We explore the effect of computerization on productivity and output growth using data from 527 large US firms over 1987-1994. We find that computerization makes a contribution to measured productivity and output growth in the short term (using one year differences) that is consistent with normal returns to computer investments. However, the productivity and output contributions associated with computerization are up to five times greater over long periods (using five to seven year differences). The results suggest that the observed contribution of computerization is accompanied by relatively large and time-consuming investments in complementary inputs, such as organizational capital, that may be omitted in conventional calculations of productivity. The large long-run contribution of computers and their associated complements that we uncover may partially explain the subsequent investment surge in computers in the late 1990s.

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There is good reason to believe that R&D in‡uences on TFP growth in other sectors are indirect. For R&D to spill over, it must …rst be successful in the home sector. Indeed, observed spillovers conform better to TFP growth than to R&D in the upstream sectors. Sectoral TFP growth rates are thus interrelated. Solving the intersectoral TFP equation resolves overall TFP growth into sources of growth. The solution essentially eliminates the spillovers and amounts to a novel decomposition of TFP growth. The top 10 sectors are designated ”engines of growth ” led by computers and o¢ce machinery. The results are contrasted to the standard, Domar decomposition of TFP growth.