Proving the Business Case for the Internet of Things

Ericsson finds link between IoT and productivity

Steve Rogerson
May 13, 2020



There is a link between the number of IoT connections per inhabitant and productivity growth, according to a research article by Ericsson Research in collaboration with Imperial College London.
 
Productivity can be crucial in spurring economic development, which in turn creates a wide range of opportunities that enable people to escape poverty. Increasing productivity will be most urgent for countries wanting to recover from the economic turmoil caused by the Covid-19 pandemic.
 
The results of the research suggest that a ten percentage points increase in the growth of cellular IoT connections per inhabitant is associated with a 0.23 percentage points increase in total factor productivity (TFP) growth, which amounts to a contribution of $197bn, based on world GDP in 2018.
 
IoT cellular connections have been growing very rapidly during the past decade. The growth in absolute figures has been particularly strong in China. The annual growth worldwide has been 40 per cent, while the corresponding figure for China is 70 per cent. Moreover, China had the second highest share of cellular IoT connections per capita. Sweden was the only country with a higher density.
 
“It is argued that IoT will impact both consumers and industries,” said Harald Edquist, master researcher at Ericsson. “The latter will be observed in measured productivity, but the former may not if time-savings, free goods or quality improvements are not fully reflected in measured prices. We argue that productivity effects will occur via two channels. Firstly, via capital deepening (an increase in the capital-to-labour ratio), as firms invest in connectivity equipment for their machines. Secondly, in the form of TFP growth, which may be due to increased efficiency and optimisation in the production process, complementary innovation, and the accumulation of complementary intangible capital, including organisational capital and spillovers or network effects from the accumulation and deployment of communications capital.”
 
Based on data from 82 countries from 2010 to 2017, the research found a strong association between the change in IoT connections per inhabitant and TFP growth, suggesting large effects in the early stages of diffusion.
 
Researchers observed growth in IoT connections per inhabitant of 30 per cent per annum in the sample, implying a yearly contribution to TFP growth of 0.69 per cent. This is equivalent to a contribution of $592bn, based on world GDP in 2018.
 
“Even though this study is based on data before the world economy was hit by the Covid-19 pandemic, increasing productivity will be a key factor to a quick economic recovery,” said Edquist.
 
To test the robustness and provide a cross-check on econometric results, the researchers proceeded with growth accounting methods. Growth accounting implies that economic and productivity growth is decomposed into components associated with changes in factor inputs and a residual that reflects technological progress and other elements.
 
The analysis distinguishes between the capital deepening and TFP effects of IoT. Of that, the capital deepening effect of IoT turns out to be relatively small. This is because, while the projected rates of IoT investment growth are high, the associated user costs and factor income share will be initially low, since IoT is a new technology. At later stages of diffusion, growth rates in investment and capital services will slow, and IoT user costs and the income share will rise in line with the higher level of the capital stock. The analysis suggests that the indirect effects of IoT on TFP growth may be considerably larger.
 
Using estimates of current IoT investment and the investment profile observed during the previous wave of the ICT revolution, the researchers found an IoT contribution at around 0.99 per cent per annum of growth, which is equivalent to $849bn of global GDP. Moreover, the analysis shows that the key parameter in forecasting the IoT growth contribution is the starting value for IoT investment, for which no official data are yet available. Thus, the results are quite sensitive to the assumptions made about the initial starting values of IoT investment.
 
TFP is economic growth not attributed to inputs of capital and labour and therefore productivity achieved by using new technology and smarter organisation of production. As a result, TFP is achieved without additional inputs of resources.
 
“Productivity play a key role in spurring economic development and creating a range of new opportunities that enable more people to escape poverty,” said Edquist. “Hence, increased productivity will release resources that make it possible to improve other important sustainability goals such as health, pollution, security and education.”