ICT, the Internet, and Economic Performance: Empirical Evidence and Key Policy Issues Donald Siegel Professor of Economics Rensselaer Polytechnic Institute Prepared for UNCTAD and UNECE Conference Geneva October 20, 2003

Outline  Empirical Studies of the Impact of ICT on Economic Performance  Empirical Studies of the Impact of ICT on Wages, Labor Composition (“Skill-Biased” Technological Change-SBTC), and the Work Environment  Computers and the Internet as a General Purpose Technology (GPT)  Conclusions and Policy Recommendations

Investment in ICT and Economic Performance Levels of Aggregation  Plant Level  Firm Level  Industry Level  National Level Indicators of Economic Performance  Profitability  Market Share  Stock Prices (Short and Long-Term Measures)  Productivity  Labor Productivity (Partial Productivity)  Total Factor Productivity

Estimating The Contribution of Computers to Economic Growth Augmented Production Function Approach Q i = f (K i, L i M i, C i ) where: Q=output K=stock of physical capital L=labor input C=the stock of computer capital i=the unit of analysis (e.g., firm, industry, nation) Two Approaches:  Parametric-Estimate the Marginal Product or Output Elasticity of Computers  Non-Parametric- “Growth Accounting”-Analyze the Sources of Output Growth-(Jorgenson and Stiroh (2000)

Estimating The Contribution of Computers to Economic Growth (cont.) Typical Parametric Studies (Brynjolfsson and Hitt (1996)): Cobb-Douglas Production Function-Constant Returns to Scale: Q = A e λt K  L (1-  ) C  where: λ is a disembodied rate of growth parameter and  and  are output elasticities of capital and labor, respectively Key parameter:  the output elasticity of computer capital  = (∂Q/ ∂C)(C/Q) Typical Non-Parametric Studies (Siegel 1997)): Differentiating the Production Function w.r.t. time (t) and re-arranging terms leads to: PRODGROWTH = λ + ρ (C/Q)

Econometric Studies of the Impact of ICT on Productivity- U.S. Based Studies Author(s)Level of AggregationResults Dunne, Foster, Haltiwanger, and Troske (2000) Plant-LevelPositive Association Between Computers and Labor Productivity, Which Appears to be Growing Over Time Brynjolfsson and Hitt (1996) Firm-Level“Excess” Returns to Computer Capital and Labor Siegel and Griliches (1992) Industry-LevelPositive Correlation Between Investment in Computers and TFP Growth Jorgenson and Stiroh (2000) Aggregate-LevelGrowth Contribution of ICT Increased Substantially in the mid-late 1990s

Econometric Studies of the Impact of ICT on Productivity-Non-US Studies Author(s)Level of AggregationResults Licht and Moch (1999)-Germany Firm-LevelTerminals Have a Positive Impact on Productivity in Goods Industries, But Not in Services. Strong Positive Relationship Between PCs and Productivity in Manufacturing and Services Gera, Gu, and Lee (1999)- Canada Industry-LevelPositive Correlation Between Investment in Computers and Labor Productivity Growth Greenan and Mairesse (1996)- France Firm-LevelImpact of Computers is Positive and at Least as Large as For Other Types of Capital. Returns Appear to be Higher In Services Than in Manufacturing

Econometric Studies of the Impact of ICT on Productivity-”External” Effects Author(s)Level of Aggregation Results Morrison and Siegel (1997) Industry-Level“External” Investments in Computers by Related Industries (Suppliers and Customers) Enhance Productivity in a Given Industry

Key Stylized Facts Regarding ICT and SBTC  Strong Evidence in Favor of SBTC  Positive Correlation Between Some Proxy for Technological Change and Shifts in Wages and Workforce Composition in Favor of Highly Educated Workers  Wage Premium of Slightly Less Than 20% in Most OECD Countries  Investment in ICT Explains Approximately 33%-50% of the Increase in Returns to Education  In Some Countries, the Demand for Computer-Literate Workers is Increasing More Rapidly Than Supply  The Gap in Earnings Between Workers Who Use a Computer and Those That Do Not Appears to Have Widened

Key Stylized Facts Regarding ICT and SBTC- International Evidence (cont.) Berman, Bound, and Machin (1998):  Strong Evidence of Pervasive SBTC in OECD Countries- Patterns Are Quite Similar Across Countries Berman and Machin (2000):  Comparison of SBTC in Developed and Developing Countries  Analysis of “Technology Transfer” from Developed (OECD) to Developing Countries  Evidence of “Transfer” of Skill-Biased Technologies from High Income to Middle Income Countries, But Not From High Income to Low Income Countries  Less Evidence of SBTC in Developing Countries

Evidence on SBTC in Developing Countries (From Country-Specific Studies)  Korea: Workers in Industries With Rapid Technological Change Are Paid More  Mexico, Taiwan, Colombia, Malaysia: Wages and Training Tend to Be Higher in Industries Experiencing Rapid Technological Change  Singapore: The Rise of the “Knowledge Economy” Appears to Explain The Increase in the Returns to Education  Vietnam: If Work Requires Computer Skills, Wages Are 10-14% Higher

ICT and Organization Change Siegel (1999)-Firm-Level Study  Implementation of new ICT Associated With Organizational Change  Implementation of new ICT Associated With Increases in Training and Skill Upgrading  Implementation of new ICT Associated With Enhanced Employee Empowerment  Major Obstacles to Additional Investments in New Technologies:  High Cost of Customizing Software to Fit Company Needs  Difficulties in Quantifying Benefits  Some Firms Also Report Shortages of Skilled Workers

ICT and Organization Change Brynjolfsson and Hitt (2000)  ICT Reduces the Cost of Coordination, Communication, and Information Processing  ICT is Associated with a “Cluster” of Complementary Organizational Changes/Practices  Transition from mass production to “flexible” manufacturing technologies  Changing Interaction With Suppliers  Transforming the Firm  Replacing Back-Office Jobs and Increasing the Importance of Front-office Skills and Leadership  Changing Interaction With Suppliers  Decentralized Decision Making and Enhanced Communication

Computers/Internet as a General Purpose Technology (GPT) GPTs-Technologies That Cause Dramatic Economic Changes by Stimulating New Applications and Industries and Rejuvenating Existing Sectors  Strengthens the Rationale for Government Intervention Examples of GPTs: Steam Engine, Electric Dynamo, Lasers, Computers Computers/Internet as a GPT Creation of New Industries:  Internet Service Providers  Network Communications Equipment  Consulting Services

Conclusions and Policy Recommendations  ICT Appears to Be Generating High Social Returns (Although Not Quite As High As Those Associated With R&D, But Still Quite High)-Not Showing Up As Much In Aggregate Statistics Because Productivity Gains Are In Services  ICT Has Transformed the Workplace in Many Industries and Increased the Returns to Education in Developed and Developing Countries (To a Lesser Extent)  Developing Countries Appear to Be Falling Further Behind in the Digital Divide, as Well as in the “Learning" Divide

Conclusions and Policy Recommendations (cont.)  Increased Demand for ICT Workers May Not be Met in Many Developing Countries (Role of Outsourcing)  Important For Policymakers in Developing Countries To Invest in Infrastructure That Complements/Supports Use of ICT (Physical and Educational):  Low-Cost, High-Bandwith Internet Connections  Internet Security  Ensure That Educational System Addresses Skill Deficiencies  Important For Developing Countries To Foster Institutions That Complement/Support Use of ICT

Conclusions and Policy Recommendations (cont.)  Developed Countries-Public-Private Partnerships Have Been Useful in Alleviating Innovation Market Failures Public-Private Partnerships in Developing Countries Can Be Useful for:  Better Access to Financial Capital  Enhancement of Human Capital  Stimulating the Development and Extension of Networks That Increase the Returns to ICT and E-Business