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How Does Technology Affect the Economy?

by Katie Moritz
February 13, 2017 | Our Future

Looking back at human history, technological advancements serve as mile markers for where we were as people: the invention of the wheel, the telephone, the dial-up modem. These developments changed the world and how we interact with it. But how do innovations from technology companies affect the economy?

technology pbs rewire

A new study of more than a million patents issued over the past 100 years shows that not only do technological advancements have a positive impact on the economy, they actually expand it. Eras marked by technological innovation, such as the 1920s, 1960s and 1990s, pushed industries to produce more, actually growing the economy and improving the country's financial health.

“If innovation were only about McDonald’s getting ahead of Burger King, we wouldn’t really care,’’ said Amit Seru, a professor of finance at the Stanford University Graduate School of Business and co-author of the study, to the university. “But our study shows that something more important is happening. When firms innovate, they are expanding the pie, and we see increased aggregate growth.”

Researchers from Stanford, the Massachusetts Institute of Technology, Northwestern University and Indiana University looked at 1.8 million patents granted to publicly traded companies from 1926 to 2011. They measured how much a company's stock price was impacted by news that it had been issued a new patent.

They found that a new patent had a measurable impact on the stock price of a company a day or two after it was announced. They also found a correlation between the pace of a company getting new patents and how much that company grew and competed with other firms. The more game-changing patents they racked up, the bigger they grew and the better their edge was over others.

The top 10 most innovative companies grew between 1 and 3 percent faster in the following five years than companies that innovated at the average pace. The growth of companies that trailed behind their industry's average innovative pace slowed by as much as 2.5 percentage points, the research team found.

technology pbs rewire

But how much does innovation actually grow the size of the economy? The researchers found by looking at the data that a boom in technologically innovative products actually correlated to a boost of the annual U.S. economic output by between 0.6 and 6.5 percentage points. Considering the U.S. economy's average growth since 1947 is less than 3.5 percent per year, that nudge can make a big difference.

So if you're choosing where to invest your money, technology is a safe bet for growth. And if you have an idea for a product that would push the innovation boundaries, you could be sitting on something that could impact not just your own bottom line, but the entire country's economy.

Katie Moritz
Katie Moritz was Rewire's senior editor from 2016-2020. She is a Pisces who enjoys thrift stores and pho. Follow her on Twitter @katecmoritz.
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