The Impact of IT on Firm TFP Growth and Resource Reallocation within Firms

This paper examines the relationship between firm's IT adaptation and its TFP improvement by using Japanese firms and establishment level data. Our estimation results indicate that the rate of TFP growth is higher in firms and their manufacturing establishments (in the manufacturing industry) when the firms advance the IT adaptation. Our estimation results also show that there is a positive relationship between firm's IT adaptation and the expansion of its overseas activity, such as international trade between headquarters and its overseas affiliates, the number of employees, and R&D activities in the overseas affiliates. In addition, our results suggest that higher IT adaptation of a firm leads to the increased production of domestic high-productivity manufacturing establishments, and conversely decreases the production of low-productivity establishments. These estimation results imply that firms with greater IT adaptation improves its TFP through reorganizing domestic and overseas production.