Economic Report of the President

Innovation and the Information EconomyChapter 6, Innovation and the Information Economy, provides an overviewof recent developments in information technology and discusses some of theeconomic issues relevant to this especially dynamic sector of the economy.Innovation and information technology are increasingly key contributors toeconomic growth and productivity. Our Nation’s growing prosperity dependson fostering an environment in which innovation will flourish.Information technology has made many workplace tasks easier, boostingpeople’s productivity. One recent study finds that labor productivity in thenonfarm business sector grew at an annual rate of 2.4 percent from 1996through 2001, and attributes nearly three-quarters of this growth to the accumulationof information technology capital together with improvements inhow people use this capital. Of the 2.9 percent growth in real gross domesticproduct (GDP) in 2003, some 0.8 percentage point was attributable toinformation technology.A key development of the growing information economy is that more peopleare using computers and communicating over the Internet. Usage of theInternet includes email and the rapid growth of e-commerce, which includestransactions with consumers and transactions between businesses. Consumershave benefited from e-commerce through the greater variety of goods availableonline and through the additional competition and lower prices resulting fromthe spread of e-commerce. A downside is the rise of online theft, vandalism,and fraud. The Administration has taken actions to protect property rightsand ensure that the Internet and other new technologies are safe venuesfor commerce.The process by which innovations such as the Internet come about involvesthe invention, commercialization, and diffusion of new ideas. At each of thesestages, people are spurred to action by the prospect of reaping rewards fromtheir investment. Government thus has an important role to play in definingand protecting property rights in intellectual and physical capital so thatentrepreneurs will be spurred to innovate.In a free market, innovators vie to lower the cost of goods and services, toimprove their quality and usefulness, and—most importantly—to developnew goods and services that promise benefits to customers. An innovationwill succeed if it passes the market test by profitably delivering greater valueto customers. Successful innovations blossom, attracting capital and diffusingrapidly through the market, while unsuccessful innovations can wither just asquickly. In this way, markets allow capital to flow to its highest-valued uses.Competition drives the broad diffusion of innovative low-cost, high-qualityinformation services. This has held true in markets for mobile wirelesstelephones, satellite television, and dial-up and broadband Internet services.24 | Economic Report of the President