Main Street in the Digital Age: How Small and Medium-Sized Businesses Are Using the Tools of the New Economy

Robust investment in information technology (IT) played a major role in the acceleration of output
and productivity growth from 1996 to 2000. Until now, however, very little was known about the
extent to which small and medium size enterprises (SMEs) were taking part in the digital economy.
This report examines new evidence of how small and medium-sized businesses are faring in the
new economy—their IT investment, their online activities, and the computer experience of their
employees.
Small businesses are indeed investing in and using the tools of the new economy. Small and
medium-sized firms invest about a quarter of their total capital expenditures on computers and
communications equipment. A Federal Reserve Board study found that over 70 percent of small
and medium-sized firms use computers in their businesses and our best evidence from a
combination of Census and private sector data suggests that a majority of SMEs are also Internet
subscribers.
Yet, the evidence also shows that while SMEs and larger firms spend roughly the same proportion
of their investment budget on IT, SMEs invest less on a per employee basis. In two IT categories,
computers and communications, enterprises with more than 500 employees invested roughly
$8,700 per employee in 1998, those with between 100 and 499 employees $3,700, and those with
fewer than 100 employees less than $2,500. As a result, firms with more than 500 employees
invested twice as much per worker in IT as the 100 to 499 group and four times as much as the
below 100 employee firm.