technology use.

Use of ICTs during production ordering process leads to productivity gains

This study also sheds light on how ICTs contribute to success. The study found that the highest growth was in the adoption of network communications technologies (local area networks, company-wide networks and inter-company networks).

Information and communications equipment can be used for a variety of purposes, such as keeping databases for analysis, engaging in financial transactions, selling products over the Internet and facilitating the ordering process.

According to the study, firms that used their electronic communications networks to improve the efficiency of their ordering processes were more likely to have improved their productivity.

This is consistent with previous studies that found that an emphasis on just-in-time inventory practices could be found in those firms that were more successful.

Growth in labour productivity key factor behind market-share growth

Over the period studied, plants exchanged substantial amounts of market share as some plants grew and others declined. About 15% of market share in an average four-digit industry was transferred from continuing plants that lost market share to plants that gained market share. At the beginning of the period, plants that subsequently increased their market share were 16% less productive than those about to lose market share; by the end of the period, they had become 17% more productive.

Growth in market share is strongly linked to growth in labour productivity. Firms with greater labour productivity growth typically experienced increases in their market share.

Technology growth was found to have both a direct and an indirect effect on market-share growth. First, it was linked to productivity growth, which in turn has strong positive ties with market share growth. In addition, technology growth has a direct effects on market-share growth, most likely because of its impact on product innovation.

By the end of the period, the market rewarded those who managed to improve their efficiency or the quality of their product and hence their labour productivity, with an increase in market share.

Research and development important for market-share growth

Complementary investments in firm competencies were also shown to be important. Firms did particularly well if they stressed a strategy that focussed on the use of advanced technologies.

Research and development was also found to be related to the growth of a plant's market share. Research and development strategies, as well as advanced innovation strategies, are complementary factors that contribute to the development of new products.

The economic analysis study The Effect of Changing Technology Use on Plant Performance in the Canadian Manufacturing Sector (11F0027MIE2004020, free) is now available online. From the Our Products and Services page, under Browse our Internet publications, choose Free, then National Accounts.

More studies on technology and innovation can be found on the Update on Economic Analysis page (11-623-XIE, free) of our website.

For more information, or to enquire about the concepts, methods or data quality of this release, contact David Sabourin (613-951-3735; david.sabourin@statcan.gc.ca), Industrial Organization and Finance Division.