Industry Level Supplier-Driven IT Spillovers

In this research we model and estimate the effects on productivity downstream from information technology (IT) investments made upstream. Specifically, we examine how one industry’s productivity is affected by the IT capital stock of its suppliers. These supplier-driven IT spillovers occur because, due to competition in the supplying industry, quality benefits from suppliers’ IT investments can pass downstream. If the output deflators of supplying industries (consequently the intermediate input deflator of the using industries) do not capture the quality improvement from IT, then the output productivity of the supplying industries is mis-measured or mis-assigned. We develop and empirically test a model capturing these supplier-driven effects using data on 85 three-digit SIC manufacturing industries. We find that for a 10.5% increase in suppliers’ IT capital, the suppliers’ output increases by 0.63%-0.70%, more than covering the cost of the increase in suppliers’ IT capital. In addition, this increase in suppliers’ IT capital increases the average downstream industry’s output by between $66M and $72M, thereby confirming substantial supplier-driven IT spillovers downstream. We also infer the magnitude of the measurement error of the price deflator of the intermediate input resulting from the failure to account for IT-related quality improvement, finding that the measured price deflator overestimates the true deflator by approximately 30% at the mean level of IT capital.