Essay For Productivity Class (temep In Snu)

Summary and Policy Implications for the Paper “ICT Productivity and Firm Propensity to Innovative Investment: Evidence from Italian Microdata” Rovshan M. Mukhrumbaev1 and Aung Kyaw Oo2 Technology Management Economics and Policy Program, College of Engineering, Seoul National University, San 56-1, Shilim-dong, Kwanak-Gu, Seoul, 151-742, South Korea

ABSTRACT The purpose of the essay is to summarize briefly the article of Atzeni and Carboni (2006), which was published in Information Economics and Policy journal, and give policy implications as homework for “463.508 - The Theory of Productivity and Application” class.

Keywords: ICT; Rate of Return; Productivity; Innovative Investment, Economic Growth.

INTRODUCTION During preparation of this material, several references have been read by authors regarding rate of return from ICT and ICT investment. All of the papers have many interesting findings and results with respect to output from ICT and ICT investment. For instance, Spencer (2002) proposed new methods and tests to analyze the impact of ICT investment on United Kingdom’s GDP potential. He found that without quality-adjusted measures of labor supply, it is possible to assess the contribution of the investment to GDP potential. The calculations by new methods shows that ICT investment highly contributes to potential output growth which reflects the rapid growth in ICT investment and its high marginal product. Oulton (2002) developing new estimates to measure contribution of ICT in GDP growth, found that ICT output contributed a fifth of overall GDP growth during 1989 to 1998 and this contribution has been rising over time. Also, several papers analyze and discuss productivity effects from ICT investment, contribution of ICT and ICT investment to output, Economic Growth and Labor Productivity. They are: Meijers and Hollanders (2001), Piatkowski (2003), Sharpe

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(2006), Colecchia and Schreyer (2001), Ark B. et al (2002), Jalava and Pohjola (2005), Becchetti et al (2003). However Chowdhury and Wolf (2003) shows that ICT investment has a negative impact on labor productivity and does not have any significant impact on enterprise’s return. Among these all interesting readings Atzeni and Carboni (2006) have been chosen by authors to summarize and give policy implications. This paper provides some insight into the link between ICT, productivity and the innovative level of investment and this was one of the reasons to choose this paper among the others. The next parts of the essay provide brief summary to Atzeni and Carboni (2006) and give policy implications.

SUMMARY

Introduction In this section, the summary upon the research paper that was mentioned above will be presented in accordance with the sub-sections appeared in the original research paper. Since this is only the summary of the original, it will not cover the complete work they did and the methodology and equations applied in their paper. The authors didn’t include services industry firms in their survey but with the dataset from manufacturing industry firms, and so they pointed out that generalizations based on their information should be cautious. ICT data they used are only for the period 1995–97 and which prevented them from using more recent data in their study.

Model used Starting from the dataset, the researchers look for a methodology to estimate ICT productivity without information on ICT capital stock. They measure firm productivity changes through the variations in output and input prices. They use ‘Partial Price Change’ (PP), used to parallel TFP growth in the estimation equation, to compute ICT additional contribution to productivity. But, constant returns to scale are assumed throughout the calculation process.

Results By their research, the rate of return on ICT capital is found to be 0.814, and which implies that putting one additional dollar of ICT capital into service yields roughly

$ 0.40 of output per annum. Regarding the quality adjustment problem, they found weak correlation between ICT and quality changes in labor. ICT productivity is about eight times greater than that of non-ICT investment. Interpretation of the magnitude of their research results refers to gross and not net investment. Depreciation without being considered could lead to a downward bias in the results. High-innovative firms have, in fact, an ICT coefficient of 2.0. Although the difference in group coefficients is wide, it seems that it is the low-REP and high-INNO group that strongly determines overall low-replacing group ICT productivity. The low-REP and low-INNO group ICT investment share in total output is less than half that of its corresponding low-REP and high-INNO counterpart. It was found out in the paper that improvements in the workforce through a higher demand for more educated labour have a positive impact on productivity. This may explain the low coefficient in the highly innovative firms. While for ‘standard’ investment skills do not play a paramount role and firms have high productivity, for innovative investment, where complementing workers’ ability is crucial, the problem emerges consistently. Capital renewal is not the best strategy if skills are not complemented properly. In spite of its lower importance, ICT investment accounts for a relevant share of output growth when compared to non-ICT investment.

Conclusion This paper is a small contribution towards understanding the link between ICT productivity and firms’ investment behaviour. The findings they reached by this paper can pave the way ahead for the other researchers to go deeply into finding the relationship between the ICT productivity and firm investment. In their conclusion, they told that when investment is mainly guided by replacement, the average firm behaves notably worse than the others.

POLICY IMPLICATIONS Nowadays ICT is becoming as one of the main part in our life and in many industrialized countries. By spending millions of dollars in IT, many countries try to achieve significant economic growth and better living environment. We can see recent empirical studies which show a positive and significant relationship between growth in ICT (IT) investment and growth in national economic performance. As a last part of this

essay we would like to give several policy implications regarding IT and ICT investment and its impact to overall economic growth. Based on the results of the analysis, Atzeni and Carboni (2006) and also Schreyer (2000), Oliner and Sichel (2000) and Oulton (2002) came to conclusion that ICT relatively far more important than other form of capital investment. However, these analyses considered for Italian, United States and United Kingdom’s data, which means that ICT became more important than the other form of capital investment in developed countries. In our opinion, these finding should encourage not only for developed countries but also for developing countries to promote IT investment. Additionally, for developing countries, developing human recourses and infrastructure is needed to support effective use of the technology. Another statement in policy implications of Atzeni and Carboni (2006) is that ICT is much more important than non-ICT in determining output growth. We agree with this statement with respect to Italy and some other developed countries such as Korea, Japan and United States. However, if we consider developing or least developed countries, which focus on, for instance, agricultural or other sectors, this statement can not be appropriate at least in short-run, because, in early stages of introduction new technologies, higher level of skills is needed due to the risks and complexity of the necessary learning processes. We also can not argue against the statement of Atzeni and Carboni (2006), because in long-run this statement can be appropriate for developing and least developed countries. It was also found out from the paper that the dataset was only for the short period of (3) years. If it were available for longer period, the interrelationship and causal relationship between the ICT investment and the productivity and growth of the firms can be more visible and analyzed. In addition, not including the service sector firms in the research makes the dataset incomparable between the two different industries. In the paper, in addition, the researchers confirmed that investing in non-leading technologies appears to be both more remunerative and more effective in terms of output growth than investing in ladder technology. It can be said that no new ICT investment could be reliably established with the expectation that quick-and-tangible increasing returns will be certain unless the investment is accompanied and complemented with the simultaneous skill-improvement in human capital in the respective firms. However, it can be referred from the research paper and from other

academic findings that ICT investment is much more important and productive, at least, than any other forms of capital investment. Gera et al (1999) found out that IT investments are much more important at the margin than non-IT investment for labor productivity in Industries in both Canada and the United States. And also, when they estimate the impact of aggregate (the sum of IT and non-IT investments) net investment and aggregate replacement investment separately on productivity growth, the net investment rate is found to have a strong positive impact on productivity growth, while the replacement investment rate is not significant. They found no evidence of decreasing returns to IT investments in US industries. It is often argued that Italy’s technological gap is mainly due to its sectoral specialization: textile, clothing, leather and food industries are low-tech sectors, whose production technology requires a limited use of advanced capital, as ICT (Bugamelli etal 2004) . They have identified two possible impediments to ICT investment that are firm-specific: the availability of skilled workers and the need for implementing reorganizations of the internal functioning of the firm, which act as capital adjustment costs. Lastly, we would like to give additional policy implication to the paper written by Atzeni and Carboni (2006). In the fast growing industry of developed and developing countries many segments of the industry are dominated by incumbents and there are many high entry barriers for newcomers. In order to realize the potential benefits of Information and Communication Technologies in developed and developing countries, we suggest for the countries to weight the value of promoting IT production and ICT use. The policies such as providing financial and other incentives to producers can also be appropriate. Moreover, firms in any manufacturing industries (perhaps service industries alike included) should pay great attention not to invest hurriedly in any cutting-edge technology so as to upgrade the facility and infrastructure of the plant without knowing exactly the drawbacks of that technology to their respective firms. As it was shown in this research paper, all the dataset are based and compared with the EU, Canada and United States and conclusions were drawn from the perspective of the developed countries. It is obvious from the fact that the institutional and organizational establishments between developed and developing worlds are not the same like one another, and so copying and applying the productive and useful model in developed atmosphere will not result in the same benefits in the developing world. As a matter of

fact, digital divide between the two worlds is the culprit and as long as the differences in utilization, infrastructure and opportunity of ICT remains existed, perceptions and expectations on ICT-related investments will be troublesome not only for the start-ups but for the mature firms as well.

REFERENCES Atzeni G. E. and Carboni O. A. (2006), ICT productivity and firm propensity to innovative investment: Evidence from Italian microdata; Information Economics and Policy, 18 (2006) 139 – 156. Spencer P. (2002), The impact of information and communication technology investment on UK productive potential 1986 – 2000: New statistical methods and test; The Manchester School Supplement, 1463 – 6786, 107 – 126. Oulton N. (2002), ICT and productivity growth in the UK; Oxford Review of Economic Policy, 18 – 3 Meijers H. and Hollanders H. (2001), Investments in intangibles, ICT-hardware, Productivity Growth and Organizational Change: An Introduction; Background paper on the New Kind – project: New Indicators for the Knowledge Based Economy; Second Draft; IST – 1999 – 20782. Piatkowski M. (2003), The contribution of ICT Investment to Economic Growth and Labor Productivity in Poland 1995 – 2000; Transformation, Integration and Globalization Economic Research; Working Paper Series; No. 43. Sharpe A. (2006), The relationship between ICT investment and productivity in the Canadian economy: A review of the evidence; Centre for the Study of Living Standards; CSLS Research Report. Colecchia A. and Schreyer P. (2001), ICT Investment and Economic Growth in the 1990s:A comparative study of the nine OECD countries; OECD Science, Technology, and Industry Directorate and Statistics Directorate. Chowdhury S. K. and Wolf S. (2003), Use of ICTs and the economic performance of SMEs in East Africa; United Nations University and World Institute for Development Economic Research; Discussion Paper – 2003/06. Ark B. et al (2002), ICT investment and growth accounts for the European Union, 1980 – 2000; Final Report on “ICT and Growth Accounting” for the DG Economics and Finance of the European Commission

Jalava J. and Pohjola M. (2005), ICT as a source of output and productivity growth in Finland; Helsinki Center of Economic Research; Discussion Paper No. 52; ISSN 1795 - 0562 Becchetti L. et al (2003), ICT investment, productivity and efficiency: Evidence at firm level using a stochastic frontier approach; Centre for International Studies on Economic Growth; CEIS Tor Vergeta – Research Paper Series, Vol. 10, No. 29 Schreyer P. (2000), The contribution of information and communication technology on output growth: A study of the G7 countries; STI Working paper, No.2; OECD Oliner S. D. and Sichel D. E. (2000), The resurgence of growth in the late 1990s: Is information technology the story?; Journal of Economic Perspectives 14, 3-22 Gera S., Gu W., and Lee F.C. (1999), Information Technology and Labor Productivity Growth: An Empirical Analysis for Canada and the United States; The Canadian Journal of Economics / Revue canadienne d'Economique, Vol. 32, No. 2, Special Issue on Service Sector Productivity and the Productivity Paradox, pp. 384-407. Bugamelli M. and Pagano P.(2004), Barriers to Investment in ICT, Applied Economics, 36; 20, 2275-2286.

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