IT investments and growth - The role of information and communication technologies in economic development: a partial survey

4.1.2 IT investments and growth
While the previous set of studies dealt with the effects of telecommunications on growth,
more recent studies have used the neoclassical growth-accounting framework to examine how
investments in computers contribute to growth. A representative study of this type is provided
by Niininen (1998). The author begins with a standard growth equation and decomposes Finnish
economic growth between 1983 and 1996 into portions that may be attributed to capital, labor
and multi-factor productivity. Subsequently, this model is augmented to include the effects of IT
on growth, i.e., by examining the contribution of the stock of computer hardware, software and
computer labor to growth.
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This finding reflects the “big-push” argument. Due to scale economies, the lumpiness of investment and the
externalities generated by infrastructural investments, substantial investments in infrastructure may be required
before there is a payoff. As Rosenstein-Rodan (1964) put it, “a high initial investment in social overhead capital
must either precede or be known to be certainly available in order to pave the way for additional more quickly
yielding directly productive investments.”
The Role of ICT in Economic Development – A Partial Survey
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The results indicate that, compared to other inputs, IT exerts quite a strong influence on
real growth in output. While 11 percent of the net mean annual growth of 2.36 percent may be
attributed to capital, almost 8 percent may be attributed to IT investments. This high share of IT
in growth may be attributed to the sharp increases in the rate of growth of computer hardware
and software. As for the other components, the contribution of labor is negative, while that of
multi-factor productivity (MFP) is more than the total growth rate.
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Niininen’s results are
similar to those obtained for the United States, where around 9 percent of the mean annual
growth of 1.6 percent between 1987 and 1993 may be attributed to IT investments (see Sichel,
1997).
While these results indicate that IT investments contribute quite substantially to growth, it
is possible that relaxing the assumptions underlying the neoclassical growth model, i.e., the
absence of externalities, constant returns to scale and competitive markets, may substantially
change the results. As argued earlier, investments in IT may generate substantial externalities
and increase the efficiency of other inputs as well.
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If this is the case, then part of the effects of
IT would be ascribed to the productivity residual. Similarly, even if IT does not generate
externalities but simply has a higher marginal product than other capital, then the effects of IT
would also be underestimated. In fact, recognizing these problems, in his estimates, Niinien
allows for externalities (by allowing for a higher income share of all capital) and higher marginal
returns to capital. As may be expected, the contribution of IT to growth increases and now
accounts for between 24 and 36 percent of the growth rate. There is a corresponding drop in the
contribution of the productivity residual.
A similar paper (Kraemer and Dedrick, 1994), although cast in a regression context, uses
data from eleven Asia-Pacific countries for the years 1983 to 1990 to examine the effect of IT
investments on GDP growth. While the authors find a positive correlation between the two and
seem to interpret their results as evidence of IT-led growth, they recognize that their results may
be plagued by an endogeneity bias.
Concluding remarks
:
Given the variety of factors that may be responsible for growth
(omitted variable problems) and the endogeneity of ICTs and output, it is difficult to identify a
clear causal mechanism between ICT availability and income measures or to pin down the
quantitative impact of the ICT-growth link. Regardless of the causal linkages, it is clear that
there is a positive association between ICTs and growth. This association may be mutually
reinforcing. While countries experiencing high growth may be investing more heavily in these
technologies, these technologies in turn may be providing the potential for future income growth.
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The contributions of the various components to the total annual growth rate of 2.36 percent are: IT - 0.18, capital
- 0.26, labor - 0.89 and MFP - 2.81.
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Formally, the direct and indirect effects of ICTs (their direct contributions as measurable final products to output
and their indirect effects – enhancing the productivity of other inputs) may be represented by rewriting (4) as:
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