Techonomics Talks | 21 May 2024

Tech Software Investment | Techonomics Talks

Victoria Tribone

Economist, Industry

Despite inflation and interest rates at levels unseen in three decades, industries continue to invest heavily in software fueled by its ability to improve an industry’s productivity and financial performance.

In our latest Techonomics Talks, join Victoria Tribone, Economist and Data Scientist, as she examines the connection between software investment and productivity growth.

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Research Briefing

US investments continue to power profits growth

US business investment continues to advance, despite fears it would tumble in 2023 ahead of a widely anticipated recession.

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I’m Victoria Tribone, an Economist with the US Industry team here at Oxford Economics. Despite inflation and interest rates at levels unseen in three decades, industries continue to invest heavily in software, fueled by its ability to improve an industry’s productivity and financial performance. Over the three and a half years since the Covid 19 recession, US private businesses spent 11.7 trillion on new fixed investments, which corresponds to an inflation adjusted growth rate of 18.3%, compared to 10.5% increase in GDP.

Software investment specifically, is now 38% higher in inflation adjusted terms since Q3 2020, and continues to become an increasingly relevant share of investment for all industries. Industries that spend the most on software are concentrated in the tech producing industries, such as data processing and internet services, broadcasting and telecoms, and computer system design services, and in finance and insurance and professional service industries.

From a manufacturing perspective, chemical and computer and electronic product manufacturing rank highest. The reason the manufacturing industries don’t rank higher in software investment is in part because much of their investment in intellectual property is focused on R&D in, for example, semiconductors, motor vehicle design and medical research. Much of this R&D relies significantly on cutting-edge technology, so there is a strong link between R&D and software development,

But we’ll stick to software investment here. Leveraging Oxford Economics US Tech Spend Monitor data set, which provides insights into various industries tech buying patterns, we can zero in on spending patterns on software specifically. Manufacturers and non-tech service industries tend to invest in prepackaged, “off the shelf” software and bespoke custom software developed by IT specialists, whereas tech providers unsurprisingly invest in a significant amount in own account and in house software development

Increasingly prepackaged software, faces competition from cloud solutions – the benefits to cloud are multiple, as they i) don’t require large upfront capital costs ii) are scalable, cost effective and agile, and iii) much of the cutting-edge software development, including artificial intelligence, is often cloud native. Therefore, we expect prepackaged software specifically to lose share in the capex mix in the medium term.

So what’s the impact of all this software investment? There’s a clear boost to productivity. Investment in software has the largest estimated impact on productivity, with a 1% increase translating into an estimated 0.1% increase in GDP per employee. This is compared to the 0.2% estimated increase in investment in tech hardware, and a 0.1% increase for all other nonresidential fixed investment.

The boost to productivity, in turn, improves the financial performance of software heavy industries by improving their efficiency. Specifically, we estimate that investment in software boosts an industries asset turnover ratio, a measure of how efficiently assets are being deployed to generate revenue. We therefore expect industries such as information and professional and business services that have strong investment in software to have both above average productivity growth and a bright profits outlook in the coming years.