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CESifo Economic Studies Advance Access originally published online on July 8, 2008
CESifo Economic Studies 2008 54(3):386-413; doi:10.1093/cesifo/ifn018
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© The Author 2008. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org

The Rise and Fall of German Productivity Software Investment as the Decisive Driver

Theo S. Eicher* and Thomas Strobel{dagger}

*Department of Economics, University of Washington and Ifo Institute for Economic Research at the University of Munich, e-mail: te{at}u.washington.edu

Investments in Information and Communication Technology (ICT) are the source of the global growth resurgence that commenced in the mid-1990s. Most studies focus on broad ICT measures, or on computer hardware; here we examine the contributions of software-intensive industries to productivity growth. The price of prepackaged software has been falling exponentially since the 1960s, which has led to substitutions towards software investments, and to reductions in the total cost of ICT hardware investments. We use novel German ICT investment data to show that software-intensive industries have been the crucial determinant of German productivity growth since 1995. Not only did these industries contribute strongly to productivity growth, but they offset declining investments and productivities in other industries. Post 1995, other industries’ investments in new equipment per worker collapsed, while software-intensive industries’ capital investments rose steadily to generate over half of Germany's productivity growth by 2000–04. We document sharply diverging productivity paths for software-intensive and other (non-software-intensive) industries. Post 1991, total factor productivity (TFP) declined secularly in other industries to generate a –0.39 percent drag on German labor productivity by 2000–04, while TFP in software-intensive industries rose steadily to contribute 35 percent to German labor productivity growth by the same period. Overall, the results combine to paint a stark picture of rising capital per worker and TFP growth in software-intensive sectors, contrasting with falling capital per worker and increasingly negative TFP growth in other sectors. About two-thirds of the impact from software-intensive industries is generated by investments in prepackaged and purchased custom software. (JEL codes: O03, O04)

Key Words: Software-intensive industries and productivity growth • industry productivity analysis • growth accounting

{dagger} Ifo Institute for Economic Research at the University of Munich and Department of Economics, University of Munich, e-mail: strobel{at}ifo.de


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