In this guest blog post, Dr Anna Valero and Professor John Van Reenen examine the evidence on technology adoption through the pandemic and what it means for the UK’s future of work and productivity crisis. New evidence offers a basis for guarded techno-optimism: the positive effects of the pandemic on technology adoption probably outweigh its negative effects.
The COVID-19 pandemic overlays the UK’s productivity crisis. Productivity growth has significant implications for job creation and wages and so requires renewed attention in order to mitigate the double disruption of the pandemic and Brexit. Low adoption of new technologies has been part of the explanation of weak UK productivity. According to the WEF World Competitiveness report (2019) “ICT adoption, while increasing, remains low by OECD standards: the [UK] ranks 31st globally and only 16th in Europe”.
A key question for policymakers in 2021 will be: can increased technology adoption help buck this trend and lay foundations for abetter future of work across the country?
Downsides. Mainstream economic theory would predict that the Pandemic should slow technology adoption via a number of mechanisms. First, COVID-19 and the necessary government-imposed restrictions to contain it have had a major negative effect on demand. The OBR predicts UK GDP will shrink by over 11% in 2020 - the largest drop in annual output since the Great Frost of 1709. Falling demand reduces the return to investments, including those in technology, as there are fewer customers to buy any increase in output.
Second, not only is demand lower, but making predictions is harder. In other words, COVID-19 has engendered greater uncertainty. Since investing in new technologies is mostly irreversible, firms are likely to delay making decisions until this uncertainty gets resolved. There is a growing body of evidence that uncertainty has a large chilling effect on investment.
Third, there has been a large hit to company cash flows. Capital markets are highly imperfect as revealed by the banking crisis and a multitude of empirical studies. Hence, hits to liquidity will also constrain investment, and this might particularly be the case with respect to risky investments in new technologies by Small and Medium Sized Enterprises (SMEs).
Finally, the huge amount of managerial time absorbed dealing with the immediate COVID-19 crisis likely takes time away from considering longer-run strategic issues around new technologies.
Upsides? But there are several countervailing forces. First, firms are investing in new technologies to deal with the disruption. For example, with so many employees working from home, firms may respond by investing in software platforms that facilitate meetings and scheduling (like Zoom) and producing with less face to face interaction by using automotive technologies like robotics.
Second, the impact of the Pandemic is likely to be harder on less efficient, low-tech firms. Experience of other bad times, such as recessions and trade shocks, suggests that less productive firms will shrink and contract by the most. If the resources are reallocated towards more productive and higher-tech firms this “creative destruction” effect will raise aggregate productivity and technology intensity.
There are some theories suggesting that some positive activities could emerge from bad times as firms respond to the Pandemic by changing themselves. Local restaurants using their wholesale supply chains to market fresh produce direct to the public, for example, and there often appears to be surprisingly large amounts of innovation in recessions (e.g. Babina, Bernstein and Mezzanotti, 2020 or Aghion and Saint-Paul, 1998) and after the Chinese import shock (e.g. Bloom, Draca and Van Reenen, 2016).
So, what does the empirical evidence say?
In the months since the crisis began to unfold, several survey-based analyses suggest that COVID-19 has accelerated the adoption of technologies. In a survey of UK businesses conducted in collaboration with the Confederation of British Industry in July 2020, Riom and Valero (2020) find that more than 60% of firms had adopted new digital technologies (e.g. remote working technologies or cloud computing) or new management practices since the start of the pandemic, and nearly 40% invested in new digital capabilities (such as e-commerce or advanced analytics). The majority of respondents stated that the pandemic prompted or accelerated these changes.
Other studies have also found that COVID-19 has accelerated the adoption of digital technologies. Be the Business (BTB) and McKinsey find that UK SMEs significantly accelerated their adoption of technology, undergoing “three years’ worth of innovation in just three months of the lockdown period”. Another recent survey of small businesses with fewer than 10 employees (BTB- Lloyds, 2020) shows that across different types of digital technologies, between 10-20% of micro-businesses have started using them since the crisis (and these rates are higher for the larger firms within this category).
In general, businesses expect these changes to outlive the crisis. Riom and Valero (2020) find that the vast majority (over 90%) of innovating firms intend to keep such changes in place once the immediate crisis is over. At the time of the survey, most firms considered adoption to have had a positive impact on business performance so far, and most expected it to increase employee productivity, or allow employees to be reallocated to different tasks, rather than reduce the need for employees over time.
BTB-McKinsey (2020) report that 45% of SMEs expressed willingness to invest in technology post-COVID-19; and BTB-Lloyds (2020) find that of those that have started using/are using more of digital technologies, the majority intend to carry on using them. As COVID-19 uncertainty recedes with the new vaccines this might help cement in changes (although Brexit-type forces may push in the opposite direction).
We note that businesses consistently report that financing/cost constraints are key barriers to adoption (see Figure 1 and the UK Innovation Survey (2019) on innovation activities more broadly) and the longer the crisis lasts; the more these are likely to be felt.
A range of complementary factors, including digital/management skills and access to improved broadband infrastructure will also determine the extent to which firms are able to successfully adopt technologies into the future. BTB-McKinsey consider barriers on both the business demand, and technology supply side outlining how the technology adoption journey is challenging, particularly for smaller businesses, and argue that simultaneous action across these is likely to be required in order to sustain an improved technology trajectory into the future.
Each of the factors we have identified have implications for the amount, nature and conditions of work across the UK, and for labour market transitions more widely. It is as yet unclear the extent to which demand for labour is changing in response to the technology adoption that has occurred since the onset of COVID-19, though many highlight the potential negative impacts of workers in certain sectors or occupations from “forced automation.” This is particular concern given that the UK is currently transitioning from an extended period of rising employment to one of rapidly rising unemployment. So far this has been exacerbating pre-existing inequalities and creating real risks of labour market scarring, particularly for certain demographic groups such as younger workers.
The positive response of firms to the crisis in terms of technology adoption (and the introduction of new products) in the short term can be contrasted with the impacts on more long-term innovation activities such as R&D. In a survey conducted in June/July 2020, Roper and Vorley (2020) find that nearly 80% of Innovate UK grant holders had either stopped or reduced R&D activity due to immediate disruptions.
The COVID-19 crisis creates new risks for innovation in firms particularly for those facing new financing constraints in light of changed demands or increased costs due to the pandemic that might cause them to reign in investment in innovation, or even threaten their survival. A number of studies have shown that R&D activity tends to suffer in downturns, and Aghion et al. (2012) find that this was particularly the case for credit constrained firms following the financial crisis.
There is also evidence that the pandemic is shaping the direction of innovation. Clearly, the pandemic has stimulated R&D in a number of areas directly relevant to dealing with and exiting the pandemic including vaccine development, ventilators and personal protective equipment. Bloom et al. (2020) analyse the text in U.S. patent applications and show that COVID-19 has shifted the direction of innovation toward new technologies that support video conferencing, telecommuting, remote interactivity, and working from home.
Importantly, this highlights the extent of what can be achieved when the public and private sector work in partnership to address urgent societal challenges, and lessons from this experience should now be applied to climate change. Looking forwards, policies and investments related to the new “Ten Point Plan for a Green Industrial Revolution” must be accelerated to further change the direction of innovation towards clean technologies, where there is significant job creation potential in the short and longer run. Indeed, there are many areas where the UK has international comparative advantage in clean technologies, and where the economic benefits felt in the UK appear to be large.
There is an important role for policy to address some of the new and pre-existing barriers to technology adoption faced by firms, as well as more broadly in terms of securing a sustainable and inclusive recovery to the pandemic. Increasing focus on the evaluation of business support programmes and incentives in recent years has begun to shed light on what works. To date, we know relatively more about stimulating innovation than its diffusion. The extent to which lessons from the past still apply is still unclear and the need for evaluating and adjusting policy, in light of what works, is particularly important.
The evidence suggests that swift consideration of boosted policies aimed at improving responsible technology adoption in the “Long Tail” of SMEs will be needed in 2021. Given rising unemployment and labour market displacement due to the pandemic it is also clear that programmes to encourage technology adoption must be complemented by bold programmes to support worker transitions, including up- and re-skilling, aimed at building smarter, more sustainable and inclusive future.
This blog post draws from a forthcoming Economics Observatory piece, “Impact of Covid-19 on Technology Adoption”
Anna Valero and John Van Reenen