Small business and computers: adoption and performance

Until recently, little evidence suggested that the computer revolution of recent decades has had much impact on aggregate economic growth. Analysis at the worker level has found evidence that use of computers is associated with higher wages. Although some research questions whether this finding is solely due to unobserved heterogeneity in worker quality, others point to such results as evidence that the wage premia for skilled workers have increased over time. Adoption of new technologies is associated with higher productivity and higher productivity growth. As in the worker literature, firms adopting computers may simply be more productive firms. Using new data from the 1998 Survey of Small Business Finances, I examine the determinants of computer adoption by small, privately-held firms and analyze whether computer use affects profits, sales, labor productivity, or other measures of firm success. I am able to control for many firm characteristics not available in other data sets. I find that computer adoption is more likely by larger firms, by younger firms, by firms whose markets are national or international, and by limited liability firms. Adoption is also more likely by firms founded or inherited by a current owner and by firms whose primary owners are more educated. Firms with more than 50% of their ownership shares held by African Americans or Asians, and, in some specifications, firms with more than 50% of their shares held by Hispanics are less likely to have adopted computers, echoing results for households in the literature. Evidence concerning the link between computer use and firm performance is mixed. Current performance as measured by profits or sales is not associated with current computer use in the full sample. In some specifications, use of computers for specific tasks is associated with higher costs. Estimates of the effects of computer use on costs are larger (in absolute value) when the sample is restricted to manufacturing or wholesale trade firms or to larger small businesses. Estimates using the more parsimonious set of control variables widely available in other firm level data show large and positive effects of computer use on firm costs, sales, and profits, suggesting that controlling for managerial, firm, and owner characteristics is important.