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Do ICT Influence Economic Growth and Human Development in European Union Countries?
Thursday, 25 March 2010: 17:25 Hilton Prague Esteban Alfaro Cortés, Ph.D. , Castilla-La Mancha University, Albacete, Spain Maria de la O González Pérez, Ph.D. , University of Castilla-La Mancha, Albacete, Spain Francisco Jareño Cebrián, Ph., D. , Universidad de Castilla-La Mancha, Albacete, Spain Objectives: This study analyses the influence of the introduction of Information and Communication Technologies (ICT) on economic growth and human development in the countries that make up the European Union 27. The remarkable interest that the European Commission has shown in the Information Society (IS) and the introduction of ICT inspired us to analyse to what extent ICT had established themselves in these countries. Data/Methods: This research uses information referring to: the implantation and use of ICT, economic development, competitiveness and human development in the EU-27. The information comes from Eurostat, except in the case of the human development and education indexes, for which the United Nations Development Programme was the source. Countries are grouped in accordance with some of the main Information Society (IS) indicators used in this paper to ascertain whether or not there are different groups of countries with different levels of development and where ICT have been implemented to different degrees. Once these groups have been formed, we determine whether they have achieved different levels of economic and human development. Results/Expected results: This analysis enables us to confirm (or reject) the main theories that suggest ICT have a strong influence on economic and human development. Results show the existence of four clearly distinct groups of countries, which register significant differences in most of the variables related to economic growth and human development contemplated in this paper.Conclusion: The enormously important role played by ICT in economic growth and human development inspired this research, which analyses whether existing technological differences among EU-27 countries influence their economic and human development. This allowed us to detect in which there are significant differences. More precisely, we can see a need to boost ICT implantation and use in the most backward countries, as they are clearly below

the level of the technologically advanced group in practically all the variables under consideration. This situation should act as an incentive for these countries, as fostering ICT can boost both economic and human development. Key words: Information and communication technology, Information society, Economic growth, Human development. See more of: C10-4 2840 Quantitative Methods in Economic Research

Making Sense of the Relationship between ICT and Economic Development page 1 Making Sense of the Relationship between Information Communication Technologies and Economic Development by Matthew Mitchell & Bill Gillis Washington State University / Center to Bridge the Digital Divide This brief article explores the challenges faced by those who attempt to document the attribution between information communication technologies (ICT) and development. After introducing this challenge, a model used by the WSU Center to Bridge the Digital Divide is presented as a helpful tool for making sense of the relationship between ICT and economic development. While public policy and academic literature frequently tout substantial progress in bridging the digital divide, over half of the world’s population does not presently have access to even a telephone, let alone the Internet.1 Even within the United States there is substantial disparity in access to information and communication technologies. For example, within the United States, those living in families with lower income, with less education, Latinos, Native Americans and African Americans are substantially less likely to have access to the basic information and communication technologies than others.2 The uneven availability of access to information and communication technologies among the world’s population has great importance to public policy and the well being of nations and individuals worldwide. Of particular importance, from a global “public welfare” perspective, is unrealized potential economic and human development that could be achieved through information communication technologies.3 On an individual basis, this forgone development activity translates into higher rates of poverty, poorer health, lower literacy and quality of life than is necessary.4 With these important implications, it is not surprising that the connection between the expansion of information communication technologies and economic development is currently receiving considerable attention by practitioners, policy makers, researchers and funding organizations;5 and, there is good reason for this attention. If increased deployment of information communication technologies leads to greater digital opportunities, including economic and human development, ICT can be framed and applied as a potent tool in reducing poverty, extending health services, expanding educational opportunities and generally improving the quality of life for many of the world’s disadvantaged. However, it is critical that such framing recognize these desired outcomes are only plausible when ICT deployment is accompanied by concurrent public policies supporting equitable access to social institutions such as health care, education, government, and other benefits potentially available through the application of digital tools and telecommunications. ICT is an important tool but not a solution in itself for economic or social problems.

Economic development is a well-discussed goal by many organizations ranging from local chambers of commerce to the United Nations. Increasingly, the terms “information society”6 and “knowledge-based economy”7 are used to describe contemporary economic society. As expressed by the DOT Force during their April 2002 meeting in Calgary, Making Sense of the Relationship between ICT and Economic Development page 2 Canada, “in our global, networked economy and society, information is an essential resource for capacity-building and social and economic development.”8 A growing number of digital divide projects (domestically and abroad) are aimed at beneficially impacting economic development. The desired economic development benefits extend well beyond potential economic growth and wealth creation. For example as pointed out by the United Nations in 20009 ICT can enable (a) better access to government services, (b) the alleviation of fraud and skepticism in elections, (c) increased quantity and quality of training opportunities, (d) a balancing of gender inequalities in access to opportunities, (e) improved delivery of health care services and the list goes on. Consequently, the interest in understanding the relationship between ICT and economic development must consider outcomes beyond traditional measures such as GDP, employment and enterprise creation. The leveraging of ICT to facilitate broader public goods including improved health care, literacy, civic responsiveness and equitable access to economic opportunity creates social capital essential for the full leveraging of economic development potential that can be achieved through the use of digital tools and telecommunications. A view that overlooks the critical, dynamic role of social capital formation substantially underestimates the potential economic development benefits of ICT. Partially because of its complexity, experience in empirically defining this relationship between ICT and economic development has proved to be significantly difficult. Driven by the need to design and implement monitoring and evaluation plans for documenting the results of ICT-related projects aimed at benefiting economic development including the creation of social capital, the WSU Center to Bridge the Digital Divide is actively constructing a model for making sense of the relationship between ICT and development. An approach for mitigating this challenge begins with three general ideas distilled from the rich literature on this matter that is currently in circulation. First, the relationship between ICT and development is a multi-dimensional system and may be best understood from multiple perspectives.10 Second, while complete understanding of the relationship may someday be quantifiable, a robust blend of qualitative and quantitative data renders a better-balanced description.11 Third, given that the relationship between ICT and economic and human development involves countless variables, direct attribution of objective results is likely to be difficult to establish.12 With these ideas in mind, the WSU Center to Bridge the Digital Divide has created a model (see Figure 1) for lending clarity to development programs whose aim is to beneficially impact the ICT/ED relationship. Notably, this circular model is divided into three sections, each representing one of three stakeholders in the ICT/ED relationship. Another aspect of this model is the embedded triangle connecting each stakeholder group. Inside the triangle is the interplay between three general goals: (1) the development and deployment of ICT, (2) the development of viable and sustainable economies and (3) the equitable access to the economic and broader social capital benefits potentially delivered through ICT.

Making Sense of the Relationship between ICT and Economic Development page 3
Figure 1

The primary concern of any project addressing the digital divide is the identification of the intended beneficiaries of digital access and their needs. In most cases, the prime beneficiaries are the members of a defined community. For this reason, the top stakeholder group in this model is the “Community Members.” ICT is of no productive social value if it does not contribute to the economic and social values desired by “Community Members.” The term “community” has many meanings. In this discussion, community refers to a broad grouping of individuals aligned around the common interest of building and maintaining a quality of life in which current and future generations will be safe, healthy, happy and prosperous. The stakeholder group labeled “Community Members” should be understood as including members of the other two stakeholder groups. Although community stakeholders may have significant interest in the aggregate economic growth that can be leveraged from ICT, a broader common interest that brings community members together is the widespread availability of affordable services and the ability to utilize technology to expand local education, enhance local health care, improve civic interaction and develop mechanisms for community support (e.g., daycare co-ops, carpooling, crime-watch, etc.). This spectrum of community application of ICT defines “demand” for ICT investment at the local level. Given the wide-range of potential benefits ICT can offer communities in terms of development, there are two imperative ingredients for the provision ICT infrastructure responsive to community needs: (1) the marshaling of investment resources and (2) the oversight and regulation that provides a stable and supportive environment for investment. In this model, two stakeholder groups are the described as being responsible for the investment and regulation of ICT infrastructure. The first stakeholder group is called “ICT Investment” because this collection of private organizations and businesses is primarily responsible for building the ICT infrastructure. The second stakeholder group, labeled “Public Policy,” consists of the makers of the public policies that enable and regulate the primary builders and providers of ICT infrastructure. As depicted in the model, the context in which the relationship between ICT and development is found involves all three stakeholder groups. To be successful and sustainable, we believe that the relationship must facilitate the interests of all stakeholders. Therefore, this model highlights three goals and the role of each stakeholder group in making the relationship productive, meaningful and responsive to community needs. Making Sense of the Relationship between ICT and Economic Development page 4 A threshhold goal is the deployment of ICT. Global experience has shown that closed and monopolistic regulatory environments are less likely to attract private investment. While

ICT infrastructure requires a significant capital investment, most national governments, especially in the developing world, are unable to meet the challenges alone. With few exceptions, private businesses and organizations have funded much of the world’s nonmilitary ICT infrastructure. There is little indication that this trend will decrease. In fact, as more and more governments make it clear that they are not able or willing to finance the construction of ICT infrastructure, the role of non-governmental investment becomes increasingly more pivotal in bridging the digital divide. To attain the goal of an adequate and equitable deployment of ICT infrastructure, we recognize three necessary interrelatinships: First, there must be a market demand for ICT. The end users of the ICT infrastructure, namely the members of a given community, are best positioned to demonstrate a market demand for ICT investment. Next, the regulatory environment must be stable and open such that fair competition is encouraged. The makers of public policy have a responsibility to develop and maintain an enabling regulatory environment that encourages investment by private organizations and businesses in ICT infrastructure. Finally, there must be a willingness by ICT investors to take a risk. Without the investment of private capital, the goal of adequate ICT deployment may never be realized. Hence, these three stakeholders (community members, policy makers and ICT investors) are bound in an interactive, inter-dependent relationship. Efforts to bridge the digital divide that focus on using information communication technologies to stimulate or augment economic and human development show great promise for ameliorating global public welfare. While this objective may appear to some as being an obvious and undeniable truism, organizations that fund these efforts look for clear and convincing evidence supporting the connection. As witnessed by many, this connection is difficult to establish. The model provided in this brief discussion is offered as one possible tool for understanding, describing and beneficially impacting the relationship between ICT and development. At the WSU Center to Bridge the Digital Divide, this model is being applied to (a) design programmatic interventions to digital exclusion, (b) assess the effectiveness of previously implemented projects and (c) develop a conceptual framework that clearly defines the logic behind our mission and strategic goals. Making Sense of the Relationship between ICT and Economic Development page 5 Endnotes & References
1 International

Telecommunication Union (ITU), World Telecommunication Development Report (ITU: Geneva, Switzerland, March 2002). 2 National Telecommunications and Information Administration (NTIA), A Nation Online (U.S. Department of Commerce: Washington D.C., February 2002). 3 Digital Opportunity Initiative (DOI), Creating a Development Dynamic (Accenture, Markle Foundation, United Nations Development Programme, 2001). 4 United Nations Development Programme (UNDP), UNDP Thematic Trust Fund: Information Communication Technology (ICT) for Development (UNDP, Bureau for Development Policy: New York, 2001). 5 Paul Schreyer, The Contribution of Information and Communication Technology to Output Growth: A Study of the G7 Countries (Organization for Economic Co-Operation and Development: Paris, France, 2000). 6 Frank Webster, Theories of the Information Society (Routledge: New York, 1995). 7 United Nations Economic and Social Council, Report of the High-Level Panel of Experts on Information and Communication Technolgy (United Nations General Assembly: New York, 2000).

8 Digital

Opportunity Task Force (DOT Force), Global Policymaking for Information and Communication Technologies: Enabling Meaningful Participation be Developing Nations Stake Holders (DOT Force: Calgary, Canada, April 2002), 12. 9 United Nations Economic and Social Council, 6. 10 DOI Report and the UNDP’s Thematic Trust Fund 11 John Daly, Measuring the Impacts of the Internet in the Developing World (iMP: http:www.cisp.org, May 1999). 12 Stephen Ruth and Bhaskar Choudhury, Assessing the Yield of IT projects in Developing Nations: Aggregated Models are not Sufficient (School of Public Policy, George Mason University: Fairfax, VA, 2001).

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INNOVATION IN ICT AND ECONOMIC DEVELOPMENT IN THE REPUBLIC OF MACEDONIA Vera Naumovska, PhD Abstract
Modern technical – technological changes have enormous influence on the economic development in every country and also all over the world. Today, ICT (InformationCommunication Technologies) enabled every kind of information to become accessible to every individual, everywhere in the world. The traditional industries, the financial sector, services and all other sectors became more effective and more efficient, which is due to introducing ICT products in their own processes and activities. ICT is both a separate sector which absorbs a great number of the active population belonging to different professional vocation on one hand, and also an industry which produces a wide variety of products (hardware and software) for all other industries. But, all the countries in the world do not have a completely implemented and integrated ICT that will be on a satisfying level. ICT implementation procedure includes four main areas: 1) regulatory environment and industrial framework; 2) internet infrastructure; 3) e-government and 4) eeducation. All these areas will be referred to in the content of this paper. Also, this paper should present the efforts the companies and the society make in order to incorporate themselves in the digital processes and to integrate in the information society.

Key word: innovation, e-readiness, digital economy, economic development Introduction Innovations and very fast implementation of ICT resources undertaken by the companies are reengineering their business processes, change the communication between employees inside the companies and outside with suppliers, customers, agencies and other third parties using intranet, extranet and internet. This transformation led to having digital economy, information

economy, internet economy, web economy, network economy, new economy, knowledge base economy and resulted in the society becoming a postindustrial society, a knowledge base society or an information society. This is case with the developed countries. But, developing countries and undeveloped countries also tend to implement ICT resources. The level of ICT implementation is not satisfactory because all their economic power is not developped enough. That is case and with RM (Republic of Macedonia). 1. Innovation in ICT The goal of innovation defined as a common term means undertaking a continuous change for the purpose of making someone or something better. The care for innovations in global is agenda to authorities of developed countries. EU with communications (COM(2005)0488; COM(2006)502 from 13.09.2006; COM(2007)-“Lead market initiative for Europe”; COM(2008)-Towards on increased contribution from standardization to innovation in Europe”, for eHealth, bio-based products, protective textiles, recycling and renewable energy
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managed it to better development. We can say that ICT is part of innovation; it changes everyday and enables the information to be accessible to everyone, everywhere and at every instance (24/7/365). Innovation in ICT has led to many visions for creating channels of interactive communication between the entities: the citizens, the governments and the businesses. ICT is a broadly used term that can encompass many technologies used to produce, process, exchange and manage the information and knowledge. The effects that the ICT has on different type of innovations are taken into consideration, being the following ones: 1) process (speed and reliability of business processes; automation; information management; organizational change: and 2) process and product innovation (new products and services; customization; new bundling

offering; 3) rational innovation as number of indicators describing innovations in relationships with customers and suppliers (number of customers and suppliers; change in value per customers; value of purchase per supplier; share of retained customer; number of repeated supplier). In general, it associates to computers, software, peripheral devices and connection resources to the internet. With the intensive development of ICT, starting from 1990s, above entities tend to have benefit from communication networks - internet, intranet and extranets, and the economy such as common expression of all activities of the companies is called digital economy, information economy, e-economy, web economy, network economy, internet economy, knowledge-base economy and so on. The society in these conditions is called postindustrial society, information society, knowledge-base society and so on. Not all countries have the same intensity of development (social and economic) and the same ICT implementation in their own environment. The developed countries still dedicate remarkable attention to practicing – establishing new innovations in ICT, although it has been implemented in many parts of everyday life. That is not the case with many developing and undeveloped countries. They must implement ICT, because if not aiming to do so, it is likely that they will encounter poor economy with businesses subjected to bankruptcy, growth of unemployment and population experiencing poverty. As it is immanent that the developed countries continually follow news and implementation of ICT innovation, it also appears to be a case with the undeveloped counties, although not to that extent. Therefore, there exists a digital gap or differentiation between countries, regions, or continents. The high level of implementation and inclusion of ICT requires regulation (in EU (with many projects, directives, action plans as e-European information society, 1999), Russia (e-Russia program for implementation of ICT, 2002-2015), even and RM (National strategy for Information Society,

2005) and so on). The EU countries through European Council in 1999 adopted an initiative called “e-Europe information society for all”, action plans “e-Europe 2002” & “e-Europe 2005”, an initiative “i2010 – A European information society for growth and employment”, lunched at 2005, which has brought them high economic growth and social prosperity, broadband internet for all and single European information space with aims to create a modern, market-oriented regulatory framework for the digital economy”. The high speed internet is the passport to the information society and essential condition for economic growth. EU has stimulated broadband
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internet with the following three tools1: 1) telecom rules for more competition and investment, 2) a new system to stimulate mobile satellite services which can deliver broadband via satellite across the EU, 3) reform of radio spectrum to free resources for new wireless services. Today only 7% of EU’s citizens are still not connected with fast internet (some rural areas) and in Denmark, Luxemburg and Belgium are covered 100%. Also, ebusinesses are following with measures of two groups of indicators i.e. 1) percentage of enterprises tools turnover to e-business / e-commerce and 2) with composite index to reflect the companies level of readiness to engage in the more complex e-business environment. The number of home-computer owners in EU is the highest in urban places, mainly typical for highly-educated persons and households with children (70%). The number of companies with internet access in Eu-10 amounts 93% whereas the number of employees using the Internet is 95%. Republic of Macedonia belongs to developing countries that tend to follow the EU institutions which have programs and projects for ICT implementation. Republic of Macedonia is working systematically in order to implement ICT. It prepared “edeclaration 2002” for developing IS (Information Society) and digital economy, National strategy for development of

IS (2004), Law on Telecommunication (2005), E-signatures, Law on Ecommunication (2005), Law on Forms of Data (2001), Law on E-commerce (2007) , Law on Free Access to Public Information, Law on Interception of Communication and so on. The Government of RM is making efforts to enable higher level of ICT usage in many ways such as: computer for every child at schools, vouchers for every student in final year of university education (during 2007 and 2008), trainings for citizens who are retired and unemployed (2007 and 2008) through clubhouses center or e-points, (project titled “Macedoniacountry of IT professionals”), the Government team with group of businessmen (IT professionals) had visited Silicon Valley (2008) with goal to animate US IT companies (Oracle, Sun Micro Systems, Intel, Howllet Packard) to establish business communication with IT companies from RM ( IT company Seavus opened office in Silicon Valley - San Francisco), and to consider the possibilities for FDI (foreign direct investment). The central government with help of USAID2 has good implementation of ICT: it introduced e-tax (http://e-tax.ujp.gov.mk) 90% of companies are already registered in the information system and 70% of their monthly tax return is submitted online; students submit online applications for dormitories and students’ loans and scholarships (www.raspredelba.gov.mk; e-procurement for speed and simplicity for indisputable evidence of quantitative savings and transparency (www.enabavki.gov.mk); online applications for new jobs in governmental institutions (http://eprijava.ads.gov.mk); services for enabling e-payment for governmental services and answer to citizens’ questions to government (www.uslugi.gov.mk); budgets users submit their budget requests through the system (www.ebudget. gov.mk); online distribution of internal cargo transport licenses through Ministry of Transport and Communication (www.mtc.gov.mk); interoperability with Ministry of Interior Affairs, Central Registry, Pension Fund. With all the above presented effort, RM achieved in the

first quarter of 20083, a computer usage in households of 45.6% and internet connection of
/ Broadband Internet for All Europeans: Commission lunches debate on future of Universal Service, Brussels, 25 September, 2008, IP/08/1397, p.1,
1

http://ec.europa.eu/information_society/policy/ecomm/current/consumer_rights/universal_service/index_en.htm
2/

US Agency for International Development, http://macedonia.usaid.gov/English/EG/ebiz_eng.htm 3/ Statistical data enclosed on website www.mio.gov.mk/statistics

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29.4%; without its efforts these percentage would have been smaller (this is data from State Statistical Office on www.mio.gov.mk). But this does not appear to be satisfactory when compared to Slovenia that in 2006 had 65% of households using computer, 40% of broadband connection and 40% users of internet, which is much better result than the result of RM nowadays). 2. ICT and Economic Development Today, the benefit of the ICT resulted in the Republic of Macedonia becoming an information society and having digital economy. It is essential and unavoidable that the economy has continuous economic development, which is partnership between government, and its institutions and agencies, private firms and non-profit sector. ICT sector represents a big part of the industry with software applications, system’s software products and information equipment (computers, printers, routers, modems, external memory network components, web tools, hosting, satellites, security, e-payments), and ICT human resources. IT products are implemented in all other sectors, starting from agriculture and ending with all kind of services, it helps for having effective, productive and efficient economy. ICT occupations include many wide spectra of hardware and software areas, information management systems to web variety of vocations. Implementing the IT products led to traditional sector in developed countries becoming subjected to redesigning and this transformation led to introduction of new terms: e-business, e-commerce, e-marketing, e-payment, e-banking, e-finance, e-procurement, efulfillment and so on. Prefix “e”

is present everywhere ICT are implemented, because its activities are expressed in bits, not on papers. Also, the communication between different departments is made by making use of intranet, the communication with suppliers and customers is made via extranet and internet. Internet is a network which enables every unit and every company to be available and to have the world on its hand. ICT usage depends on: - capital resources- investment in connection to internet hardware and software components) - people with remarkable e-skills - implementation and usage of the internet and computers, demand for trained and skilled citizens and employees with technical and information background - technological base- internet requires three main components: infrastructure, computers and network-communication technologies - national needs- ICT and internet are implemented for the purpose of achieving better economic and social condition of the countries, and competitive advantages for the businesses. The economy consists of more entities beginning from business, commerce, finance, and all other areas of production and services whose everyday e-working is not only installing a web server and web site, but making complete change of all working processes to the claims of digital economy - from reengineering of internal, business processes to econnection with suppliers, customers and third parties. It can be done with the compny’s own staff or by outsourcing. Everywhere in the world, the attention is put on SMEs which are mainly flexible firms, which accept innovations very easily. That is the case with Canada (more than 90% of Canadian
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firms are small and medium size, and they created 36% of new jobs in the Canadian economy between 2002-2004)4. In EU 20 million SMEs provide 65 millions jobs5. The micro, small and medium size enterprises are dominant type of enterprises in the

Macedonian economy. They are newly founded during the transition period over the last decade of the 20th century. The transition period resulted in the enterprises’ transformation from selfmanagement system towards market economy, which was not very successful, because during the transformation, majority of existing companies went into bankruptcy. SMSEs (the small and medium size enterprises) as newly established, operate nowadays and some of them even started to develop and to grow. It is assisted by USAID (e-biz project in the e-biz centers which offers high impact of the ICT applications, which help for achieving fast improvement of SMSEs’ competitiveness in entire clusters or industries), and Government National SMSEs’ Development Strategy (2002-2013) including, a 2007-2010 Entrepreneurship, Competition and Innovation Development Program. Macedonian IT sector belongs to SMSEs companies (about 250 companies and all of them are start-up companies) with 2 to 50 employees. Mostly IT companies resell hardware or provide fairly low margin services and software solutions on the Macedonian markets or to Macedonia’s surrounding environment (Kosovo, Serbia, and Albania). Macedonian IT market in 2007 was $121 million worth, and this was due to the demand in the education sector that was invested in by the Government, then the demand of the companies and finally the households. IDC (International Data Corporation) estimated that from the total IT expenditure 2/3 belong to hardware, 1/5 to IT services, and the last place belongs to software6. In RM at 20077, 90.7% of the enterprises with 10 and more employees used computers and 73.3% had access to internet. Only large companies in the RM had internet usage 97.4% (with 98% internet usage in businesses are Ireland, Japan, Finland, Swaziland, Denmark and Austria8). When it comes to the web sites, only 53.8% have websites which are most frequently being used for advertising, less frequently for products’ presentation with catalogues and rest for price list and providing after sales support (data from State Statistical Office on www.mio.gov.mk). In general,

USA is benchmark for ICT and e-business usage and also a competitor on global markets. That was shown with the survey9 (2007) on differences between EU and US companies when it comes to ICT usage and e-business. In order to compare ICT and e-business performance of EU and US companies on an aggregate level, average values were calculated for 16 indicators in the area of infrastructure, e-procurement, internal e-operations and e-sales. EU companies were found to lag 11 to 15 percentage points of infrastructure, e-procurement, and esales. The overall use of internal e-operations was found to be very similar in EU and US companies. This is mainly due to the larger level of ERP use in the EU-7.
4/

“Industry Canada, small Business Quarterly, Vol 5, No4, Feb, 2004 in Final Report “Canadian e-business initiative”, Sep., 2004, p., www.cebi.ca 5/ “Helping SMEs win in the Information Society”, http://ec.europa.eu/information_society/tl/ecowor/smes/index_en.htm 6/ “Macedonian IT market worth $121 million in 2007”, www.masit.org.mk/?Macedonian %20ICT%20market 7/ http://www.mio.gov.mk/?q=node/276 8/ The Future of the Internet Economy: A Statistical profile”, OECD Ministerial Meeting, 17-18 June, 2008, p13 9/ “E-business adoption in Europe and the USA”,

How Small Places Change the World Page 6 Fulbright Academy 2009 Conference 3. ICT Education and E-readiness

ICTs are immanent in every parts of the world, because they influence as dominant power in management with economical, political, cultural and society development and help for achieving irreproducible – enormous growth of speed, quality and popularity of informatics products. That can be improved with data from the world statistics, where, the needs for implementation of ICT products are being identifiesd in all parts of the world. Therefore the growth of internet users from 2000-2008 is obvious (it is highest in Africa with growth of 1031.2% - because the base in 2000 is low and the continents with high base in 2000, such as Europe and North America is lower, but still important 266.0% and 129.6% respectively a growth of users)10. As the world statistics shows, about 81.5% of internet hosts belong to G7 countries which

include 10% of world population and about 0.65% of all hosts belong to countries with greatest number of population (India, China, Nigeria, and Brazil). Three basic components for using internet (telephone, computer-modem and electricity) are available and present in RM, whereas the fourth one i.e. knowledge in English is not at satisfactory level. Fourth component is very important because a big number of operation systems and application softwares are still in English. Due to this a new term appeared informatisation – which means changes, because it includes IT which is digital divide present among countries, continents, regions and inside between population between these segments. The digital divide is connected with stature-age and education and the percentage of users of internet is 3 times bigger in population at the age from 15-24, and also from 55 to 64. In the RM11 (2007), the users at the age from 20-29 used internet 28%, from 30-39 were 13% and from 40-49 were 10%, and with those users above the age of 50 the percentage significantly falls. The percentage is higher when it comes to persons with higher level of education, and lower with persons with lower level of education. The students account for 30% users of computers and employees account for 54%. Also, the level of urbanization divide the users: rural parts of the country have smaller degree of acceptance of ICTs. The bridging of digital gap between population and the businesses in RM, the central government is making efforts to increase the level of citizens’ ICT skills for everyone older than 18, through ICT courses in club centers (epoints) in rural and urban areas with poor development; free internet clubs, introducing information subject in elementary, secondary and higher education, given vouchers as help for students who are in their final year of studies. 4. Digital Economy and the Businesses The digital economy expresses summary results of all business activities in general, through economic indicators referring for the overall economy. ICT sector as a separate sector

with its own development supports all the others sectors, so the businesses are now e-businesses. We came across the term e-commerce, which means buying and selling online. Broad definition of e-commerce is “any use of information and communications technology by a business that helps it improve its interactions with customers or suppliers”. The broad definition of e- business as "automated business processes (both intra-and inter-firm) over computer mediated
10/ 11/

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“Internet usage Statistics”, http://www.internetworldstats.com/stats.htm, http://www.mio.gov.mk/?q=node/276

networks"12 and includes: B2C: business and consumers (their customers); B2B: business to business, e.g., where one business buys supplies from another or buys products to resale; G2B: businesses to government, where perhaps businesses conduct transactions electronically with government regarding various business licensing or reporting requirements or where businesses sell products or services to governments. Its main characteristics are: information, knowledge, and speed. It is possible to be realized using digital technologies, digital communication networks, computers, software and other components of ICT. We also need to mention lifecycles for e-business and e-commerce, which have had their uos and downs. It is generally accepted that e-business and e-commerce cross through several stages:”e-business 1.0” (19952000), where the companies were buying all sorts of immature technology; “e-business 2.0” (2002-2005), focused on cutting costs with conservative attitudes towards ICT; “e-business 3.0” (2006- until nowadays), where business models are change with estrategy. Here e-business models are driven by market developments and competitive demands. In global level (2007/2008) main competitors are USA, EU-25 and country notably from Asia. In traditional businesses, the companies used physical equipment for better production processes which added new products or new value to existing products and had a their own

channels in communication for minimizing the risk from competitors. Digital knowledge base economy and digital information include: 1) Digital services and products and 2) Physical products which sell on internet. That means now we have two types of companies: a) pure virtual dot.com sell digital products with digital content (software, music, articles of scientific journals, e-books, newspapers, magazines, movies) and can be fulfilled electronically-online. Its costs are for internet communication, hosting, web application, epayments and hardware, b) physical dot.com (brick–and-click sells products in physical form with physical content and must be sent to customers offline. The costs, for these products are same as for digital plus including the costs for fulfillment, distribution, coordination in shipment and payment and quality control. The different level of ICT implemented online working has three ways of e-transactions: - offline- transactions are being made via e-mail and the delivering is traditional - online –for digital products, the orders, shipping and payments are electronically, and if the product is in physical form, the fulfillment is physical, the payment is made electronically, whereas the delivering from seller to customer and the accepting of the physical products by the customer is traditional. No matter whether the ICTs companies (micro, small, medium or large) are from IT sector or any other sectors (primary, secondary or tertiary sector), the performance of companies is based on a combination of four sets of indicators: 1) productivity (labour productivity and operational costs); 2) growth (revenue from sales and profitability); 3) innovativeness (investment in innovation and investment in ICT) and 4) competitiveness (competition on price and competition in quality). Productivity changes are estimated by retailing gross outputs to changing labour costs and other costs (operational). Growth is estimated on the basis of changes in revenues from sales as well as changes in profit margins.

12/

What is "e-Business"?, http://www.ebusiness-watch.org/about/what_is.htm

How Small Places Change the World Page 8 Fulbright Academy 2009 Conference

Innovativeness is assessed by estimates on the relation between capital investments in innovation in general and ICTs especially. Competitiveness is assessed by relating the importance of competitions on quality and on price in relation to changing market shares. Labor productivity- investment in ICT is crucial for labour productivity growth Operational costs - ICT has stronger effects on decrease rather than increase of operational cost. Revenue from sales - almost half of the companies experienced an increase in revenues due to ICT and other factors. Profitability - significantly contribute to improving profitability. Investment in innovation - capital investment of firms in innovation is broadly defined as technology renewal and re-engineering of business processes and organization. Investment in ICT- ICT investment takes up a substantial part of the efforts of firms to modernize. Competition on price - price competition plays a crucial role gaining market shares. Competition on quality - ICT is driving force for competition on quality. The loss of market share is a result of competition on quality. Conclusion Over the last decade the ICT and internet have brought about significant changes in the economies and societies. The ICT and Internet revolution is not over. In the next years the internet will become much faster due to the rollout of very high speed broadband networks and this will permit the launch of many new interactive media and content services. The internet will also become more pervasive; available anytime and anyplace due to the widespread development of low cost wireless broadband and the merging of fixed and wireless communications. Europeans have massively adopted broadband and internet services. This is changing the

economy and transforming lifestyles. But the benefits of these significant changes for the European economy will only be unleashed if several challenges are tackled. First the internet economy must be kept open, notably to innovative business models. This requires the continuation and reinforcement of the current pro-competitive regulation of e-communications markets and appropriate consumer safeguards. Secondly, equipping networks for the internet of the future will require: major investments in infrastructure to create a high-speed internet; the development of the internet architecture to meet future needs; and more access to spectrum on a flexible basis to allow wireless services to take to the air. Third, the exponential increase in internet use will raise security and privacy challenges. RM belongs to developing countries. The main reasons are transition processes in last decade on 20 century. But in this first decade of 21st century, special in its last quarter do effort for high economic development. RM has not forces to be innovator in ICT, but to use amenity of ICT is easier and do it. With many ways for education of population to be closer to computers and internet which were presented in separate parts of this paper, with ICT companies which offer ICT equipment and some software as outsourcing and cover the countries of close environment help for higher growth of economy. But, the general world economic crises in this
How Small Places Change the World Page 9 Fulbright Academy 2009 Conference

period is one very unfavorable conditions which influence on chosen way toward better and competitiveness economy. References: 1. “Broadband Performance Index- Monitoring High-speed”, 2008
“Information Technology Outlook 2006”, OECD, Table 1A.2.5, p. 61. (ISBN 92-64-

02643, http://dx.doi.org/10.1787/110545204168

2. EIU & IBM 2005 report addressing 65 countries, http://www.eiu.com/2005eReadinessRankings 3. “The European e-Business Report 2008- The impact of ICT and e-business on firms, sectors and the economy”, 6th Synthesis Report of the Sectoral e-Business Watch

European commission and Business Watch, (www.ebusiness-watch.Org (www.ebusiness-watch.org). 4. “ICT, Innovation, and Economic Growth In Transition Economies- A Multi-country Study
of Poland, Russia, and the Baltic Countries”, An info Dev publication prepared by ECORYS Nederland in collaboration with TNO and IDEA2007,

http://www.infodev.org/en/index.html 5. Judith E. Payne, “E-Commerce Readiness for SMEs in Developing Countries: A Guide for Development Professionals”, Produced Academy for Educational Development http://ec.europa.eu/information_society/eeurope/i2010/digital_divide/ind ex_en.htm 6. “Measurement and economic analysis of e-business in Europe”, http: //ec.europa.eu/enterprise/ict/policy/econ-anal/index.htm
7. “The Report from Bridges – Organisation Contains an Inventory of E-readiness Assessments of a Total of 188 countries “,

http://www.bridges.org/files/active/0/ereadiness_whowhatwhere_bridges. pdf) 8. “Report of the Expert Meeting on Improving the Competitiveness of SMEs in Developing Countries: The Role of Finance, Including e-Finance to Enhance Enterprise Development”, Trade and Development Board, Sixth Session, Commission on Enterprise, Business Facilitation and Development Geneva, 2002, p. 1. 9. Vanesa Grey “Market Information and Statistics Division Telecommunication Development Bureau”, Symposium on Telecommunications to Commemorate the 10th Anniversary of the Fourth Protocol to the GATS, 20-21 February 2008, Geneva, 10. William Castaings, Stefano Tarantola , “The 2007 European e-Business Readiness Index”, JRC, IPCSEUR 23254 EN - 2008

AFRICAN ECONOMIC RESEARCH CONSORTIUM (AERC)
.

A Review of Methodology for Assessing ICT Impact on Development and Economic Transformation
Prof. Samuel Wangwe Daima Associates Dar es Salaam Tanzania

[email protected] Contribution to the AERC Project on The Impact of ICTs on Economic Development and Transformation July 2007
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Table of Contents
1.0 BACKGROUND AND CONTEXT ............................................................................1 2.0 THE OBJECTIVE OF THE STUDY AND RESEARCH QUESTIONS...............4 2.1 OBJECTIVES...............................................................................................................4 2.2 RESEARCH QUESTIONS.............................................................................................5 3.0 REVIEW OF METHODOLOGICAL APPROACHES ............................................8 3.1 GAP ANALYSIS ...........................................................................................................8 3.1.1 Gap Between Countries .................................................................................8 3.1.2 Gap Analysis Within Countries...................................................................10 3.1.3 Extent and Determinants of Access .........................................................10 3.2 IMPACT ANALYSIS ...................................................................................................13 3.2.1 Assessing Impact of ICT Production.......................................................13 3.2.2 Assessing Impact of Using ICT .................................................................15 3.2.3 Quantitative and Qualitative Analysis of Impacts ....................................23 _____________________________________________________________
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1

A REVIEW OF METHODOLOGY FOR ASSESSING ICT IMPACT ON DEVELOPMENT AND ECONOMIC TRANSFORMATION 1.0 BACKGROUND AND CONTEXT
The process of technological innovation in the late 20th century has led to significant developments in new technologies such as biotechnology, new materials and microelectronics together with innovations in software development. The combination of advanced microelectronics and innovations in software development has led to systemic technologies which have come to form a pervasive cluster of information and communication technologies (Mansell, 1994)1. As information and communication technologies (ICTs) diffuse into all branches of the economy their impact has come to be very pervasive. The pervasiveness of the ICTs is posing the challenge of assessing their impact on economic development and transformation. The purpose of this chapter is to review the methodology for assessing this impact. ICT refer to a myriad of stand-alone media, including telephone and mobile telephony, radio, television, video, tele-text, voic e information systems and fax, as well as computer-mediated networks that link a personal computer to the Internet. ICT is an integrated system that incorporates the technology and infrastructure required to store, manipulate, deliver and transmit information, the legal and economic institutions required to regulate ICT access and usage, and the social and

inter-personal structures which allow information to be shared, facilitate access to the ICT infrastructure, and through which innovation takes place. The ICTs will be disaggregated into ICT producing activities and ICT using activities. ICT producing industries will be categorized into ICT producing manufacturing activities and ICT producing service activities. According to SNA Rev 3 ICT producing manufacturing are those which manufacture products intended to fulfill the function of information processing and communication or must use electronic processing to detect, measure or record physical phenomena or control of physical process. ICT producing services are those which produce services that are meant to enable the function of information processing and communication by electronic means.
1 Mansell,

R. (Ed.).The Management of Information and Communication Technologies: Emerging Patterns of Control. Science Policy Research Unit. Published by The Association for Information Management, London, 1994.

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2 The degree of competitiveness is largely determined by the extent to which economy rests on three pillars: ‘knowledge’, ‘information’ and ‘technology’. These are terms which lack precise meanings. The framework paper by Nissanke has addressed these terms as follows: • The term “Knowledge’ refers to the scientific and technical knowledge in areas such as computer science, information technology, engineering and manufacturing. • The term ‘technology’ refers to the means and the processes used in the application of scientific and technical knowledge to improve or modify our natural environment, or to innovate the things that we have already produced, in order to satisfy perceived materialistic human needs, from the production of things that we need and the comforts that we take for granted in our day-today life to taking care of our environment. • The term “‘Information’ complements ‘knowledge’ but it refers to knowledge about ‘attributes’ of different aspects of our material life such as the quality of a product or a service, market information such as cost and prices, the performance of a worker or a company, the facilities provided by a bank or a development agency, track record of an entrepreneur or trustworthiness of a borrower, trustworthiness of a system, safety of a plant, the state of climate, etc. Thus, all three concepts, knowledge, information and technology, play an indispensable role in any development effort undertaken towards a knowledgebased economy. The strengths and weaknesses of the three concepts serve as a gauge to identify how far, and in which direction, African countries are likely to move in order to transform their economies into knowledge-based ones. A common definition of technological capability as adopted in the framework paper by Nissanke the ability of a given country to make use of the knowledge to acquire, assimilate, adapt, and change existing technologies and develop new products and processes to meet development objectives. The dimensions of technological capability include: • human resources capability, encompassing the ability of humans to

understand technical processes, acquire the knowledge about them, interpret and adapt it to suit the local conditions and apply it creatively to the solution of practical problems, _____________________________________________________________
A Review of Methodology for Assessing ICT Impact on Development and Economic Transformation

3 • process and management capability (in relation to industrial plants and processes), • institutional infrastructure capability, implying the existence of certain specific institutions that facilitate the integration of technical knowledge possessed by the society as a whole into a coherent framework and thus its application in a complementary and productive manner for the benefit of the society as a whole. The concept of institutional infrastructure implies a common purpose shared by the society drawing its strength from the psychological motives and the political aspirations of the society, • technological infrastructure capability, and • financial capability. _____________________________________________________________
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4

2.0 THE OBJECTIVE OF THE STUDY AND RESEARCH QUESTIONS
2.1 Objectives
The objective of this study is to investigate the impact and implications of ICTs on economic development and transformation in Africa. Assessing the impact of ICT will address two dimensions (i) Identifying the impact of ICT production and use in production and growth generating activities and specific sectors that could lead to economic development and transformation in Africa (ii) Exploring options and possibilities of harnessing ICT to more effectively impact on economic development and transformation in Africa. The use of ICT to enhance economic development and transformation in Africa will entail addressing the impact of ICT on changin g the structure of the African economy (composition of agriculture, industry and services), expanding economic and social development opportunities, facilitating diversification, exploring options for building competitive advantages, facilitating efficient functioning and responsiveness of institutions (including markets) with a view to creating vibrant markets and institutions. To address effectively the impact of the pervasive diffusion of ICTs the study will explore structural as well as cost factors, the influence of ICTs on growth and factor productivity and the impact influence on employment and investment. The impact of ICTs on poverty reduction and on raising the standard and quality of life of the poor will be explored including addressing indirect impact on poverty through growth and productivity in activities in which the poor are most actively engaged. The impact of ICTS on governance will be addressed including its implications on access to public knowledge that can influence governance structures towards more democratic and participatory processes and towards raising levels of awareness on the way

development agendas are negotiated . Related questions will be raised as a ways in which ICTs may have come to play an important role in mediating communication and information relationships in business and everyday life as well as implications of public policy. The extent to which public policy and ICT options are balanced with other socio-economic objectives will be explored. In this context, the study will _____________________________________________________________
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5 explore whether the ICT policy exists and if it does explore the extent to which it is integrated into relevant socioeconomic development policies and strategies.

2.2 Research Questions
Examples of research questions that could be asked inc lude the following What is the impact of ICT on breaking barriers to knowledge, information and on reducing information or knowledge gaps in production, organization and distribution? These could be disaggregated into more specific aspects of ICT (e.g. Internet, telephony) and how they impact on specific activities in different sectors i.e. agriculture, tourism. What is the impact of ICT on governance e.g. on participation as regards specific ICT components and sectors? What is the impact of ICT on economic opportunity such as in trade, business activities and interaction in respect of specific ICT components and sectors ? What is the status of official statistics on ICT and the extent to which the available data are reliable, accurate and are comparable internationally? Undertake the analysis of the link between ICT and development goals such as poverty reduction, economic growth and competitiveness. Specific questions could include: What is the relationship of poverty and ICTs?, How is ICT actually benefiting the poor (directly and indirectly)? What/where are the impacts of ICTs on poverty reduction (in general or on sectors where the poor are active)? How are ICTs influencing organization of production processes? How is the rate of adoption of ICTs impacting on investment and Total Factor of Productivity in the economy? Cary out the analysis of the mechanics of policy making including policy processes and its political economy (governance and power relationships, incentives and motivation of different actors). What has been the experience of policies for the regulation and coordination of selected sectors that have made use of ICT in their design, implementation and monitoring? Which are the existing co-ordination and regulatory structures in the selected sector that can or should be involved in ICT? More specifically what have been _____________________________________________________________
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6 found to be the most appropriate institutional structures for the promotion and regulation of ICT usage? Which are the existing co-ordination and regulatory structures in ICT that might impact upon production, processing or consumption? What role can the national and international private sector play in the promotion of ICT for coordination and regulation that improve production and value added

activities at different points along the supply chain? How can the economic and social impact of ICT on development and economic transformation be assessed for production and distribution in Africa? What stages of the supply chains are most likely to be affected by ICT in terms of productivity and profitability and what are the possible consequences in terms of job creation or loss; capital/labour ratios; gain or loss of control over production and distribution process? What is the impact of using ICT on various actors and the respective stages in the supply chain taking account of prices, profitability, choice and quality of life? The analysis should capture both intended and unintended consequences resulting from ICT usage at the selected levels of analysis. What are the costs of non-adoption of ICT at different levels (government departments, local authorities, enterprises of different sizes, households and individuals within households) and how is the burden of such costs distributed in society? What is the social impact of ICT on geographic location, isolation, market integration, education, income, wealth, gender, ethnicity, and social exclusion? What is the role of social networks in the use and diffusion of ICT usage? What factors determine the adoption of ICTs by firms at different levels of economic and technological development? What is the impact of ICTs on employment generation and transformation of the economy or specific sectors through new skills and new technologies? What policies influence the size and shape (demand characteristics) of the domestic market (e.g. taxation, wages), input costs or outputs for entrepreneurs _____________________________________________________________
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7 (e.g. land prices and use), nature of competition, foreign investment, and those that promote local upgrading and linkages between foreign and local agents. _____________________________________________________________
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8

3.0 REVIEW OF METHODOLOGICAL APPROACHES
Assessment of the impact of ICT on development and economic transformation should take into consideration the continuous interaction between technical and social processes. Transformations in the ICT environment are both technically and socially determined whereby the processes of technical change interact with the institutions in which people are differentially empowered to act. Socioeconomic and technical factors interact to shape the in novative processes that influence ICT developments in a dynamic way. Advanced ICTs are being constructed and constituted by a complex matrix of cultural, social, political, economic and technical relationships that are mediated by changing institutional relationships (Freeman, 1994)2. Some of these institutions arise spontaneously from social and market circumstances and others are deliberately created by government. The methodological approaches that have been used are categorized into those focusing on gap analysis and impact analysis. These analyses can be further categorized into those adopting quantitative analysis and those adopting a qualitative analysis in respect of either engaging in the production of ICT or in its use ICTs or both.

3.1 Gap Analysis
Gap analysis addresses the impact of ICT on inequalities in society across countries or within countries. Studies on the digital divide have addressed the status of the digital divide and have conceptualized various forms of exclusion or inclusion in the world of ICT. These studies have addressed the challenges of exclusion and how the technology could be made more accessible and affordable. 3.1.1 Gap Between Countries A major concern in the literature has been expressed around the problem of the development gaps and more specifically the digital divide between the developed and developing countries. The digital divide is far from closed and in most parts of the world it is still widening (van Dijk, 2005)3. The gap between the developed and developing countries is extremely wide and it is growing. The digital divide is deepening where it has stopped widening. The significance of the digital divide is
2 Freeman,

C. The Economics of Technical Change: A Critical Survey Article. Cambridge Journal of Economics, 1994. 3 Van Dijk, Jan. The Deepening Divide: Inequality in the Information Society. SAGE Publications, 2005.

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9 manifested in ICT products and outputs such as Internet access and cellphones and in ICT inputs such as engineers and scientists. The main aspects of the African economies, which have important implications for attenuating digital inequalities are: the low level of development, low level of knowledge and physical infrastructure and limited benefits associated with ICTs (such as employment creation, productivity growth). The divide between nations can be explained in terms of gaps in objects like capital, raw materials and human capital or in terms of gaps in ideas represented by instructions that are needed to combine physical resources to produce economically valuable commodities. In recent years, the gaps in ideas as represented by knowledge generation and technological change have gained in importance as determinants of levels of development and levels of competitiveness. Invention, innovation, discovery and technological change are activities which increase the stock of intangible knowledge or ideas (Pohjola, 2001). ICTs have created a world that is more interconnected than ever before. Growing interconnectedness has permeated economic relations (e.g. trade, finance, investment and global organization of production) as well as social and political interactions. Problems of marginalization and exclusion that have been associated with globalization are due to deficiencies in the governance of globalization which in turn largely derive from the behaviour of nation states (ILO, 2004)4. Employment effects of ICT have influence on marginalization or social and economic inclusion. Marginalisation is real in the global economy threatening to make redundant whole countries especially the least developed countries and a whole section of people excluded from the informational networks. There are more jobs and a higher proportion of working age people employed including greater incorporation of women in paid work. However, employment effects are influenced by social institutions to a greater extent than the influence of new production systems. It is expected that the spread of ICTs in Africa will enhance Africa’s participation in

the knowledge economy. The evidence that is coming out of recent research is demonstrating this trend (e.g. the output from Research ICT Africa).
4 ILO:

A fair Globalization: Creating Opportunities for All. Report of World Commission on Social Dimension of Adjustment, Geneva, 2004.

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10 3.1.2 Gap Analysis Within Countries The more ICT is immersed in society and pervades everyday life, the more it becomes attached to all existing social divisions. Within specific economies, the ICT networks may to a greater or lesser degree be inclusive or exclusive . Even in the advanced countries, there is evidence of production being increasingly concentrated on the educated sections of the population aged between 25 and 40 with the threat of creating highly segmented social structures driven by extreme flexibilisation of work and individualization of labour (Castells, 1996)5. The risk of this threat is likely to be higher in developing countries of Africa. The studies that have been done in Africa have found two types of access gaps: the urban-rural gap and the rich-poor gap (Pigato, 2001). Four types of access have been identified in the literature: physical or material access; motivational access; skills access; and usage access. A distinction has been made between these four successive kinds of access that indicate the full appropriation of the new technology. Analysis of the causes of access (e.g. distribution of resources), analysis of consequences of the digital divide and analysis of the context of digital divide could be carried out along the lines of the four types of access. There is increasing evidence that access to ICTs has a direct impact on raising the standard and quality of life of the poor and has indirect impact on poverty through growth and productivity. Information and knowledge enable the poor to understand better their own circumstances and to voice their own opinions and needs more effectively. ICTs are being introduced to empower rural communities. 3.1.3 Extent and Determinants of Access Policy implications of these studies are essentially in terms of alternative regulatory incentives or selective financing with a view to promoting access to ICT by the otherwise marginalized sections of society. The research findings also throw some light on the status of distribution of ICT infrastructure and how the infrastructure could be made to facilitate and encourage further inclusivity of the ICTs. For instance, the study on Pro -poor Opportunities and Challenges in Liberalizing Markets (WDR, 2005) is formulated with a view to addressing this challenge. ICT infrastructure is made up of three components: telecommunications, computing and connectivity infrastructure. Connectivity infrastructure has four components: the aggregate bandwidth of the domestic backbone(s); the aggregate bandwidth of the
5 Castells,

M. The Information Age: Economy, Society and Culture. Vol. I. The Rise of the Network Society. Published by Blackwell, Massachusetts, Oxford, 1996.

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11 international IP links; the number and type of interconnection exchanges; and the type and sophistication of local access methods in use. Local, National and regional telecommunications infrastructure include server connectors, local loop telecommunication lines, inter-nodal connections, and switching systems among

others, and determine the cost and quality of access. Users in high-bandwidth telecommunications environment are likely to have access to lower cost connections. Most developing countries face capacity constraints, largely a result of thinbandwidth and frequent power outages. Another WDR study addresses the role of telecom regulation in influencing network investments opportunities (Terrab, 2006). The insights from this study would be useful in understanding issues of access and spread and expansion of telecom networks. This information would be complementary to information that would be generated by the proposed study on the impact of ICTs on the economy. The study on Information Provision and Participation in Regulatory and Policy Processes (Mahan of Comunica, 2005) has been designed to address information provision practices and communication with a view to enhancing the participation of a wider range of stakeholders in the regulatory and policy making processes. The study provides useful information on the role of stakeholders or beneficiaries of ICTs in encouraging better access and therefore expanding the benefits of ICT in society. The study on indicators of the network use and development is designed to capture more effectively the developments in terms of access to and use of ICTs in developing countries. The findings are expected to facilitate monitoring and evaluation of progress and efforts being made in ICT deployment and adoption. Research ICT Africa (RIA) has produced a document “Towards an African e-Index” indicating ICT access and usage by households and individuals across 10 African countries6. RIA is a network of 14 African institutions with the vision of developing a sustainable information society and network knowledge economy by providing data and analysis that may be required for designing ICT policies and regulatory processes and monitor and review those policy and regulatory developments. This is a useful source of information for understanding the status of ICT access in Africa. However, it should be noted that it is difficult to measure the total number of Internet users given the large number of shared accounts, along with the relatively high and rapidly growing use of public access services such as Telecentres, and cybercafés. Although the number of dialup subscriber accounts is readily available, these figures are only a partial gauge of the size of the Internet sector and should be looked at
6 Gillwald,

Alison (Ed) Towards an African e-Index: household and individual ICT access and usage across 10 African countries. The LINK Centre, Wits University School of Public and Development Management, Johannesburg, 2005.

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12 along with other factors such as the quantity of international traffic each country generates. However, an enhanced understanding of the status of ICT, recent trends and challenges of improved social inclusion are useful considerations as inputs into the analysis of impacts on the economy and can be used to improve understanding of how positive impacts on the economy could be enhanced through attainment of better access to ICTs. One of the research projects under WDR has been designed to explore innovative models of financing ownership and management. The study addresses how alternative models of ownership, management and financing can influence access and adoption of ICTs (Bruce Girard, 2005).

Research on e-Access and Usage at household level has revealed the demand side of ICT by individuals and households and how ICTs are used across 10 African countries. These findings have filled an important knowledge gap and will contribute to policy making. There is need for information on the impact of ICTs on the economy in order to better appreciate the kinds of demands that need to be satisfied first if the positive impacts of ICT are to be optimized. The two sets of studies are complementary in that sense. Previous work on ICT in Africa is rather scanty. For instance, a recent study done by UNU-INTECH (Oyeyinka and Lal, 2004)7 employed firm level data from three countries (two of them Nigeria and Uganda being in Africa) to analyse factors determining the adoption of internal e-business technologies in developing countries. The study found that adoption of ICTs was influenced by size of operations, export performance, profitability, value addition, skill intensity, academic qualification of CEOs, learning processes and technological collaboration with foreign firms. The study found bi-directional relationships among several factors although all causal relationships could not be identified due to lack of sufficient time series data. In another study (Oyeyinka and Lal, 2004a) 8it was found that sectorspecific factors influenced the degree of adoption of e-business technologies. It was also found that there are significant variations in the conduct and performance of
7 Oyelaran-Oyeyinka

and Kaushalesh Lal. Determinants of E-Business Adoption: Evidence from firms in India, Nigeria and Uganda. UNU_INTECH Discussion Paper 2004-14. 8 Oyeyinka, Banji and K.Lal. Sectoral Pattern of E-Business Adoption in Developing Countries. UNU-INTECH Discussion Paper 2004-7.

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13 firms that use lower levels of e-business tools from those categorized as the most advanced users. The IDRC studies and others which have been cited here have provided useful insights into the status of access and adoption of ICTs. The proposed study on the impact of ICT on the economy is complementary to these studies. These studies have been designed to enhance the understanding of the status of acces s and adoption of ICT and have explored ways in which access could be enhanced. Knowledge of the benefits and other impacts of ICT will complement the information on adoption and use of ICT. Policy formulation requires adequate knowledge of both (impacts and access). The approach to be adopted in this study will therefore be to establish the status and patterns of access and adoption with a view to throwing light on the possible impacts in terms of economic development and transformation.

3.2 Impact Analysis
The ICTs will be disaggregated into ICT producing activities and ICT using activities. In assessing the impact of ICT it is important to distinguish which aspect of ICT is being assessed. Productivity increase has occurred in ICT producing sectors and in ICT using sectors9. The breakdown of factor productivity aggregates into sectoral contributions has helped to show attributions to ICT producing sectors, ICT using sectors and other sectors (Pilat, Lee and van Ark, 2002). The impacts in this category can be direct or indirect. 3.2.1 Assessing Impact of ICT Production ICT producing industries are categorized into ICT producing manufacturing activities

and ICT producing service activities. ICT Producing Activities include: Design and Research; Equipment Manufacturing; Assembling and CKDs and Software Developers. Investing in the production of ICT goods can be done with the specific aim of entering the ICT producing market, in particular, in areas such as software development and assembly and manufacturing
9 According

to ISIC Rev 3 ICT producing manufacturing are those which manufacture products intended for fulfil the function of information processing and communication or must use electronic processing to detect, measure or record physical phenomena or control of physical process. ICT producing services are those which produce services that are meant to enable the function of information processing and communication by electronic means.

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14 of computing equipment and components. Though initially they may be limited to meeting the internal demand, such efforts may offer, in the longer term, opportunities for export and outsourced technological processes. Although this path may not be associated with significant benefits to economic development in African countries the importance of efforts directed at the production of ICT goods has been demonstrated by those developing counties that currently enjoy generally significantly higher growth rates in ICT exports, compared to other export-oriented economic sectors. This suggests that such efforts could offer, at least for some African countries, long-term strategic advantage in turning their economies into modern knowledge-based economies. Production of ICT goods can contribute to economic growth because the global demand for ICT products is growing faster than average of most sectors. In addition, the production of ICT products involves the use of highly advanced manufacturing processes the mastery of which is likely to generate higher productivity growth than the average of other sectors. ICT producing sectors showed important contribution to factor productivity in Finland (both ICT-producing manufacturing and ICTproducing services). This reflects rapid technological progress in the ICT producing sectors. In the case of Finland, the contribution of Nokia is clearly dominant. ICT sector is one of the leading sectors in R&D effort and the returns from research in ICT should be widespread given their pervasive use. In addition, ICT plays a leading role in knowledge creation, codification and transmission. International R&D spillovers have been shown to be significant whether in terms of social rates of return, elasticities of TFP growth or growth contributions (Mohnen, 2001)10. The main determinants of spillover appropriation are the acquisition of expertise through own R&D and education, the openness to international contacts and close collaboration with foreign researchers. (a) ICT Manufactures of hardware According to SNA Rev 3, ICT producing manufacturing are those which manufacture products intended to fulfill the function of information processing and communication or must use electronic processing to detect, measure or record physical phenomena or control of physical process. In the context of Africa, ICT hardware may be disaggregated into telecommunications equipment and computer hardware manufacture and assembly. The latter should cover manufacture and assembly of
10

Mohnen, P. International R&D Spillovers and Economic Growth. In Pohjola (Ed.), 2001.

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15 computers (branded or unbranded/clones) and include clusters that are emerging in activities associated with repair of computers. In telecommunications hardware should cover the manufacture and assembly and repair of telecommunications related equipment such as cell phones and others. (b) ICT Production of Services ICT producing services are those which produce services that are meant to enable the function of information processing and communication by electronic means. The main categories of products are software and services. The detailed classifications can be sought more precisely from the System of National Accounts. 3.2.2 Assessing Impact of Using ICT ICT Using Activities include Service providers; Application Developers/ Content providers; Intermediaries and Sector Specific users, government, private firms etc. Reliance on ICT applications for efficiency gains may occur in industry, commerce, agriculture and public administration to result in significant efficiencies, improved quality of service in areas such as health and education, better quality of life for citizens, enhanced and new market opportunities for entrepreneurs and so on. These may take numerous forms, benefiting, amongst others, rural communities through marketing and financial services and producers of developing countries through new global markets for their business and generate new businesses and new and better employment prospects for all. Users of ICT may be categorized by type of user. Applications of ICT range from personal use, to use in business and use in government. The types of uses can be categorized into individuals or personal use and households level use, use in small and medium businesses/enterprises, use in large businesses/enterprises and use in government. An alternative categorization may be made by sectors. This kind of categorization can be made based on the most likely users in a particular country. These may be the financial sector, the trade sector and other services sectors to be selected after preliminary investigation has been carried out at country level. Uses of ICT are diverse ranging from e-commerce, enterprise management, eservices etc. It is recommended that priority be given to the use of ICT in enterprise management and in production systems in the form of automation. Factors driving investments in the use of ICT could be identified for policy consideration. These factors could include national wealth, infrastructure, human resource development, wage rates and prices. _____________________________________________________________
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16 ICTs have the feature of being able to be customized to personal needs or local conditions. It is therefore imperative to define the needs at various levels and explore what ICT can do to meet those needs. At the national level for instance, it is important to define the national development objective and strategy as a basis for posing the question of use of ICT for realizing the national objectives. In the context of Africa, concern over growth and poverty reduction would have to be addressed along with concerns over the transformation of the African economy towards a more dynamic economy which can better cope with the global competitive environment.

The World Dialogue on Regulation (WDR), under a Learning Initiative on Reforms for Network Economies (LIRNE), has produced several research reports addressing the status of various aspects of ICT in selected countries and diversification of networks. These studies have taken a snapshot of selected aspects of ICT like telecommunications, microtelcos and community based networks. These studies have also addressed specific issues relating to institutional design of regulators, mobilizing ICT for effective disaster warning and how access to ICT could be enhanced. The thrust has been placed on the status and prospects of better access or enhanced inclusion. For instance, the research project on replicability of microfinance approach to extending access to telecommunications is addressing the issue of access. These studies are essentially designed to deepen the understanding of the status of aspects of ICT, how the status could be better measured and how access could be enhanced or their application improved. These studies produce outputs which throw light on the ingredients needed to analyse the impact of ICT on the economy but they fall short of addressing that challenge directly. Returns from investments which can make ICT adoption more widespread in the economy can be very high to the extent ICT reduces transaction cost in business operations. ICTs can create positive economic and social multipliers. Economic multipliers are associated with increasing productivity in the economy through more efficient information gathering and reduction of transaction costs, improving the functioning of markets and accessing new markets (e.g. e-commerce), lowering cost of communicating and improving the management of supply chains. Social multipliers can be manifested in enhanced social cohesion and improved safety and survival. ICT can enhance the functioning of government in general and in public service delivery such as health and education. The functioning of government can be improved through enhancing efficiency in performing administrative and planning functions, facilitating government decision making processes, provision of government services to its people, promoting accessibility to government and _____________________________________________________________
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17 making it easier for peoples’ voices to be heard by government and government messages to be heard by the people. ICT is both a significant sector in the economy and a vital service to business and industry and other users in the economy. In the information economy, the role of ICTs become even more critical for economic development through its role in the system of national innovation, development of entrepreneurship and public service delivery. The dynamism of ICT is expected to come from several sources including the decline in the prices of information processing, convergence in communication and computing technologies and the rapid growth in network computing. The communication networks and interactive multimedia applications are providing the foundation for transformation of existing social and economic relations into an information society (Pohjola, 2001)11. The role of ICT in economic development is expected to be manifested in productivity increase, enhancing the quality of life, reducing prices, creating new economic activities and new employment activities as well as generating wealth

(Pohjola, 2001). An important revolutionary aspect of ICT is the possibility it offers to unbundle information from its physical carrier characterized by the global movement of weightless bits at the speed of light. This is manifested in increasing share of all services in the GDP and the growing importance of ICT in particular. Some researchers have found it more manageable to examine specific components of ICT in order to allow more indepth analysis of the impacts. One example of this approach has been the analysis of the impacts of ICT by assessing the importance of the computer as a factor of production in the economy. The decline in computer prices and improvements in quality and performance has led to a substantial increase in the nominal share of computer and information processing equipment in fixed capital formation. However, the capital share of computer hardware has remained rather small because computers become obsolete quite rapidly. OECD countries that improved performance in the 1990s were generally able to draw more people into employment, increase investment and improve factor
11 Pohjola,

Matti (Ed.). Information Technology, Productivity and Economic Growth. International Evidence and Implications for Economic Development. WIDER Studies in Development Economics, Oxford University Press, 2001.

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18 productivity (Pilat, Lee and van Ark, 2002)12. ICTs contributed to this growth in two ways. First, ICTs contributed to increasing investment and therefore to capital deepening encouraged by the steep decline in ICT prices and the growing scope of their application. Reviews of models of technology adoption show that decreases in prices of new capital goods tend to increase economic growth. Second, ICTs contributed to factor productivity growth. The evidence from OECD countries has shown that ICTs facilitate economic growth by increasing productivity though this is a long-term outcome of ICT investment. Some studies have found that ICT capital has larger impacts on labour productivity than other types of capital suggesting that there might be spillovers from ICT investment (OECD-DAC, 2004a). ICTs have made it easier to disperse value chains both geographically and organizationally. ICTs have influenced management of supply chains and in the design of products and components by facilitating enterprise resource planning, business -to-business e-commerce markets and electronic data exchange. When combined with CAD and CAM systems, firms can communicate complex product specifications to outside suppliers permitting the creation of fully integrated computer-integrated manufacturing procedures that track product quality and inventory and design and production cycles. The suppliers or subcontracted firms are likely to benefit from membership in the production networks through transfer of technology gains, acces s to specialized technical and marketing expertise and the impetus that demanding purchasers provide to enhance productivity and innovation (Porter, 2000)13. However, recent research on the use of ICT suggests that the benefits from the use of ICT are likely to outweigh the benefits from production, which are limited to just one sector of the economy. Moreover, globalization of production of ICT is likely to deter most developing countries from reaping the benefits of producing ICT (Kraemer and Dedrick, 2001)14. The ICT using service sectors showed considerable contribution to factor productivity growth in Germany, Denmark and Finland. The impact of ICT use on factor productivity may be manifested in more productive firms

gaining market share, product diversification may be facilitated, customized services may be offered, it may be possible to respond more effectively to customer demand
12 Pilat,

Dirk., Frank Lee and Bart van Ark: Production and Use of ICT: A Sectoral Perspective on Productivity Growth in the OECD Area. OECD Economic Studies No. 35, 2002. 13 Porter, M.E. Location, Competition and Economic Development: Local Cluster in a Global Economy. Economic Development Quarterly, 14, 2000. 14 Kraemer, K.L. and Dedrick, J. Information Technology and Economic Development. Results and Policy Implications of Cross-country Studies. In Pohjola (Ed.), 2001.

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19 or it may help reduce inefficiency in the use of factors of production. Strong productivity growth was found in ICT-using sectors especially retail trade in the US where firms like Walmart used innovative practices to gain market shares and in turn forced competitors to improve their performance. Relevant evidence relating to the impact of ICTs on economic growth and productivity have not yet been produced for developing countries (OECD-DAC, 2004a)15. ICTs and related systems have shown the potential to contribute to economic growth and improvement in social conditions in the developing world. However, ICT growth is expected to influence growth through gains in labour productivity as well as total factor productivity. Developing countries and LDCs in particular are less well-equipped to tap the potential of ICTs to stimulate growth for several reasons such as economic stru cture (e.g. dominance of agriculture and low incomes) and policy issues (e.g. restrictive regulatory environments, low levels of human resource development). This phenomenon has been termed the productivity paradox. The productivity paradox suggested that computers are everywhere except in the productivity data (Solow, 1987)16. This paradox has been explained in terms of failure to pick it up in statistics to the extent most improvements occur as improvements in the quality of services which are not captured in productivity data. It has also been argued that impacts of new technologies take time to emerge and it takes time to adjust to new organizational arrangements and to upgrading of human resources to cope with the challenges of the new technologies (OECD, 2003)17. To the extent it takes time and resources to operate a new technology then even a major technological revolution such as ICT may be associated with decline in productivity as has been shown by David (1990)18 and Greenwood (1997)19. This learning period is also characterized by increasing wage inequality as skilled labour has an advantage at learning.
15 OECD-DAC:

ICTs and Economic Growth in Developing Countries. DAC Network on Poverty Reduction. DCD/DAC/POVNET (2004)6/REV1, December 2004. 16 Solow, R. We’d Better Watch Out, Book Review No. 36, The New York Times, 12 July 1987. 17 OECD. ICT and Economic Growth. Evidence from OECD Countries, Industries and Firms. OECD, Paris, 2003. 18 David, P.A. The Dynamo and the Computer: an historical perspective on the modern productivity paradox. American Economic Review. Papers and Proceedings 80. 1990. 19 Greenwood, J. The Third Industrial Revolution. Washington DC. AEI Press, 1997.

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20 ICTs may improve the quality of education to the extent they make it easier to access vast amounts of information, facilitate presentation of materials using multimedia and collaboration with others to improve classroom experience and

ultimately lead to improved cognitive skills. However, to make effective use of ICT requires additional complementary investments such as investment in teacher training and adaptation of the curriculum to accommodate the adoption of ICTs. Experience in other countries has shown that a major challenge here is in addressing the question of how ICT should be integrated and how classroom conduct could be changed to take full advantage of the new technology (Yusuf et al, 2003). ICT can also facilitate expansion of reach of long distance learning allowing people to interact with education and learning and allowing the accommodation of larger numbers of learners from virtually all places that can be reached by ICTs. ICTs have been shown to impact on poverty reduction by impacting on poverty reducing sectors such as the social sectors. For instance, ICTs can increase the volume and flow of medical information which can impact on the health of the poor. ICTs can be used to influence learning and delivery of education. ICTs impact on poverty through their impact on productivity and income generation as it gives to sectors where the poor are likely to be most actively engaged. For instance, productivity increase in the SMEs can have poverty reducing effect to the extent SMEs gain access to market information (faster and more cheaply), access to information on input prices and output markets and to the extent they strengthen forward linkages to the market (Pigato, 2001)20 and backward linkages to the domestic suppliers of inputs. Rural based ICTs have the potential to impact on agriculture through increased revenues and diversification of agricultural production, made possible by delivering SMS-based price and crop information (OECD-DAC, 2004)21. ICT based access to public knowledge is influencing governance structures towards more democratic and participatory processes. It is influencing the way development agendas are negotiated. Telecottages, community networks and one stop shops for basic development information and statistics are facilitating access of communities to information flows that are raising levels of awareness. For instance, telecottages in
Pigato, M. Information and Communication Technology, Poverty and Development in SubSaharan Africa and South Asia. World Bank, Washington DC, August 2001. 21 OECD-DAC: Leveraging Telecommunications Policies for Pro-poor Growth Universal Access Funds with Minimum -Subsidy Auctions. DAC Network on Poverty Reduction. Berlin, 27-29 October, 2004. DCD/DAC/POVNET(2004)13. October 2004.
20

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21 parts of Asia and Afric a are broadening access to information. Community networks are being introduced with public access points in locations like schools, libraries and community centres. One-stop shops with basic development information and statistics are being introduced in terminals that are located within the communities. Integrated systems are being designed to meet basic needs of rural communities. It is important to acknowledge that impacts of ICTs are not automatic. Some prerequisites may have to be present before the impacts can be realized. In this regard, some studies have also suggested that the US may have been able to benefit from spillover effects as ICT investment started earlier and was stronger. Diffusion of ICT may help establish networks which produce spillover effects the more firms are connected to the network. Increased use of ICT may also lead to greater efficiency in the creation of knowledge. Studies at firm level have been able to show spillovers from ICT capital although this has been difficult to show that

impact at the aggregate level. It has also been suggested that the US may have been able to benefit more from ICT since it got its fundamentals right. In particular, it has been reported that the impacts of ICT on the US economy were facilitated by high level of competition strengthened through regulatory reforms combined with sound macroeconomic policies and well-functioning institutions and markets. Studies have also suggested that a range of structural reforms in Australia have been important in driving the strong uptake of ICT by firms and have enabled these investments to be used in ways that generate productivity gains. This was particularly found to be evident in wholesale and retail trade and in financial intermediation. Experience from developed countries has shown that ICT investment can contribute to economic growth and in that process complementary factors such as human capital, and deregulation play an important role in accelerating the benefits of ICT investment both for firms and for countries. However, this potential impact of ICT on growth is not realized automatically or by simply transferring technology to the developing world. The design and formulation of ICT policies is increasingly having to face the challenge of improving their capacity to address the specific contexts in which ICTs are managed and implemented. The importance of context in terms of organisation, sector-specificity, country-specificity or region-specificity deserves recognition in the process of examining the role of ICT in economic development of Africa (Avgerou and Walsham, 2000)22. ICT sector is one of the leading sectors in R&D effort and the returns from research in ICT should be widespread given their pervasive use. In addition, ICT plays a
22 Avgerou,

C. and G. Walsham (Eds.) Information Technology in Context: Studies from the Perspective of Developing Countries. Ashgate Publishing Ltd. Aldershot, 2000.

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22 leading role in knowledge creation, codification and transmission. International R&D spillovers have been shown to be significant whether in terms of social rates of return, elasticities of TFP growth or growth contributions (Mohnen, 2001). The main determinants of spillover appropriation are the acquisition of expertise through own R&D and education, the openness to international contacts and close collaboration with foreign researchers. Value chain analysis The framework paper by McCormick and Onjala in this volume gives pointers to how each of the components of ICT can be associated with a value chain that can offer benefits to society. A value chain is the sequence of production, or value adding activities that bring a product from its conception to its final consumption. The term ‘global commodity chains’ was extensively used in economic literature in the early 1990s, while the business community often refers to ‘supply chains’ Recognition of this chain of value addition encourages the investigation of th e distribution of that value among the various actors and promotes a search for upgrading or value addition strategies. Various components of the chain may be associated with high or low linkages to other activities which supply inputs and support services to facilitate activities in the respective components of the chain. Value chain analysis also highlights the issues of chain coordination or governance (control of the chain by various actors).

Value chains may be buyer-driven (often labour intensive and low technology) or producer-driven (often capital intensive and high technology). In addressing these impacts, value chain analysis could be used as a tool for mapping and making assessments processes and dimensions involved. Thinking in terms of va lue chains helps them to identify the appropriate “niche” in the chain as a central part of the strategic plan. For example, in the garment or footwear industry, the relevant criteria are to map out: o Product quality o Price o Time from order to delivery o Punctual delivery o Flexibility o Innovative design. _____________________________________________________________
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23 The value chain approach provides a framework for sector-specific action addressing domestic as well as global linkages and helps to identify leverage points and ways to intervene. The Indian software industry provides a good example of how developing country enterprises can take advantage of the global trend to outsourcing of services and providing software services tailored to the demands of global businesses. Value chain analysis helps the researcher to find out where the bottlenecks are. Which part of the chain holds up progress in the others? Who (government, private sector, PPP, donors) is most appropriate at doing what? Demand-side factors ICTs associated with knowledge products reduce the distance between consumers and producers of knowledge products. It has been shown that demand side factors such as consumer attitudes on sophisticated goods, training, education and skills for consumption (rather than production) importantly influence patterns of technological development and therefore economic growth and development. This explains the failure of the industrial revolution to occur in technologically advanced China of the 14th Century (Quah, 2001)23. The policy implication of this finding is that training and education can be important, not only in providing skills for work and production, but also in providing a sufficiently strong demand base. Government policies which make consumer attitudes more favourable to knowledge products can cultivate demand which appreciates and exploits sophisticated technology thus enhancing peoples’ participation in the information economy. 3.2.3 Quantitative and Qualitative Analysis of Impacts Methodological approach needs to be specific and focused on the application of ICT on specific activities. Qualitative and quantitative methodologies should be combined as deemed appropriate in specific conditions. Research questions will determine what methodologies can be employed within specific country constraints. Quantitative approaches often involve the use of sample surveys with emphasis on quantitative indicators such as income, consumption levels and access to technologies such as tele-density. The analysis of the impact of ICTs on economic
23

Quah, D. The Weightl ess Economy in Economic Development. In Pohjola (Ed.) 2001.

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24 growth and competitiveness largely rely on quantitative data as exemplified by the World Economic Forum’s Global Information Technology Reports. Weaknesses of quantitative indicators necessitate the use of qualitative methods to complement quantitative data to capture non-quantifiable characteristics such as decision making powers, authority, and the underlying motivation of individuals in using one technology or the other. Experience todate suggests that that a decision should be made as to the level of the analysis (micro, meso or macro levels) and combine quantitative and qualitative analysis in most appropriate ways. Insights from relevant fields (e.g. economics, political science, sociology) should be integrated into the analysis and different levels of analysis may be invoked as deemed appropriate. Considering the paucity of recent data on the ICTs, it is advisable to carryout systematic collection of data on the ICT sector and its growth, explore possibilities of improving on ICT indicators and indices and draw experiences and studies in other countries. Where appropriate indicators such as those developed by the World Economic Forum and the International Telecommunications Union should be used. Analysis of policies, policy process and performance requires first hand data on institutional contexts, political configuration and power relationships and incentives as well as access and usage data to review which policy lead to what level of ICT diffusion. This strand of research needs to draw from quantitative and qualitative information including national and cross -country data on democracy and governance (political freedom, participation of civil society, political volatility), access to communication services and the quality of policy and regulation. Subjective data are also important particularly on perception of stakeholders on policy and regulation and how this can be improved. Where qualitative methods are adopted researchers are expected to carry qualitative surveys and mapping of qualitative aspects such as policy making, regulation, power relationships , governance and social exclusion and inclusion using insights from other fields such as political science. Surveys can be used to collect quantitative data while case studies can be used to collect more indepth qualitative insights into specific sectors or enterprises. Micro-level studies are required at the level of the household or enterprise level and these should to the extent possible adopt impact assessment methodologies that _____________________________________________________________
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25 would allow for the identification of the contribution made by a specific intervention and take account of the importance of identifying the direction of causality. Such methodologies may adopt quantitative or qualitative approaches, and often may include some form of randomised intervention that affects the usage or access to a pre-identified intervention. By collecting information on the control, or counterfactual

group, and often by collecting information on initial versus post-intervention conditions, impact assessments can improve understanding of positive and negative impacts that can be directly attributed to an intervention. Even when an experimental approach is not followed, the structured research design adopted by impact assessments can be used to guide a less rigoro us assessment of the costs and benefits of a development intervention. Developing appropriate policy for both the private and public sectors, and understanding the impact of policy and how intervention actually takes place are thus important research questions for ICT usages in the economy. When addressing the impact of ICTs two considerations should be made. First, there may be a substantial time lag between ICT investments and their payoffs. Second, ICT is only one of the several factors that contribute to improved firm performance. Local, regional, and global policies influence the conduct and performance of firms. A framework linking these factors and the performance of firms would be preferred. In addition to internal factors influencing firm performance, account should be taken of determining external factors such as entrepreneurship, infrastructure, competitive environment, human resources, market preferences and cost of communication. These factors are also influenced by the global and regional infrastructure as well as the e-business technological profile., trends in FDI in telecommunications, privatization, convergence in communication technologies and R&D incentives and capital markets. The impact of ICTs on specific sectors can be addressed. Taking into account the level of investment in ICT that can optimize impact in the specific sector, the role of public investments to ensure optimum application of ICT in the sector for purposes of transformation and how various key actors in the sector may be affected and the distributional implications of the use of ICT. Within a specific sector indepth studies should be undertaken that examine the use, costs and benefits of ICT at the micro level (level of households, communities and enterprises ). These studies need to be able to distinguish the direction of causality (do ICT improve economic well-being, or does economic well-being result in increased ICT usage) as well as the distribution of usage patterns, costs and benefits within the unit being examined. _____________________________________________________________
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26 In undertaking sector level studies, both the quantitative analysis and the case studies could be approached by specifying common building blocks of the sectoral system of innovation. A sectoral Innovation System (SIS) has its own knowledge base and learning processes , it has specific technologies, systems boundaries, institutions and interactive activities. The basic elements of the SIS are: • Actors or agents : include individuals and organizations. Individuals include enterprise owners, and engineers/ scientists; while organizations include enterprises universities and firms, R&D departments, financial institutions such as development banks. • Knowledge and Learning Processes: Organizations and individual capabilities differ in their scientific and technological skills and experiences. The research should therefore carefully examine the different knowledge

bases and he processes of learning. The sector level studies are expected to cover sector timeline and evolution, sector mapping and sec tor innovation policies. • Sector timeline and evolution would address questions like what is the nature and dynamics of the sector? Who are the main players? What has been the performance of the sector to date? What challenges does the sector face? How effective have policies and support structures been in triggering innovation and developing a dynamic innovation capacity? • Sector mapping would cover issues such as Who are the main actors and organisations in the sector, what role do they play and what are their skills and competencies? Which actors and competencies are missing an d how can they be promoted? What is the role of policy in influencing the position and effectiveness of various actors? What is the extent of linkage between actors and organisations, what is the nature of these links and does it support interaction and learning? Which links are missing links are missing and what types of linkage need to be encouraged? • Innovation policies would address the role of policies in strengthening learning, investment and linkages that constitutes the bases for _____________________________________________________________
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27 dynamic innovative change on a continuous basis. Research would map policies that directly or indirectly affect technological capacity building, learning, linkages and investment within the computer system of innovation. These might include: It is important to define the needs at various levels and explore what ICT can do to meet those needs. At the national level for instance, it is important to define the national development objective and strategy as a basis for posing the question of use of ICT for realizing the national objectives. In the context of Africa, concern over growth and poverty reduction would have to be addressed along with concerns over the transformation of the African economy towards a more dynamic economy which can better cope with the global competitive environment. Applying quantitative and qualitative analysis is possible in specific areas of ICT itself or in any of the requisite infrastructures. The framework papers have gone into further details regarding specifc aspects of ICT. For instance, in the area of human resource development for the ICT development Nissanke has pointed out that relevant information will need to be gathered, synthesised and evaluated. The information will be gathered from government, the academia and the industry with emphasis on collection of human capital information on tertiary education and other forms of specialised education and to a limited extent on secondary education. It is recommended that information be collected on the quantitative indicators as well as qualitative indicators. The collected information is to be synthesised and evaluated based on clusters that can signify key attributes such as quantity and quality of desired categories of human resources, quality of the environment for professional development and related infrastructure. This approach can be adopted with

appropriate modifications to different sectors and country contexts. _____________________________________________________________
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28

4.0 CONCLUDING REMARKS
The review of methodology has shown that both quantitative and qualitative approaches to the impact of ICTs on economic development and transformation may be adopted in the analysis. The challenge is in adopting the methodologies to specific contexts with appropriate adaptations. In any case, the assessment of the impact of ICT on economic development and transformation should take into consideration the continuous interaction between technical and socioeconomic processes. The respective roles of various stakeholders should be considered allowing for some of these institutions to arise spontaneously from social and market circumstances and others to be deliberately created by government. The impact of ICTs on development and economic transformation can be mediated through several channels including its impact on the ways and the speed of acquiring information and knowledge (impact on education and learning) across societies and sectors; its impact on production and the way the production process is organized whereby the technology impacts on the organization of the work place resulting in productivity impact and the consequent impact on wealth creation by transforming traditional production systems as well as creating new production regimes; and its impact on networking with its consequences on the way business and research is carried out. _____________________________________________________________
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29 REFERENCES Castells, M. The Information Age: Economy, Society and Culture. Vol. I. The Rise of the Network Society. Published by Blackwell, Massachusetts, Oxford, 1996. Framework papers for the AERC project “The Impact of ICTs on Economic Development and Transformation in Africa” (2007) Freeman, C. The Economics of Technical Change: A Critical Survey Article. Cambridge Journal of Economics, 1994. Gillwald, Alison (Ed) Tow ards an African e-Index: household and individual ICT access and usage across 10 African countries. The LINK Centre, Wits University School of Public and Development Management, Johannesburg, 2005. ILO: A fair Globalization: Creating Opportunities for All. Report of World Commission on Social Dimension of Adjustment, Geneva, 2004. Mansell, R. (Ed.).The Management of Information and Communication Technologies: Emerging Patterns of Control. Science Policy Research Unit. Published by The Association for Information Management, London, 1994. Oyelaran-Oyeyinka and Kaushalesh Lal. Determinants of E-Business Adoption: Evidence from firms in India, Nigeria and Uganda. UNU_INTECH Discussion Paper 2004-14. Oyeyinka, Banji and K.Lal. Sectoral Pattern of E-Business Adoption in Developing Countries. UNU-INTECH Discussion Paper 2004-7.
Van Dijk, Jan. The Deepening Divide: Inequality in the Information Society. SAGE Publications, 2005.

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ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD) shall promote policies designed: – to achieve the highest sustainable economic growth and employment and a rising standard of living in member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; – to contribute to sound economic expansion in member as well as nonmember countries in the process of economic development; and – to contribute to the expansion of world trade on a multilateral, nondiscriminatory basis in accordance with international obligations. The original member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became members subsequently through accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973), Mexico (18th May 1994), the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996), Korea (12th December 1996) and the Slovak Republic (14th December 2000). The Commission of the European Communities takes part in the work of the OECD (Article 13 of the OECD Convention). Publié en français sous le titre : Les TIC et la croissance économique PANORAMA DES INDUSTRIES, DES ENTREPRISES ET DES PAYS DE L’OCDE © OECD 2003 Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be obtained through the Centre français d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, tel. (33-1) 44 07 47 70,

fax (33-1) 46 34 67 19, for every country except the United States. In the United States permission should be obtained through the Copyright Clearance Center, Customer Service, (508)7508400, 222 Rosewood Drive, Danvers, MA 01923 USA, or CCC Online: www.copyright.com. All other applications for permission to reproduce or translate all or part of this book should be made to OECD Publications, 2, rue André-Pascal, 75775 Paris Cedex 16, France. FOREWORD ICT AND ECONOMIC GROWTH: EVIDENCE FROM OECD COUNTRIES, INDUSTRIES AND FIRMS – ISBN 92-64-10128-4 – © OECD 2003 3 Foreword The 2001 OECD Ministerial report, "The New Economy: Beyond the Hype", concluded that information and communications technologies (ICT) are important, with the potential to contribute to more rapid growth and productivity gains in the years to come. Both the 2001 and 2002 OECD Ministerial meetings reiterated the importance of ICT for growth performance and requested the OECD to continue its work in this area. A request for further work on ICT and business performance was also made to the OECD in the autumn of 2001, by the US Secretary of Commerce, Mr. Evans. This report, which responds to OECD Ministers, revisits the contribution made by ICT to economic performance using new and more recent data to assess the degree to which the findings that appeared valid at the end of 2000 remain intact. The report also examines whether the policy conclusions from the previous OECD work require adjustment in the current economic environment, and what measures OECD governments should take to seize the benefits of ICT. The findings and policy implications of the work reaffirm and elaborate those of the OECD growth study. The report draws on work carried out in the OECD Directorate for Science, Technology and Industry, as well as work by statistical offices and research institutions in 13 OECD countries. Dirk Pilat was the principal author of the report. Important

contributions were received from Alessandra Colecchia, Andrew Devlin, Frank Lee, Paul Schreyer, Colin Webb and Andrew Wyckoff. Comments were received from across the OECD Secretariat. Drafts of this report were discussed by the Committee for Industry and Business Environment and the Committee for Information, Computer and Communications Policy. Participants at these meetings provided useful comments. A grant for this work by the US Department of Commerce is gratefully acknowledged. This work could not have been completed without the contributions of statisticians and researchers in many OECD member countries. This report highlights their achievements and is dedicated to their work. TABLE OF CONTENTS ICT AND ECONOMIC GROWTH: EVIDENCE FROM OECD COUNTRIES, INDUSTRIES AND FIRMS – ISBN 92-6410128-4 – © OECD 2003

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Table of Contents Main findings ............................................................................................ 9 Introduction .............................................................................................. 15 Chapter 1. The diffusion of ICT in OECD economies........................... 19 The state of ICT diffusion .................................................................... 20 Factors affecting the diffusion of ICT ................................................ 26 Diffusion in the OECD area – some conclusions .............................. 33 Notes ....................................................................................................... 34 Chapter 2. The contribution of ICT to growth ...................................... 35 The impact of investment in ICT ........................................................ 36 The role of ICT-producing and ICT-using sectors ............................ 38 ICT and competitive effects ................................................................ 45 The impact of ICT on aggregate productivity growth ...................... 47 Notes ....................................................................................................... 53 Chapter 3. ICT and firm-level performance .......................................... 55 Does ICT use matter? ........................................................................... 56 The impacts of ICT at the firm level .................................................. 58 Factors that affect the impact of ICT ................................................. 66 Does the impact of ICT at the firm level differ across countries? . 75

Concluding remarks on the firm-level evidence .............................. 76 Annex I. Some implications for statistics .......................................... 80 Annex II. Data for firm-level studies ................................................... 82 Chapter 4. Policy implications................................................................. 87 Strengthening competition in ICT goods and services ................... 88 Fostering a business environment for ICT adoption ....................... 89 Boosting security and trust ................................................................. 91 Unleashing growth in the services sector ......................................... 92 Harnessing the potential of innovation and technology diffusion .... 93 Concluding remarks ............................................................................. 93 Notes ....................................................................................................... 94 References ................................................................................................. 95 TABLE OF CONTENTS 6 ICT AND ECONOMIC GROWTH: EVIDENCE FROM OECD COUNTRIES, INDUSTRIES AND FIRMS – ISBN 92-64-10128-4 – © OECD 2003 List of Tables 2.1. The impact of ICT investment on GDP growth – results from national studies .................................................................... 39 2.2. Accounting for the acceleration in US productivity growth, non-farm business sector ............................................................. 44 Annex A2.1. Key databases for firm-level statistical analysis on ICT and business performance ........................................................... 84 List of Figures 1.1. ICT investment in selected OECD countries ............................... 21 1.2. Share of the ICT sector in value added, non-agricultural business sector, 2000 ........................................ 22 1.3. Information technology as a percentage of all stock of equipment and software, United States, 2001 ....................... 23 1.4. Internet commerce measured by the number of secure Web servers .................................................................... 24 1.5. Proportion of businesses using the Internet for purchases and sales, 2001........................................................ 25 1.6. Diffusion of key ICT technologies................................................. 27 1.7. Countries with low access costs have a greater diffusion of the Internet.................................................................................. 28 1.8. Perceived barriers to Internet access and use in the business sector, 2000........................................................... 29 1.9. Barriers to Internet commerce faced by businesses, 2000........ 30 1.10. Countries that had strict product market regulations in 1998 had lower ICT investment................................................ 32 1.11. Countries with strict employment protection legislation in 1998 had lower ICT investment................................................ 32

2.1. The share of investment in ICT in total GDP .............................. 37 2.2. The contribution of investment in ICT capital to GDP growth..... 38 2.3. The contribution of ICT manufacturing to aggregate productivity growth ................................................. 40 2.4. The contribution of ICT-producing services to aggregate productivity growth ................................................. 41 2.5. The contribution of ICT-using services to aggregate productivity growth ................................................. 42 2.6. Contributions of key sectors to aggregate MFP growth, 1990-95 and 1996-2001.................................................................... 43 2.7. Estimated industry entry rates relative to the total business sector............................................................ 46 2.8. Net employment gains amongst surviving firms in high-tech industries, 1990......................................................... 48 TABLE OF CONTENTS ICT AND ECONOMIC GROWTH: EVIDENCE FROM OECD COUNTRIES, INDUSTRIES AND FIRMS – ISBN 92-64-10128-4 – © OECD 2003 7 2.9. Pick-up in MFP growth and increase in ICT investment ........... 49 2.10. Changes in GDP per hour worked in OECD countries, 1980-2001.......................................................................................... 50 2.11. Recent trends in labour productivity growth, United States and Canada ............................................................. 51 2.12. Trends in MFP growth, 1980-90 versus 1990-2000....................... 52 3.1. Relative productivity of advanced technology users and non-users.................................................................................. 60 3.2. Estimated contribution of ICT to multifactor productivity growth in Australia ......................................................................... 61 3.3. Use of ICT network technologies by activity, United Kingdom, 2000 ................................................................... 65 3.4. ICT investment is associated with high skills in ICT................. 69 3.5. Use of ICT network technologies by size class, United Kingdom, 2000 .................................................................... 72 3.6. ICT investment is accompanied by rapid innovation in ICT .... 74 3.7. Relationship between the year of ICT adoption and the current degree of e-activity............................................. 75 3.8. Differences in productivity outcomes between Germany and the United States ..................................................................... 77 List of Boxes 3.1. The productivity paradox – has it been solved? ......................... 57 3.2. Participants in the OECD firm-level project on ICT and business performance ............................................................ 59 3.3. The impacts of ICT on firm performance – selected studies.... 62 MAIN FINDINGS
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Main findings

The 2001 OECD Ministerial report, “The New Economy: Beyond the Hype”, concluded that information and communications technology (ICT) is important and has the potential to contribute to more rapid growth and productivity gains in the years to come. Both the 2001 and 2002 OECD Ministerial meetings reiterated the importance of ICT for growth performance and requested the OECD to continue its work in this area. A specific request for further work on ICT and business performance was made to the OECD in the autumn of 2001, by the US Secretary of Commerce, Mr. Evans. This report, which responds to OECD Ministers and Secretary Evans, revisits the contribution made by ICT to economic performance using more recent data to assess the degree to which the empirical findings that appeared valid at the end of 2000 remain in tact. It draws on a range of new statistics and empirical analysis that was not available for prior OECD work. This includes new empirical analysis with official firm-level data that has been carried out through an OECD-led team of researchers and statistical offices in 13 OECD countries. The study also incorporates new evidence from official statistics on the use of ICT and e-commerce by firms, which were also not available for previous work. The report also examines whether the policy conclusions from the previous OECD work require adjustment in the current economic environment. The findings and policy implications of the work are summarised below; they reaffirm and elaborate those of the OECD Growth Study.

Empirical messages
ICT continues to have strong impacts on performance
The recent slowdown has laid to rest several myths regarding the new economy: the business cycle is not dead, stock market valuations must be realistic and backed by sound profit expectations, and the ICT sector is not immune to downturns. But this should not distract from the economic benefits that have already accompanied the spread of ICT and the continued importance of ICT for growth in the years to come. It may be too early to tell how the role of ICT in growth and productivity performance will develop in the first decade of the 21st century. Some general trends can be observed, however, that suggest that ICT will continue to be a driver of growth: ● Productivity growth in the United States, the main example of ICT-led growth and productivity improvements, has continued to be strong during
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the recent slowdown, suggesting that part of the acceleration in productivity growth over the second half of the 1990s was indeed structural. Productivity growth in Australia and Canada, both countries characterised by ICT-intensive growth, was also strong over the recent past. ● ICT networks have now spread throughout much of the OECD business sector, and will increasingly be made to work to enhance productivity and business performance. Technological progress in ICT goods and services is continuing at a rapid pace, driving prices down and leading to a wide range of new applications. For example, business-to-consumer e-commerce continues to gain in importance, broadband is diffusing rapidly, and activity in the telecommunications sector continues to grow. Moreover, several applications, such as broadband and e-commerce, are still in their early stages and may have a large potential for future growth. ● While ICT investment has dropped off during the recent slowdown, the release of increasingly powerful microprocessors is projected to continue for the foreseeable future, which will encourage ICT investment and support further productivity growth. Nevertheless, the level of ICT investment may well be lower than that observed prior to the slowdown, however, as the 1995-2000 period was characterised by some one-off investment peaks, e.g. investments related to Y2K and the diffusion of the Internet. On the other hand, some countries may still have scope for catch-up; by 2000, Japan and the European Union area invested a similar share of total investment in ICT than the United States did in 1980. ● Further technological progress in ICT production will imply a continued positive contribution of the ICT manufacturing sector to multifactor productivity (MFP) growth, notably in countries with large ICT-producing sectors such as Finland, Ireland, Japan, Korea, Sweden and the United States.

The impacts of ICT differ markedly across OECD economies
Despite the importance of ICT, there continue to be marked differences in

the diffusion of ICT across OECD countries. New OECD data show that the United States, Canada, New Zealand, Australia, the Nordic countries and the Netherlands typically have the highest rates of diffusion of ICT. Many other OECD countries lag in the diffusion of ICT and have scope for greater uptake. It is likely that the largest economic benefits of ICT should be observed in countries with high levels of ICT diffusion. However, having the equipment or networks is not enough to derive economic benefits. Other factors, such as the regulatory environment, the availability of appropriate skills, the ability to change organisational set-ups, as well as the strength of accompanying innovations in ICT applications, affect the ability of firms to seize the benefits of ICT. Consequently, countries with equal ICT diffusion will not always have similar impacts of ICT on economic performance.
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The measured economic impacts of ICT that have been observed thus far differ markedly across OECD countries. Three impacts of ICT on economic growth can be distinguished. First, investment in ICT adds to the capital stock that is available for workers and thus helps raise labour productivity. ICT investment accounted for between 0.3 and 0.8 percentage point of growth in GDP per capita over the 1995-2001 period. The United States, Canada, the Netherlands and Australia received the largest boost; Japan and the United Kingdom a more modest one, and Germany, France and Italy a much smaller one. Investment in software accounted for up to a third of the contribution of ICT capital. Second, the ICT-producing sector plays an important role in some OECD countries, although it is small in most. Having an ICT-producing sector can be important, since it has been characterised by rapid technological progress and very strong demand. In Finland, Ireland and Korea, close to 1 percentage point of aggregate labour productivity growth in the 1995-2001 period was due to ICT manufacturing. In the United States, Japan and Sweden, the ICTproducing sector also contributed significantly to productivity growth. Third, new evidence from an OECD-led consortium of researchers in 13 OECD countries demonstrates that the use of ICT throughout the value chain contributes to improved firm performance. The smart use of ICT can help firms increase their overall efficiency in combining labour and capital, or multi-factor productivity (MFP). ICT use can also contribute to network effects, such as lower transaction costs and more rapid innovation, which can improve MFP. In some countries, notably the United States and Australia, there is evidence that sectors that have invested most in ICT, such as wholesale and retail trade, have experienced more rapid MFP growth. Firm-level studies also show that the use of ICT may help efficient firms gain market share at the cost of less productive firms, raising overall productivity. In addition, the use of ICT may help firms expand their product range, customise the services offered, or respond better to demand, i.e. to innovate. Moreover, ICT may help reduce inventories or help firms integrate activities throughout the value chain. These studies also show that ICT is part of a broader range of changes that help enhance performance. The impacts of ICT depend on complementary investments, e.g. in appropriate skills, and on organisational changes, such as new strategies, new business processes and new organisational structures. Firms adopting these practices tend to gain market share and enjoy higher productivity gains than other firms. ICT use by firms is also closely linked to the ability of a company to adjust to changing demand and to innovate. Users of ICT often help make their investments more valuable through their own experimentation and innovation, e.g. the introduction of new processes, products and applications. Without this
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process of “co-invention”, which often has a slower pace than technological innovation, the economic impact of ICT would be more limited. Firms that have introduced process innovations in the past are often particularly successful in using ICT; in Germany, the impact of ICT investments on output was about four times higher in firms introducing innovations as in other firms. The impacts of ICT on innovation are particularly important in services, as ICT helps in reinventing business processes and developing new applications. The positive impacts of ICT use on firm performance are not limited to the

United States, where the macroeconomic impacts of ICT are considered largest, but are found in many OECD countries. This may be caused by several factors. First, aggregation across industries may disguise some of the impacts of ICT, as strong effects in some industries may be counterbalanced by weak effects in others. Second, the size of the measured impact at the firm level may be smaller outside the United States, as networks are often less developed and conditions for ICT to become effective may be less well established. This would lead to a smaller macroeconomic impact. Third, the impacts of ICT may be insufficiently picked up in data outside the United States, e.g. due to differences in the measurement of output in the services sector. Fourth, countries outside the United States may not yet have benefited from network – or spillover – effects that could create a gap between the impacts of ICT at the level of individual firms and those that are measured at the macroeconomic level. Such spillover effects could show up as benefits for downstream firms and consumers, and would thus not be picked up in the evidence for individual firms using ICT. Finally, in a large and highly competitive market such as the United States, firms investing in ICT may not always be the main beneficiaries of their investment. Consumers may extract a large part of the benefits, in the form of lower prices, better quality, improved convenience, and so on. In countries with less competition, firms might be able to extract a greater part of the returns, and spillover effects might be more limited.

ICT is no panacea

Firms may well overinvest in ICT, either in an effort to compensate for lack of skills or competitive pressure, or because they lack a clear market strategy. However, ICT is no panacea, but a technology that can be made to work to enhance business performance. Evidence for Germany shows that firms that were able to extract the benefits from ICT were those that had already successfully innovated, i.e. changed their products and processes. Moreover, ICT requires many other changes to make it work. It also takes time to adapt to ICT, e.g. in changing organisational set-ups and worker-specific skills. Firms that adopted network technologies several years ago, notably large firms, have often already been able to make the technology work, whereas more recent adopters are still adapting their organisation, management or skills. Evidence for the United Kingdom shows that among the firms that had
MAIN FINDINGS
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already adopted ICT technologies in or before 1995, over 50% purchased through electronic networks in 2000. For firms that only adopted ICT in 2000, less than 20% purchased through electronic networks in 2000. This also suggests that some of the benefits of prior ICT investments may still emerge in the future.

The impacts of ICT are affected by differences in the business environment The firm-level evidence also confirms that there are important crosscountry differences in firms’ use of ICT. New firms in the United States seem to experiment more with business models than those in other OECD countries; they start at a smaller scale than European firms, but grow much more quickly when successful. This may be linked to less aversion to risk in the United States, linked to its financial system, which provides greater opportunities for risky financing to innovative entrepreneurs. Moreover, low regulatory burdens enable US firms to start at a small scale, experiment, test the market and their business model, and, if successful, expand rapidly. Moreover, if they do not succeed, the costs of failure are relatively limited. In contrast, firms in many other OECD countries are faced with high entry and exit costs. In a period of rapid technological change, greater scope for experimentation may enable new ideas and innovation to emerge more rapidly, leading to faster technology diffusion. The empirical analysis also points to several other factors that affect firms’ investment and the diffusion of ICT. These can be divided into several categories:

● Factors related to the direct costs of ICT, e.g. the costs of ICT equipment, telecommunications or the installation of an e-commerce system. ● Costs and implementation barriers related to enabling factors, e.g. linked to the availability of know-how or qualified personnel, the scope for organisational change, or the scale of accompanying innovations in ICT applications. ● Factors related to risk and uncertainty, e.g. the security of doing business online or the uncertainty of payments, delivery and guarantees online. ● Factors related to the nature of the businesses. ICT is a general-purpose technology, but is more appropriate for some activities than for others. ICT may not fit in all contexts and specific applications, such as electronic commerce, may not be suited to all business models. ● Factors related to competition. A competitive environment is more likely to lead a firm to invest in ICT, as a way to strengthen performance and survive, than a more sheltered environment. Competition also puts downward pressure on the costs of ICT, thus promoting its diffusion. MAIN FINDINGS
14 ICT AND ECONOMIC GROWTH: EVIDENCE FROM OECD COUNTRIES, INDUSTRIES AND FIRMS – ISBN 92-64-10128-4 – © OECD 2003 Policy implications
The analysis confirms and reaffirms the findings of the OECD work on growth, and its policy conclusions as regards ICT diffusion and economic growth. The main policy conclusions that can be drawn are: 1. Competition in ICT goods and services needs to be strengthened. Competition in ICT goods and services requires attention, as continued technological change is creating new challenges to competition in many markets. 2. The business environment needs to be improved. This includes, inter alia, having an environment that provides access to finance, allows firms to change the organisation of functions and tasks, helps workers acquire the skills they need in a rapidly changing global environment, and promotes good management practices. Rigid regulations of product and labour markets that impede reorganisation or competition between firms also need to be addressed. The experience of countries such as Australia shows that structural reform is key in harnessing the new dynamism that is associated with ICT. Firm creation also needs to be fostered. Experimentation and competition are key in selecting those firms that seize the benefits of ICT and in making them flourish and grow. In the current time of rapid technological change, greater scope for experimentation may enable new ideas and innovation to emerge more rapidly, leading to faster technology diffusion. Barriers to the entry, exit and growth of firms therefore need to be addressed. Moreover, competition needs to be strengthened. Competition not only helps lower the costs of ICT products and services, which fosters diffusion, it also strengthens pressures on firms to improve performance and change conservative attitudes. 3. Security and trust need to be boosted. Concerns on security, privacy and authentification continue to affect the uptake and use of ICT and should remain a priority for policy. 4. Barriers to the effective use of ICT in services require attention. Sector-specific regulations reduce the development of new ICT applications and limit the capability of firms to seize the benefits of ICT. Further reform of regulatory structures is needed to promote competition and innovation, and to reduce barriers and administrative rules for new entrants and start-ups. 5. Innovation needs to be harnessed to draw the benefits from ICT. ICT is closely linked to the ability of firms to innovate, i.e. introduce new products, services, business processes, and applications. Firms that have already innovated achieve much better results from ICT than those that have never innovated. Policies to harness the potential of innovation, as outlined in the OECD Growth Study, are thus of great importance in seizing the benefits of ICT. To strengthen innovation, policy needs to give greater priority to fundamental research, improve the effectiveness of public R&D funding and

promote the flow of knowledge between science and industry.
INTRODUCTION
ICT AND ECONOMIC GROWTH: EVIDENCE FROM OECD COUNTRIES, INDUSTRIES AND FIRMS – ISBN 92-64-10128-4 – © OECD 2003

Introduction
The 2001 OECD Ministerial report “The New Economy: Beyond the Hype” concluded that information and communications technology (ICT) is important and has the potential to contribute to more rapid growth in the future. Both the 2001 and 2002 OECD Ministerial meetings reiterated the importance of ICT for growth performance and requested the OECD to continue its work on ICT. A specific request for further work on ICT and business performance was also made to the OECD in the autumn of 2001, by the US Secretary of Commerce, Mr. Evans. This report responds to these requests and examines whether ICT is still important now the hype of the new economy is over. It provides new evidence on the factors that affect the diffusion of ICT across OECD countries, the economic impacts of ICT, the factors that influence these impacts, and the policies that can help countries in seizing the benefits from ICT. This study differs from previous OECD work on growth and the role of ICT as it considers a range of questions that were not explicitly addressed in the previous work by the OECD. For example, why have some OECD countries invested more in ICT than others? What characterises firms that adopt ICT? Which technologies are they using and for which purpose? What factors help firms in seizing the benefits from ICT? How precisely does ICT affect firm performance, e.g. in strengthening productivity and in increasing market shares? And what policies are key in helping firms seize the benefits of ICT? Many of these questions can not easily be examined with the macroeconomic and sectoral data that were used in previous OECD work. Firm-level data are often necessary, since they allow interactions at the firm level to be examined. For example, the role of ICT in helping firms gain market share can only be analysed with firm-level data, as can the role of organisational change. Studies drawing on firm-level evidence can thus contribute to a better understanding of the drivers of economic performance, e.g. the interaction between ICT, human capital, organisational change and innovation, and thus to better, evidence-based, policy making. The report also draws on a range of new data. First, it draws on new empirical analysis with official firm-level data that has been carried out through an OECD-led team of researchers and statistical offices in 13 OECD
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countries, thus complementing the sectoral and aggregate analysis.* Second, the study incorporates new evidence from official statistics on the use of ICT and e-commerce by firms, which were not available for previous work. Third, it draws, to the extent possible, on the latest available data to examine the contribution of ICT to growth performance in recent years. Chapter 1 of this report examines the diffusion of ICT across OECD countries. It uses official statistics, which may differ substantially from previously published private estimates of ICT diffusion. It shows that ICT networks continue to diffuse throughout the OECD area, even during a period of slower growth. However, large differences in the uptake of technologies persist across the OECD, both between and within OECD countries. Cost differentials and structural differences are among the factors explaining these differences, as is the state of the business environment in different OECD countries. Chapter 2 provides evidence on the impact of ICT at the macroeconomic and sectoral level, updating and extending previous OECD work. It shows that ICT investment has contributed to growth and labour productivity in all OECD countries for which data are available, but more in the United States than in any other OECD country. Moreover, rapid technological progress in the ICTproducing industry has contributed to rapid productivity growth in some OECD countries, notably the United States, Finland, Ireland, Korea and Sweden. In a few countries, notably the United States and Australia, there is also evidence that sectors that have invested much in ICT, for example wholesale and retail trade, have experienced more rapid productivity growth. These impacts of ICT on productivity have not disappeared with the recent

slowdown; part of the acceleration in aggregate productivity growth in certain OECD countries, notably the United States, is structural and could continue in the years to come. Chapter 3 provides evidence on the contribution of ICT use to business performance, based on detailed firm-level studies. It demonstrates that the use of ICT indeed contributes to improved business performance, but only when it is complemented by other investments and actions at the firm level, such as changes in the organisation of work and changes in workers skills. The chapter also shows that ICT is no panacea; investment in ICT does not compensate for poor management, lack of skills, lack of competition, or a low ability to innovate. Not all firms will therefore succeed in generating returns from their ICT investments; many will fail. In addition, drawing the benefits from ICT investment takes time. Moreover, there are important cross-country
* These countries are: Australia, Canada, Denmark, Finland, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, United Kingdom and United States. See Box 3.2 for details.
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differences in firms’ use of ICT. Firms in the United States are characterised by a much higher degree of experimentation in their use of ICT than European firms; they take higher risks and opt for potentially higher outcomes. Chapter 4 draws implications from the empirical evidence presented in Chapters 1 to 3 for policy makers. It argues that governments should reduce unnecessary costs and regulatory burdens on firms to create a business environment that promotes productive investment. This involves policies to enable organisational change, to strengthen education and training systems, to encourage good management practices, and to foster innovation, e.g. in new applications, that can accompany the uptake of ICT. Moreover, policy should foster market conditions that reward the successful adoption of ICT; a competitive environment is key for this to happen. Governments will also need to work with business and consumers to shape a regulatory framework that strengthens confidence and trust in the use of ICT, notably electronic commerce. Policies to foster growth in services are important too, as ICT offers a new potential for growth in the service sector, providing that regulations that stifle change are adjusted or removed. Finally, the report reaffirms the importance of economic and social fundamentals as the key to lasting improvements in economic performance. A short set of conclusions completes the report.
ISBN 92-64-10128-4 ICT and Economic Growth: Evidence from OECD Countries, Industries and Firms © OECD 2003
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Chapter 1 The diffusion of ICT in OECD economies Abstract. This chapter examines the diffusion of ICT across OECD countries. It uses official statistics, which may differ substantially from previously published private estimates of ICT diffusion. It shows that ICT networks continue to diffuse throughout the OECD area, even during a period of slower growth. However, large differences in the uptake of technologies persist across the OECD, both between and within OECD countries. Cost differentials and structural differences are among the factors explaining these differences, as is the state of the business environment in different OECD countries. 1. THE DIFFUSION OF ICT IN OECD ECONOMIES 20 ICT AND ECONOMIC GROWTH: EVIDENCE FROM OECD COUNTRIES, INDUSTRIES AND FIRMS – ISBN 92-64-10128-4 – © OECD 2003 The state of ICT diffusion The economic impact of ICT is closely linked to the extent to which

different ICT technologies have diffused across OECD economies. This is partly because ICT is a network technology; the more people and firms that use the network, the more benefits it generates. The diffusion of ICT currently differs considerably between OECD countries, since some countries have invested more or have started earlier to invest in ICT than other countries. A core indicator of ICT diffusion is the share of ICT in investment. Investment in ICT establishes the infrastructure for the use of ICT (the ICT networks) and provides productive equipment and software to businesses. While ICT investment has accelerated in most OECD countries over the past decade, the pace of that investment differs widely. The data show that ICT investment rose from less than 15% of total non-residential investment in the early 1980s, to between 15% and 30% in 2001. In 2001, the share of ICT investment was particularly high in the United States, the United Kingdom, Sweden, the Netherlands, Canada and Australia (Figure 1.1). ICT investment in many European countries was substantially lower than in the United States. The high growth of ICT investment has been fuelled by a rapid decline in the relative prices of computer equipment and the growing scope for the application of ICT. Due to rapid technological progress in the production of key ICT technologies, such as semi-conductors, and strong competitive pressure in their production,1 the prices of key technologies have fallen by between 15 and 30% annually, making investment in ICT attractive to firms. The benefits of lower ICT prices have been felt across the OECD, as both firms investing in these technologies and consumers buying ICT goods and services have benefited from lower prices. The lower costs of ICT are only part of the picture; ICT is also a technology that offers large potential benefits to firm, e.g. in enhancing information flows and productivity. Chapter 2 examines the impact of ICT investment on economic growth in more detail. A second determinant of the economic impacts associated with ICT is the size of the ICT sector, i.e. the sector that produces ICT goods and services. Having an ICT-producing sector can be important, since ICT-production has been characterised by rapid technological progress and has been faced with very strong demand. The sector has therefore grown very fast, and made a large contribution to economic growth, employment and exports. Moreover, having a strong ICT sector may help firms that wish to use ICT, since the close 1. THE DIFFUSION OF ICT IN OECD ECONOMIES ICT AND ECONOMIC GROWTH: EVIDENCE FROM OECD COUNTRIES, INDUSTRIES AND FIRMS – ISBN 92-64-10128-4 – © OECD 2003 21 proximity of producing firms might have advantages when developing ICT applications for specific purposes. In addition, having a strong ICT sector should also help generate the skills and competencies needed to benefit from ICT use. And it could also lead to spin-offs, as in the case of Silicon Valley or in other high technology clusters. Having an ICT sector can thus support growth, although previous OECD work has shown that it is not a prerequisite (OECD, 2001a). In most OECD countries, the ICT sector is relatively small, although it has grown rapidly over the 1990s.2 In 2000, value added in the ICT sector

represented between 4% and 17% of business sector value added (Figure 1.2). Moreover, about 6-7% of total business employment in the OECD area can be attributed to ICT production. Trade in ICT has also grown very rapidly, growing from just over 12% of total trade in 1990, to almost 18% in 2000 (OECD, 2002a). Chapter 2 examines the contribution of the ICT-producing sector to economic performance in more detail. A third factor that affects the impact of ICT in different OECD countries is the distribution of ICT across the economy. In contrast to Solow’s famous remark, “you see computers everywhere but in the productivity statistics” Figure 1.1. ICT investment in selected OECD countries As a percentage of non-residential gross fixed capital formation, total economy Note: Estimates of ICT investment are not yet fully standardised across countries, mainly due to differences in the capitalisation of software in different countries. See Ahmad (2003). 1. Or latest available year.
Source: OECD, Database on Capital Services.

1980 1990 20011 30 25 20 15 10 5 0 Portugal Austria Ireland Spain Italy Greece Japan Germany Belgium Finland Denmark Australia Canada Netherlands Sweden United Kingdom France United States 1. THE DIFFUSION OF ICT IN OECD ECONOMIES

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(Solow, 1987), computers are, in fact, heavily concentrated in the service sector. Figure 1.3 shows evidence for the United States. It shows the share of the total stock of equipment and software that is accounted for by IT equipment and software (excluding communications equipment). The graph shows that more than 30% of the total stock of equipment and software in legal services, business services and wholesale trade consists of IT and software. Education, financial services, health, retail trade and a number of manufacturing industries (instruments and printing and publishing) also have a relatively large share of IT capital in their total stock of equipment and software. The average for all private industries is just over 11%. The goodsproducing sectors (agriculture, mining, manufacturing and construction) are much less IT-intensive; in several of these industries less than 5% of total equipment and software consists of IT. The relative distribution of ICT investment across sectors for other OECD countries is not very different for other OECD countries (Van Ark et al., 2002; Pilat et al., 2002); services sectors such as wholesale trade and financial services are typically the most intensive users of ICT.3 This may suggest that any impacts on economic performance might be more visible in the services Figure 1.2. Share of the ICT sector in value added, non-agricultural business sector, 2000

*1999. **1998. 1. Excludes rental of ICT (ISIC 7123). 2. Includes postal services. 3. Excludes ICT wholesale (ISIC 5150). 4. Includes only part of computer-related activities. 5. 2000-2001. Source: OECD (2002a), Measuring the Information Economy, www.oecd.org/sti/measuring-infoeconomy

% 20 15 10 5 0 Ireland*1 Korea*1 United States New Zealand2 Sweden Hungary* United Kingdom Netherlands Belgium1 OECD 25 Japan3, 4 Czech Republic1,3 Norway Canada** EU 14 Denmark Finland France Portugal*1 Austria Australia5 Spain Italy Germany*1, 3 Mexico Slovak Republic*1, 3 Greece*1, 2, 3 1. THE DIFFUSION OF ICT IN OECD ECONOMIES

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sectors than in other parts of the economy. Nevertheless, ICT is commonly considered to be a general-purpose technology, as all sectors of the economy use information in their production process, which implies that all sectors might be able to benefit from the use of ICT. Chapters 2 and 3 return to the sectoral aspects of ICT use. The distribution of ICT also differs according to the size of firms. Smaller firms are typically less ICT-intensive than large firms. This is partly because large firms have more scope for improving communication flows within the firm, e.g. establishment of intra-firm networks, or by outsourcing different tasks, e.g. creation of extranets. But large firms also invest more in ICT than small firms since ICT investment is risky and uncertain, which may be more difficult to bear for small firms. This may obviously imply that the impacts of ICT use could be larger for large firms than for small firms. Chapter 3 provides further evidence on this issue. One further indicator that points to the uptake of ICT is the number of secure servers in each country (Figure 1.4). This measures the number of servers that use secure software for purchasing goods and services or transmitting privileged information over the Internet, e.g. credit card details. It therefore provides an indication of the development of Internet-based activity Figure 1.3. Information technology as a percentage of all stock of equipment and software, United States, 2001
Source: Bureau of Economic Analysis, US Department of Commerce, Fixed Assets Tables, www.bea.doc.gov/

40 30 20 10 0 Legal services Business services Education Printing, publishing Instruments

Finance, insurance, real estate Retail trade Health All private industries Personal services Durable goods manufacturing Communications Manufacturing Construction Non-durable goods Electric, gas, water Wholesale trade Mining Transportation Agriculture, forestry, fishing 1. THE DIFFUSION OF ICT IN OECD ECONOMIES

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in different countries, notably the increased security of such activity. By July 2002, over 65% of all secure servers were located in the United States. The United Kingdom had the second largest number of secure servers, accounting for about 6% of the OECD total. Large OECD countries such as Japan, France and Italy had relatively few secure servers, especially when measured on a per capita basis. Among smaller countries, Iceland, New Zealand and Australia have a relatively large number of secure servers. The diffusion of secure servers continued unabated between July 2001 and July 2002, even though ICT investment slowed down during the period. Another, more accurate, indicator of the development of electronic commerce is the proportion of businesses that use the Internet to purchases and sales (Figure 1.5). This is available for fewer countries, but roughly confirms the findings of the previous graph, with a large number of firms using the Internet for sales or purchases in the Nordic countries (Denmark, Finland, Norway and Sweden) as well as in Australia, the Netherlands and New Zealand. In contrast, only few firms in Greece, Italy, Portugal and Spain use the Internet for sales or purchases, even if many are connected to the Internet. Figure 1.4. Internet commerce measured by the number of secure Web servers
Source: OECD and Netcraft (www.netcraft.com), December 2002.

500 450 400 350 300 250 -5 200 150 100 50 0 Iceland Canada Australia Luxembourg Switzerland Slovak Republic Japan Mexico Belgium Finland Denmark Italy Portugal Hungary United Kingdom France United States Secure servers per one million inhabitants New Zealand Ireland Turkey Greece Sweden Poland

Korea Czech Republic OECD Austria Norway Germany EU Spain Netherlands New secure servers per million inhabitants, July 1999-July 2001 Secure servers per million inhabitants, July 1999 New secure servers per million inhabitants, July 2001-July 2002 1. THE DIFFUSION OF ICT IN OECD ECONOMIES
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Monetary estimates of the importance of electronic commerce are also available for several OECD countries, although these are not yet entirely comparable, depending on the definition used and the coverage of different sectors. The available data suggest that electronic commerce is growing, albeit more slowly than originally envisaged, but still accounts for a relatively small proportion of overall sales. For the few countries that currently measure the value of Internet or electronic sales, total Internet sales in 2000-01 ranged between 0.2% and 2% of total sales. In the fourth quarter of 2002, 1.65% of all retail sales in the United States were carried out through computer-mediated networks, up from 1.3% in the fourth quarter of 2001. Sales via EDI (electronic data interchange) are generally higher than sales via the Internet, with almost all countries reporting EDI sales to be at least twice as high as Internet sales. Figure 1.5. Proportion of businesses using the Internet for purchases and sales, 20011
Percentages of businesses with ten or more employees
Note: The Eurostat survey is based on a selection of industries which changes slightly across countries. See source for detail. 1. Beginning of 2001 for Internet use, purchases and sales refer to 2000 except for Canada where they refer to 2001, and Denmark and Norway where Internet use refers to 2002 and purchases and sales to 2001. 2. All businesses with 50 and more employees. 3. Use, orders received and placed refer to Internet and other computer mediated networks. 4. All businesses. 5. Orders received and made over the Internet and other computer mediated networks. Source: OECD, Measuring the Information Economy, 2002, based on Eurostat, E-Commerce Pilot Survey 2001.

% 100 80 60 40 20 0 Denmark Finland Sweden Australia New Zealand Austria Norway Netherlands3 Italy Portugal Canada4 Spain United Kingdom5 Luxembourg Greece Japan2 Businesses using the Internet Businesses receiving orders over the Internet Businesses ordering over the Internet 1. THE DIFFUSION OF ICT IN OECD ECONOMIES

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In 2000, electronic sales (including those over all computer-mediated networks) were over 13% in Sweden. There are many other indicators that point to the role of ICT in different OECD economies, most of which are available in a separate OECD study (OECD, 2002a). In practice, the different indicators are closely correlated and tend to point to the same countries as having the highest rate of diffusion of ICT. These typically are the United States, Canada, New Zealand, Australia, the

Nordic countries and the Netherlands. From this perspective, it is likely that the largest economic impacts of ICT should also be found in these countries. The diffusion of ICT in OECD countries has been relatively rapid compared to some other technologies, although technological diffusion typically takes considerable time.4 For example, over 90% of firms with more than ten employees in Denmark, Japan, Finland and Sweden had Internet access in 2001, only six years after the introduction of the World Wide Web in 1995 (OECD, 2002a). Certain recent ICT technologies (such as the Internet) have thus already reached a large proportion of potential users only a few years after their introduction. Other ICT technologies (such as broadband) are in an earlier stage of the diffusion process, however. The diffusion of ICT continues across OECD economies, despite the current slowdown. The share of ICT investment in total capital formation grew rapidly until 2000, and remained at a high share of investment even in 2001 and 2002, suggesting that ICT investment has not been affected disproportionally by the slowdown compared with other types of investment. Evidence for the United States shows that ICT investment was among the first areas of investment to recover in 2002 (BEA, 2003). The continued diffusion of ICT can also be observed in other areas (Figure 1.6). For example, the number of secure servers continued to grow between July 2001 and December 2002, as did the number of broadband subscribers. This rose from 33 million by the end of 2001, to 42 million by June 2002, and to more than 55 million by the end of 2002. This is not to suggest that the ICT sector is not going through a slowdown. However, large ICT networks are now in place throughout the business sector. These will have to be maintained and updated, and will increasingly be made to work and generate economic returns.

Factors affecting the diffusion of ICT
Why is the diffusion of ICT so different across OECD countries? Previous OECD work already noted several factors, such as lack of relevant skills, lack of competition, or high costs (OECD, 2001a). From a firm’s perspective, high costs are particularly important, as they affect the possible returns that a firm can extract from their investment. Firms do not only incur costs in acquiring new technologies, but also in making it effective in the workplace, and in using the
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Figure 1.6. Diffusion of key ICT technologies
Source: OECD, US Bureau of Labor Statistics, US Department of Commerce, Netcraft (www.netcraft.com).

110 100 90 80 70 60 50 40 30 20 1998 1999 2000 2001 2002 1999 2000 2001 2002 (prélim.) 60 50 40 30 20 10 0 400 350 300 250 200 150 0 100 50 1999 2000 2001 2002 15 14 13 12

11 10 9 8 7 5 6 1.6 1.4 1.2 1.0 0.8 0.6 A. Producer prices of ICT equipment in the United States, 1998 = 100 Communication equipment Electronic components and accessories PCs and workstations C. Broadband connections in the OECD area (millions) Digital Subscriber Lines Cable modem Other D. Secure servers per million inhabitants Newly added, July 2001-Dec. 2002 Newly added, July 1999-July 2001 July 1999 Italy France Japan European Union Germany OECD United Kingdom Canada United States B. E-commerce developments in the United States Retail e-commerce sales E-commerce as a % of total retail Billions of USD % of all retail sales Q4 Dec. Apr. Aug. Dec. Apr. Aug. Dec. Apr. Aug. Dec. Apr. Aug. Dec. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1. THE DIFFUSION OF ICT IN OECD ECONOMIES

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technologies on a daily basis. Costs related to personnel, telecommunication charges and organisational change are therefore also important. Some evidence is available on how these factors may have affected diffusion. A first factor concerns the costs of ICT hardware. Since ICT investment goods are traded internationally, their prices should not vary too much across OECD countries. Evidence from international price comparisons suggests otherwise, however. Over much of the 1990s, firms in the United States and Canada enjoyed considerably lower costs of ICT investment goods than firms in European countries and Japan (OECD, 2001a). The high costs in Europe and Japan may have limited investment in these countries. Barriers to trade, such as non-tariff barriers related to standards, import licensing and government procurement, may partly explain the cost differentials (OECD, 2002b). The higher price levels in certain OECD countries may also be associated with a lack of competition within countries. In time, however, international trade and competition should erode these cross-country price differences; prices of ICT investment goods in 1996 in European countries and Japan were already

much closer to those in the United States than they were in 1993. By 1999, they had come down further across the OECD (OECD, 2002c). The costs of telecommunication are also important, as they affect the use of ICT in networks. This is illustrated by the take-up of the Internet in different OECD countries. Countries with lower access costs typically have a higher take-up of the Internet (Figure 1.7). Evidence on perceived barriers to the uptake of selected ICT technologies can also be drawn from firm-level surveys of ICT use. These surveys ask firms Figure 1.7. Countries with low access costs have a greater diffusion of the Internet
Internet hosts per 1 000 inhabitants, July 2001
Source: OECD (www.oecd.org/dsti/sti/it/cm) and Telcordia Technologies (www.netsizer.com).

300 250 200 150 100 50 0 20 30 40 50 60 70 80 90 100 Average price for 20 hours Internet access 1995-2000, in PPP dollars OECD United States United Kingdom Turkey Switzerland Spain Poland Portugal Norway New Zealand Netherlands Korea Mexico Japan Italy Ireland Iceland Greece Hungary Germany France Finland Denmark Canada Austria Belgium Australia Sweden Czech Republic 1. THE DIFFUSION OF ICT IN OECD ECONOMIES

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and consumers about the barriers they face in using the Internet and electronic commerce. While these surveys currently only cover a limited number of OECD countries, some interesting patterns emerge (OECD, 2002a). As regards Internet access, lack of security and slow or unstable communications were considered the key problems in European countries (Figure 1.8). Other problems, such as lack of know-how or personnel, high costs of equipment or Internet access, were considered less of a problem. These barriers also differ by the size of firms; large firms tend to face fewer problems in getting qualified personnel or know-how than small firms. However, large firms tend to regard security issues as a more important barrier than small firms, perhaps because large firms use the Internet more actively than small firms. These barriers may also differ by activity; the perceived benefits of Internet use vary considerably across activities (and also differ across countries). Moreover, there is a considerable difference in the perceived barriers of firms that already use the Internet, and those that are considering its use. Evidence for Norway and the United Kingdom shows that “lack of security” is a much more important barrier for firms already using the Internet than for non-users, showing that the perception of barriers may change once a technology is actually used. Survey information on the barriers to Internet commerce provides further insights (Figure 1.9). These suggest that legal uncertainties (uncertainty over payments, contracts, terms of delivery and guarantees) Figure 1.8. Perceived barriers to Internet access and use in the business sector, 2000

Percentage of businesses using a computer with 10 or more employees
60 50 40 30 20 10 0

Portugal Italy United Kingdom Austria Lack of security (viruses, hackers) Data communications too slow or unstable Lacking qualification of personnel/lack of specific know how Costs to make it available too high Internet access charges too high Finland Spain Sweden Denmark Luxembourg Greece Spain Portugal Italy Sweden United Kingdom Austria Luxembourg Greece Finland Denmark Finland Portugal United Kingdom Austria Spain Greece Luxembourg Italy Denmark United Kingdom Sweden Portugal Spain Denmark Austria Luxembourg Italy Greece Portugal Spain Sweden United Kingdom Austria Finland Luxembourg Italy Denmark Greece

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Figure 1.9. Barriers to Internet commerce faced by businesses, 2000
Percentage of businesses using a computer with 10 or more employees
60 50 40 30 20 10 0 Portugal Austria Luxembourg Spain Italy Greece Finland Denmark Sweden United Kingdom % citing specific barriers Uncertainty concerning contracts, terms of delivery and guarantees
Source: OECD (2002a), Measuring the Information Economy, based on Eurostat, E-commerce Pilot Survey.

Cost of developing and maintaining an e-commerce system Uncertainty in payments Logistic problems 60 50 40 30 20 10 0 Portugal Austria Luxembourg Italy Spain Greece Finland Denmark Sweden United Kingdom % citing specific barriers Goods and services available not suitable for sales by e-commerce Stock of (potential) customers too small Consideration for existing channels of sales 1. THE DIFFUSION OF ICT IN OECD ECONOMIES
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remain important in several countries. Business-to-consumer transactions are typically hampered by concerns about security of payment, the possibility of redress in the online environment and privacy of personal data. For business-to-business transactions, the security and reliability of systems that can link all customers and suppliers are often considered more important. Issues of system security and reliability are a major concern in Japan; almost one out of every two Japanese businesses rated viruses as the major reason for not using the Internet (Tachibana, 2000). Cost considerations remain an important issue for businesses in several countries, while logistic problems were also cited frequently. Commercial factors were also cited by many businesses as a factor in not taking up Internet commerce. Many businesses in Finland and Spain found that Internet commerce would threaten existing sales channels. Existing transaction models or strong links with customers and suppliers along the value chain may discourage businesses from introducing new sales models. In many cases, the goods and services on offer by a particular firm were not considered suitable for Internet commerce. In Canada, among businesses that did not buy or sell over the Internet, 56% believed that their goods or services did not lend themselves to Internet transactions; 36% preferred to maintain their current business model. And firms in several countries, notably Italy, considered the market too small. Some of these considerations differ by the size of firm and the activity; large firms found logistical barriers more important than small firms did. However, barriers related to Internet payments and the costs of setting up Internet commerce did not differ in a consistent manner across OECD countries. There also differences across activities; many firms in real estate and hotels and restaurants did not consider their products and services suitable for Internet commerce, whereas only few firms in the financial sector considered this to be the case. More elaborate analysis of this survey evidence provides further insights in the factors explaining ICT uptake. Using recent data for Switzerland, Hollenstein (2002) finds that a range of factors play a role in ICT uptake. This includes anticipated benefits of ICT adoption (e.g. improved customer orientation and lower costs) as well as the costs and obstacles to adoption (e.g. investment costs and knowledge gaps). But other factors also play a role, such as the firm’s ability to absorb knowledge (linked to human capital and experience with innovation), whether the firm has experience with related technologies, as well as international competitive pressures. Sectoral differences also played an important role. Moreover, the introduction of new work practices was found to favour the adoption of ICT. The survey evidence outlined above already suggests that the broader business environment may play a role in firm’s decision to adopt ICT. This is further illustrated in Figures 1.10 and 1.11. While not demonstrating causality,
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Figure 1.10. Countries that had strict product market regulations in 1998 had lower ICT investment
Notes: The scale of indicators is 0-6, from least to most restrictive. Based on the situation in or around 1998. The components are weighted to show their relative importance in the overall indicator. Since 1998, many countries have implemented reforms in product markets. Source: ICT investment from sources quoted in Figure 1.1; regulations from Nicoletti et al. 1999.

30 25 20 15 10 5 0 0123 Product market regulation index ICT investment in 1998 (as a % of GFCF) United States United Kingdom Sweden Portugal Netherlands Italy Ireland Greece Germany Denmark Belgium Austria Australia Correlation = -0.54 T-statistics = -2.54 Spain Japan France Finland Canada

Figure 1.11. Countries with strict employment protection legislation in 1998 had lower ICT investment

Notes: The scale of indicators is 0-6, from least to most restrictive. Based on the situation in or around 1998. The components are weighted to show their relative importance in the overall indicator. Since 1998, many countries have implemented reforms in employment protection legislations. Source: ICT investment from sources quoted in Figure 1.1; regulations from Nicoletti et al. 1999.

30 25 20 15 10 5 0 01243 Employment protection legislation index ICT investment in 1998 (as % of GFCF) Correlation = -0.65 T-statistics = -3.46 Japan United States United Kingdom Sweden Spain Portugal Netherlands Italy Ireland Germany Greece Finland France Denmark Canada Belgium Austria Australia 1. THE DIFFUSION OF ICT IN OECD ECONOMIES

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Figure 1.10 shows that there is a link between ICT investment as a share of total capital formation in 1998 and product market regulations, as measured by an OECD index of the state of these regulations in 1998. The graph shows that countries that had a high level of regulation in 1998 had lower shares of investment in ICT than countries with low degrees of product market

regulation. This may be because product market regulations can limit competition. Competition is important in spurring ICT investment as it forces firms to seek ways to strengthen performance relative to competitors. Moreover, competition may help lower the costs of ICT, which stimulates diffusion. Product market regulations may also limit firms in the ways that they can extract benefits from their use of ICT, as it may reduce the incentives for firms to innovate and develop new ICT applications (OECD, 2002d). For example, product market regulations may limit firms’ ability to extend beyond traditional sectoral boundaries. Figure 1.11 shows the link between ICT investment and an index of employment protection legislation for 1998. The correlation between levels of ICT investment and labour market regulations may be related to the organisational factors that are required to make ICT work; if firms cannot adjust their workforce or organisation and make ICT effective within the firm, they may decide to limit investment or relocate activities. These links between regulations and ICT investment have been confirmed through econometric analysis; Gust and Marquez (2002) find that regulations impeding workforce reorganisations and competition between firms hinder investment in ICT. Bartelsman et al. (2002), Bartelsman and Hinloopen (2002) and Devlin (2003) also confirm these findings. Chapter 3 will return to this issue.

Diffusion in the OECD area – some conclusions
This chapter has shown that ICT has diffused rapidly across OECD countries, and is continuing to spread despite the recent slowdown. However, large cross-country differences persist, also across firms and activities within countries. The United States, Canada, New Zealand, Australia, the Nordic countries and the Netherlands typically have the highest rate of diffusion of ICT. From this perspective, it is likely that the largest economic impacts of ICT should also be found in these countries. However, previous studies have shown that having the equipment or networks is not enough to derive economic impacts. Other factors play a role and countries with equal rates of diffusion of ICT will not necessarily have similar impacts of ICT on economic performance. In addition, it is possible to overinvest in ICT and some studies suggest that firms have sometimes over-invested in ICT in an effort to compensate for poor performance.
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The chapter has pointed to several factors affecting the diffusion of ICT, namely: ● Factors related to the direct costs of ICT, e.g. the costs of ICT equipment, telecommunications or the installation of an e-commerce system. ● Costs and implementation barriers related to enabling factors, e.g. linked to the availability of know-how or qualified personnel, or the scope for organisational change. ● Factors related to risk and uncertainty, e.g. the security of doing business online or the uncertainty of payments, delivery and guarantees online. ● Factors related to the nature of the businesses. ICT is a general purpose technology, but is more appropriate for some activities than for others. ICT may not fit in all contexts and specific technologies, such as electronic commerce, may not be suited to all business models. ● Factors related to competition. A competitive environment is more likely to lead a firm to invest in ICT, as a way to strengthen performance and survive, than a more sheltered environment. Moreover, competition puts downward pressure on the costs of ICT. These categories point to some areas that are relevant for policy development, most of which have already been the subject of OECD work over the past years. For example, measures to increase competition can help bring down costs, effective labour market and education policies may help reduce skill shortages, and risk and uncertainty may be tackled by the development of a well designed regulatory framework. Later chapters will return to these areas in more detail.

Notes

1. Aizcorbe (2002) shows that part of the decline in the prices of Intel chips can be attributed to a decline in Intel’s mark-ups over the 1990s, which points to stronger competition. 2. These estimates are based on the OECD definition of the ICT sector. See OECD

(2002a). 3. Health and education are also intensive ICT users but are ignored here as their output is difficult to measure. 4. Technological diffusion often follows an S-shaped curve, with slow diffusion when a technology is new and expensive, rapid diffusion once the technology is well established and prices fall, and slow diffusion once the market is saturated.
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Chapter 2
The contribution of ICT to growth
Abstract. This chapter provides evidence on the impact of ICT at the
macroeconomic and sectoral level. It shows that ICT investment has contributed to growth and labour productivity in all OECD countries for which data are available, but more in the United States than in any other OECD country. Moreover, rapid technological progress in the ICTproducing industry has contributed to rapid productivity growth in some OECD countries, notably the United States, Finland, Ireland, Korea and Sweden. In a few countries, notably the United States and Australia, there is also evidence that sectors that have invested much in ICT, for example wholesale and retail trade, have experienced more rapid productivity growth. These impacts of ICT on productivity have not disappeared with the recent slowdown; part of the acceleration in aggregate productivity growth in certain OECD countries, notably the United States, is structural and could continue in the years to come.
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W

hat precisely are the impacts that ICT can have on business

performance and growth? In most analysis of economic growth, three effects are distinguished. First, as a capital good, investment in ICT contributes to overall capital deepening and therefore helps raise labour productivity. Second, rapid technological progress in the production of ICT goods and services may contribute to more rapid multifactor productivity (MFP) growth in the ICT-producing sector. And third, greater use of ICT may help firms increase their overall efficiency, and thus raise MFP. Moreover, greater use of ICT may contribute to network effects, such as lower transaction costs and more rapid innovation, which will improve the overall efficiency of the economy, i.e. MFP. This chapter discusses evidence from aggregate and sectoral data. The next chapter will examine evidence from firm-level studies.

The impact of investment in ICT
Evidence on the role of ICT investment is primarily available at the macroeconomic level, e.g. from Colecchia and Schreyer (2001) and Van Ark et al. (2002a). Both studies show that ICT has been a very dynamic area of investment, due to the steep decline in ICT prices which has encouraged investment in ICT, at times shifting investment away from other assets. While ICT investment accelerated in most OECD countries, the pace of that investment differed widely (Figure 2.1). For the countries for which data are available, growth accounting estimates show that ICT investment typically accounted for between 0.3 and 0.8 percentage points of growth in GDP per capita over the 1995-2001 period (Figure 2.2). The United States, Australia, the Netherlands and Canada received the largest boost; Japan and United Kingdom a more modest one, and Germany, France and Italy a much smaller one. Software accounted for up to a third of the overall contribution of ICT investment to GDP growth in OECD countries (see also Colecchia and Schreyer, 2001, and Van Ark et al., 2002a).1 The results of these cross-country studies have been confirmed by many studies for individual countries, which are summarised in Table 2.1. National studies may differ from the results shown in Figure 2.2, due to differences in measurement. France and the United States, for instance, use specially designed “hedonic” deflators for computer equipment: these deflators adjust

prices for key quality changes induced by technological progress, like higher processing speed and greater disk capacity. They tend to show faster declines
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in computer prices than conventional price indexes, and that means more rapid growth. As a result, countries that use hedonic indexes are likely to record faster real growth in investment and production of information and communications technology (ICT) than countries that do not use them. This faster real growth will translate into a larger contribution of ICT capital to growth performance.2 The method used in Figure 2.2 and in the work by Colecchia and Schreyer (2001) and Van Ark et al. (2002) adjusts for these differences. They are therefore more comparable than the results of individual national studies. Nevertheless, the national studies typically show the same countries as experiencing a large impact of ICT investment on growth, e.g. Australia, Canada, Korea, the United Kingdom and the United States. The impact of ICT investment on economic growth has not ended with the recent slowdown. While ICT investment has slowed down over the past year, technological progress in the production of computers, i.e. the release of increasingly powerful computer chips, is projected to continue for the foreseeable future.3 Technological progress is also continuing at a rapid pace in other ICT technologies, such as communications technologies. This implies that quality-adjusted ICT prices will continue to decline, thus encouraging ICT investment and further productivity growth.4 The level of ICT investment is likely to be lower than that observed prior to the slowdown, however, in Figure 2.1. The share of investment in ICT in total GDP
Percentages
1. Or latest available year. Source: OECD estimates based on Database on Capital Services.

1980 1990 20011 4.5 2.5 2.0 1.5 1.0 0.5 0 3.0 3.5 4.0 Portugal Austria Ireland Belgium Italy Greece Japan Germany Spain Finland Denmark Australia Canada Netherlands Sweden United Kingdom France United States 2. THE CONTRIBUTION OF ICT TO GROWTH

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particular in the United States, as the 1995-2000 period was characterised by some one-off investment peaks, e.g. investments related to Y2K and the diffusion of the Internet (McKinsey, 2001; Gordon, 2003).

The role of ICT-producing and ICT-using sectors
Evidence on the impact of ICT can also be found from sectoral data, notably in the relative contributions of ICT-producing and ICT-using sectors to overall growth performance. The ICT-producing sector is of particular interest for several countries, as it has been characterised by very high rates of productivity growth, providing a considerable contribution to aggregate performance. Figure 2.3 shows the contribution of ICT manufacturing to productivity growth over the 1990s, distinguishing between the first half of the

decade and the second half of the decade. In most OECD countries, the contribution of ICT manufacturing to overall labour productivity growth has risen over the 1990s. This can partly be attributed to more rapid technological progress in the production of certain ICT goods, such as semi-conductors, which has contributed to more rapid price declines and thus to higher growth in real volumes (Jorgenson, 2001). However, there is a large variation in the Figure 2.2. The contribution of investment in ICT capital to GDP growth
Percentage points contribution to annual average GDP growth, total economy
1. Or latest available year, i.e. 1995-2000 for Denmark, Finland, Ireland, Japan, Netherlands, Portugal and Sweden. Source: OECD estimates based on Database on Capital Services. See Schreyer et al. (2003) for methodological details.

0.9 0.5 0.4 0.3 0.2 0.1 0 0.6 0.7 0.8 % 1990-1995 1995-20011 Portugal Ireland Spain Italy Japan Germany Finland Denmark Australia Canada Netherlands Sweden United Kingdom France United States 2. THE CONTRIBUTION OF ICT TO GROWTH

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types of ICT goods that are being produced in different OECD countries. Some countries only produce peripheral equipment, which is characterised by much slower technological progress and consequently by much less change in prices.5 ICT manufacturing made the largest contributions to aggregate productivity growth in Finland, Ireland, Japan, Korea, Sweden and the United States. In Finland, Ireland and Korea, close to 1 percentage point of aggregate productivity growth in the 1995-2001 period is due to ICT manufacturing.6 The ICT-producing services sector (telecommunications and computer services) Table 2.1. The impact of ICT investment on GDP growth – results from national studies
Source: See references.

Country GDP growth Labour prod. growth Contribution of ICT 1990- Notes 95 19952000 199095 19952000 199095 19952000 United States Oliner and Sichel (2002) – – 1.5 2.3 0.5 1.0 1991-95; 1996-2001 Jorgenson, et al. (2002) 2.5 4.0 1.4 2.7 0.5 1.0 1990-95; 1995-99 BLS (2002) – – 1.5 2.7 0.4 0.9 1990-95; 1995-2000 Japan Miyagawa, et al. (2002) – – 2.2 1.4 0.1 0.4 1990-95; 1995-98 Motohashi (2002) 1.7 1.5 – – 0.2 0.5 1990-95; 1995-2000 Germany

RWI and Gordon (2002) 2.2 2.5 2.6 2.1 0.4 0.5 1990-95; 1995-2000 France Cette, et al. (2002) 0.5 2.2 1.6 1.1 0.2 0.3 1990-95; 1995-2000 United Kingdom Oulton (2001) 1.4 3.1 3.0 1.5 0.4 0.6 1989-94; 1994-98 Canada Armstrong, et al. (2002) 1.5 4.9 – – 0.4 0.7 1988-95; 1995-2000 Khan and Santos (2002) 1.9 4.8 – – 0.3 0.5 1991-95; 1996-2000 Australia Parham, et al. (2001) – – 2.1 3.7 0.7 1.3 89/90-94/95; 94/95-99/00 Simon and Wardrop (2001) 1.8 4.9 2.2 4.2 0.9 1.3 1991-95; 1996-2000 Gretton, et al. (2002) – – 2.2 3.5 0.6 1.1 89/90-94/95; 94/95-99/00 Belgium Kegels, et al. (2002) 1.5 2.8 1.9 1.9 0.3 0.5 1991-95; 1995-2000 Finland Jalava and Pohjola (2002) – – 3.9 3.5 0.6 0.5 1990-95; 1996-99 Korea Kim (2002) 7.5 5.0 – – 1.4 1.2 1991-95; 1996-2000 Netherlands Van der Wiel (2002) – – 1.3 1.5 0.4 0.6 1991-95; 1996-2000 2. THE CONTRIBUTION OF ICT TO GROWTH

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plays a smaller role in aggregate productivity growth, but has also been characterised by rapid progress (Figure 2.4). Partly, this is linked to the liberalisation of telecommunications markets and the high speed of technological change in this market. The contribution of this sector to overall productivity growth increased in several countries over the 1990s, notably in Canada, Finland, France, Germany and the Netherlands. Some of the growth in ICT-producing services is due to the emergence of the computer services industry, which has accompanied the diffusion of ICT in OECD countries. The development of these services has been important in implementing ICT, as the firms in these sectors offer key advisory and training services and also help develop appropriate software to be used in combination with the ICT hardware. The ICT sector is thus only an important driver of the acceleration in productivity growth in a limited number of OECD countries, notably Finland, Ireland, Japan, Korea, Sweden and the United States. This is because only few OECD countries are specialised in those parts of ICT sector that are characterised by very rapid technological progress, e.g. the production of semiconductors and electronic computers. Indeed, much of the production of ICT Figure 2.3. The contribution of ICT manufacturing to aggregate productivity growth
Contribution to annual average labour productivity growth, percentage points
Note: 1991-95 for Germany; 1992-95 for France and Italy; 1993-95 for Korea; 1996-98 for Sweden, 1996-99 for Korea and Spain; 1996-2000 for Belgium, France, Germany, Ireland, Japan, Mexico, Norway and Switzerland. Source: Pilat et al., (2002) and OECD STAN database.

1990-1995 1996-2001 1.00 0.40 0.20 0 0.60 0.80 Italy Ireland France Japan Germany Finland Denmark United States Canada Netherlands Sweden United Kingdom Spain Korea Percentage points Norway Mexico Austria Belgium Switzerland 2. THE CONTRIBUTION OF ICT TO GROWTH

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hardware is highly concentrated, because of its large economies of scale and high entry costs. Establishing a new semi-conductor plant cost some USD 100 million in the early 1980s, but as much as USD 1.2 billion in 1999 (United States Council of Economic Advisors, 2001). In other words, a hardware sector cannot simply be set up, and only a few countries will have the necessary comparative advantages to succeed in it. In addition, a large part of the benefits of ICT production has accrued to importing countries and other users, due to terms-of-trade effects and an increased consumer surplus (Bayoumi and Haacker, 2002). A much larger part of the economy uses ICT in the production process. Indeed, several studies have distinguished an ICT-using sector, composed of industries that are intensive users of ICT (McGuckin and Stiroh, 2001; Pilat et al., 2002). Examining the performance of these sectors over time and with sectors of the economy that do not use ICT can help point to the role of ICT in aggregate performance.7 Chapter 1 showed that services sectors such as finance and business services are intensive users of ICT.8 Figure 2.5 shows the contribution of the key ICT-using services (wholesale and retail trade, finance, insurance and business services) to aggregate productivity growth over the 1990s. Figure 2.4. The contribution of ICT-producing services to aggregate productivity growth
Contribution to annual average labour productivity growth, percentage points
Note: See Figure 2.3 for period coverage. Source: Pilat et al. (2002) and OECD STAN database.

1990-1995 1996-2001 1.00 0.40 0.20 0 0.60 0.80 Belgium Ireland France Japan Germany Finland Denmark United States Canada Netherlands Sweden United Kingdom Spain Korea Percentage points Norway Mexico Austria Switzerland Italy 2. THE CONTRIBUTION OF ICT TO GROWTH

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The graph suggests small improvements in the contribution of ICT-using services in Finland, the Netherlands, Norway and Sweden, and substantial increases in Australia, Canada, Ireland, Mexico, the United Kingdom and United States. The strong increase in the United States is due to more rapid productivity growth in wholesale and retail trade, and in financial services (securities), and is confirmed by several other studies (e.g. McKinsey, 2001; Triplett and Bosworth, 2002). The strong increase in productivity growth in Australia has also been confirmed by other studies (Parham, 2001; Gretton et al., 2002). In some countries, ICT-using services made a negative contribution to aggregate productivity growth. This is particularly the case in Switzerland in the first half of the 1990s, resulting from poor productivity growth in the banking sector.9 Stronger growth in labour productivity in ICT-producing and ICT-using industries could simply be due to greater use of capital. Estimates of MFP growth adjust for growth in capital stock and can help show whether ICT-using sectors have indeed improved their overall efficiency in the use of capital and

labour. Breaking aggregate MFP growth down in its sectoral contributions can also help show whether changes in MFP growth should be attributed to ICT manufacturing, to ICT-using sectors, or to other sectors. Figure 2.6 shows the Figure 2.5. The contribution of ICT-using services to aggregate productivity growth
Contribution to annual average labour productivity growth, percentage points
Note: See Figure 2.3 for period coverage. Estimates for Australia refer to 1996-2001. 1. Or latest available year. Source: Pilat et al. (2002) and OECD STAN database.

1990-1995 1996-20011 1.4 0.8 0.6 -0.6 1.0 1.2 0.4 0.2 0 -0.4 -0.2 Mexico Ireland Japan Germany Finland Denmark United States Canada Netherlands Sweden United Kingdom Spain Korea Percentage points Norway Belgium Australia Switzerland Italy Austria Countries where productivity growth in ICT-using services improved Countries where productivity growth in ICT-using services deteriorated 2. THE CONTRIBUTION OF ICT TO GROWTH

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contribution of all activities to aggregate MFP growth for the seven countries for which estimates of capital stock at the industry level are currently available in the OECD STAN database. Figure 2.6 shows that ICT manufacturing provided an important contribution to the acceleration in productivity growth in Finland. For ICTusing services, the MFP estimates point to growing contributions to aggregate productivity in Denmark and Finland. In several other countries, MFP growth in the ICT-using services was negative over the 1990s. The OECD STAN database does not yet include capital stock for the United States, which implies that MFP estimates for the United States can not be derived from this source. Several studies provide estimates of the sectoral contributions to US MFP growth, however (Table 2.2). The results show considerable variation. Oliner and Sichel (2002) found no contribution of nonICT producing industries to MFP growth; Gordon (2002) and Jorgenson, Ho and Stiroh (2002) found a relatively small contribution, while Baily (2002) and the US Council of Economic Advisors (2001) found a much more substantial contribution.10 Figure 2.6. Contributions of key sectors to aggregate MFP growth, 1990-95 and 1996-20011
Contributions to annual average growth rates, in percentage points
Note: Estimates are based on official estimates of capital stock and sector-specific labour shares (adjusted for labour income from self-employment). No adjustment is made for capital services. 1. Or latest available year, i.e. 2000 for Germany, France and Finland, 1999 for Italy, and 1998 for Japan. Source: Pilat, Lee and Van Ark (2002) and OECD STAN database.

% 4.0 1.0

0.0 -2.0 2.0 3.0 -1.0 Japan (90-95) Japan (96-01) ICT-producing manufacturing ICT-using services Other activities Italy (90-95) Italy (96-01) France (90-95) France (96-01) Canada (90-95) Canada (96-01) Germany (90-95) Germany (96-01) Denmark (90-95) Denmark (96-01) Finland (90-95) Finland (96-01) 2. THE CONTRIBUTION OF ICT TO GROWTH

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The problem with some of the studies presented in Table 2.2 (e.g. Oliner and Sichel, 2002 and Gordon, 2002) is that all non-ICT producing sectors are combined, and the contribution of the non-ICT producing sector to aggregate MFP growth is calculated as a residual. More detailed examination for the United States suggests that this residual is indeed small, but typically made up of a positive contribution from wholesale and retail trade and financial services to MFP growth, and a negative contribution of other service sectors. A recent study by Triplett and Bosworth (2002) finds a relatively strong pick-up in MFP growth in certain parts of the US service sector. They estimated that MFP growth in wholesale trade accelerated from 1.1% annually to 2.4% annually from 1987-1995 to 1995-2000. In retail trade, the jump was from 0.4% annually to 3.0%, and in securities the acceleration was from 2.9% to 11.2%. Combined with the relatively large weight of these sectors in the economy, this translates into a considerable contribution to more rapid aggregate MFP growth of these ICT-using services. There is therefore evidence of strong MFP growth in the United States in ICT-using services. More detailed studies suggest how these productivity changes due to ICT use in the United States could be interpreted. First, a considerable part of the pick-up in productivity growth can be attributed to retail trade, where firms such as WalMart used innovative practices, such as the appropriate use of ICT, to gain market share from its competitors (McKinsey, 2001). The larger market share for WalMart and other productive Table 2.2. Accounting for the acceleration in US productivity growth, non-farm business sector
1995-2000 minus 1973-1995 (percentage points per year)
Oliner-Sichel (2002), 1974-1990 versus 1996-2001 Gordon (2002), 1972-95 versus 1995-2000 US Council of Economic Advisors (2001) Jorgenson, Ho and Stiroh (2002) Output per hour 0.89 1.44 1.39 0.92 Cycle n.a. 0.40 n.a. n.a. Trend 0.89 1.04 1.39 0.92 Contributions from: Capital services 0.40 0.37 0.44 0.52 IT capital 0.56 0.60 0.59 0.44 Other capital –0.17 –0.23 –0.15 0.08 Labour quality 0.03 0.01 0.04 –0.06 MFP growth 0.46 0.52 0.91 0.47 Computer sector 0.47 0.30 0.18 0.27 Other MFP –0.01 0.22 0.72 0.20 2. THE CONTRIBUTION OF ICT TO GROWTH
Source: Gordon (2002); Jorgensen, Ho and Stiroh (2002); Oliber and Sichel (2002) updated from estimates received from Dan Sichel; Council of Economic Advisors (2001) as updated in Baily (2002).

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firms raised average productivity and also forced WalMart’s competitors to improve their own performance. Among the other ICT-using services, securities accounts also for a large part of the pick-up in productivity growth in the 1990s. Its strong performance has been attributed to a combination of buoyant financial markets (i.e. large trading volumes), effective use of ICT (mainly in automating trading processes) and stronger competition (McKinsey, 2001; Baily, 2002). These impacts of ICT on MFP are therefore primarily due to efficient use of labour and capital linked to the use of ICT in the production process. They are not necessarily due to network effects, where one firms’ use of ICT has positive spillovers on the economy as a whole. Spillover effects may also play a role, however, as ICT investment started earlier, and was stronger, in the United States than in most OECD countries (Colecchia and Schreyer, 2001; Van Ark et al., 2002a). Moreover, previous OECD work has pointed out that the US economy might be able to achieve greater benefits from ICT since it got its fundamentals right before many other OECD countries (OECD, 2001a). Indeed, the United States may have benefited first from ICT investment ahead of other OECD countries, as it already had a high level of competition in the 1980s, which it strengthened through regulatory reforms in the 1980s and 1990s. For example, early and far-reaching liberalisation of the telecommunications sector boosted competition in dynamic segments of the ICT market. The combination of sound macroeconomic policies, well functioning institutions and markets, and a competitive economic environment may thus be at the core of the US success. A recent study by Gust and Marquez (2002) confirms these results and attributes relatively low investment in ICT in European countries partly to restrictive labour and product market regulations that have prevented firms from getting sufficient returns from their investment. The United States is not the only country where ICT use may already have had impacts on MFP growth. Studies for Australia (Parham et al., 2001; Simon and Wardrop, 2001; Gretton et al., 2002) suggest that a range of structural reforms have been important in driving the strong uptake of ICT by firms and have enabled these investments to be used in ways that generate productivity gains. This is particularly evident in wholesale and retail trade and in financial intermediation, where most of the Australian productivity gains in the second half of the 1990s have occurred.

ICT and competitive effects
Part of the contribution of ICT-producing industries to growth and productivity can be attributed to competitive effects, i.e. the entry of new firms. Previous OECD work has shown that aggregate productivity growth can be broken down in several components, a part due to growth within existing
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Figure 2.7. Estimated industry entry rates relative to the total business sector
* Indicates significance at 10%; ** at 5%; *** at 1%. Note: The figures reported in the graph are the industry fixed-effects in an entry equation that includes country, size and time-fixed effects. Source: OECD (2003b).

-2 -1 0 1 2 3 4 5 6 Manufacturing High-technology Pharmaceuticals** Office accounting and computing machinery*** Radio television and communication equipment*** Aircraft and spacecraft** Medium-High technology Chemicals excluding pharmaceuticals Machinery and equipment n.e.c. Electrical machinery and apparatus n.e.c. Medical precision and optical instruments Motor vehicles trailers and semi-trailers Railroad equipment and transport equipment n.e.c.** Medium-Low technology Coke refined petroleum products and nuclear fuel Rubber and plastics products Other non-metallic mineral products Basic metals* Fabricated metal products except machinery and equipment Building and repairing of ships and boats***

Manufacturing n.e.c.; recycling Low technology Food products beverages and tobacco Textiles textile products leather and footwear*** Wood and products of wood and cork** Pulp paper paper products printing and publishing Services Construction Wholesale and retail trade; repairs Hotels and restaurants*** Transport and storage Post and telecommunications*** Financial intermediation except insurance and pension funding** Insurance and pension funding except compulsory social security*** Activities related to financial intermediation*** Real estate activities*** Renting of machinery and equipment*** Computer and related activities*** Research and development*** Other business activities*** 2. THE CONTRIBUTION OF ICT TO GROWTH
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firms, a part due to the entry of new firms and the exit of declining firms, and a part due to more productive firms gaining market shares. The importance of these components differs considerably between industries (Scarpetta et al., 2002). In ICT-related manufacturing industries, the entry of new firms is particularly important, more so than in other manufacturing sectors (Figure 2.7). ICT-related services industries, such as post and telecommunications and computer services, also tend to have high entry rates, confirming that new firms play an important role in industries characterised by rapid technological change. The dynamic character of the ICT-producing sector (and of other hightechnology industries) is also visible in the rapid employment expansion of new firms in these industries (Figure 2.8). New entrants in these sectors – once they survive – grew much more rapidly than firms in other parts of the economy. Firms in the United States typically grow more rapidly than firms in other OECD countries, however (Scarpetta et al., 2002). Figures 2.7 and 2.8 both confirm that newly created firms have provided an important contribution to growth in the ICT sector. The OECD work on firm turnover also pointed to important differences between Europe and the United States. Compared with the European Union, the United States is characterised by: i) a smaller (relative to the industry average) size of entering firms; ii) a lower labour productivity level of entrants relative to the average incumbent; and iii) a much stronger (employment) expansion of successful entrants in the initial years which enable them to reach a higher average size. These differences in firms’ performance can only partly be explained by statistical factors or differences in the business cycle (see Bartelsman et al., 2002 for more details), and seem to indicate a greater degree of experimentation amongst entering firms in the United States. US firms take higher risks in adopting new technology and opt for potentially higher results, whereas European firms take fewer risks and opt for more predictable outcomes. This is likely related to differences in the business environment between the two regions; the US business environment permits greater experimentation as barriers to entry and exit are relatively low, in contrast to many European countries. The next chapter returns to this issue, as it proves to be of relevance in the adoption of ICT.

The impact of ICT on aggregate productivity growth

The evidence presented above shows that ICT has had considerable impacts on productivity growth in the second half of the 1990s, and into 2001. These effects are threefold: 1. In several countries with strong growth performance, notably Australia, Canada and the United States, investment in ICT capital has supported
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labour productivity growth. The available evidence suggests that these impacts have not disappeared with the slowdown, as ICT investment is slowly recovering. 2. In a number of countries, notably Finland, Ireland and Korea, ICT

production has provided an important contribution to aggregate labour and multi-factor productivity growth. 3. In a number of OECD countries, notably Australia and the United States, there is evidence that sectors that have invested heavily in ICT, notably service sectors such as distribution and financial services, have been able to achieve more rapid MFP growth. This link between ICT use and MFP growth is also visible at the aggregate level; countries that have invested most in ICT in the 1990s have often also seen the largest increase in MFP growth over the 1990s (Figure 2.9). A key question is the extent to which these effects are still visible in aggregate productivity growth now the economies of many OECD countries have slowed down and as parts of the ICT sector have entered a down-turn. While aggregate trends in productivity are influenced by a range of factors (OECD, 2001a), ICT is commonly considered to have contributed to a structural improvement in certain OECD countries, notably those where ICT is Figure 2.8. Net employment gains amongst surviving firms in high-tech industries, 1990
Net employment gains as a percentage of initial employment
Source: OECD (2003b).

2.0 1.8 1.6 1.4 1.2 1.0 0 0.8 0.6 0.4 0.2 Portugal Italy Finland United Kingdom Office accounting and computing machinery Aircraft and space craft Pharmaceuticals Radio, television and communication equipment Netherlands United States 2. THE CONTRIBUTION OF ICT TO GROWTH
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considered to be important, e.g. Australia and the United States. Figure 2.10 shows the available evidence for key OECD countries as regards changes in labour productivity, measured as GDP per hour worked. The top panel of Figure 2.10 shows that a limited number of OECD countries substantially increased labour productivity growth from the 1980s to the 1990s, including Australia, Canada, Denmark, Ireland, Sweden and the United States. Some of the large OECD economies, notably France, Germany, Italy and Japan experienced a substantially decline in labour productivity growth over this period. The bottom panel of the graph shows the developments in labour productivity growth over the first half of the 1990s compared with the second half. The results indicate that labour productivity growth in Australia, Ireland and the United States continued to improve over the 1990s. In several other OECD countries, cyclical conditions improved from the first to the second half of the 1990s and some countries, including France and Germany, experienced more rapid labour productivity growth over this period.11 A more detailed look at the data for the most recent years shows that in most OECD countries, labour productivity growth dropped sharply in 2001, as output growth in the OECD area slowed down. In some countries, such as Australia and Ireland, however, labour productivity growth continued to be strong in 2001. In both Canada and the United States, labour productivity growth picked up in 2002 after a dip in 2001 (Figure 2.11). Figure 2.9. Pick-up in MFP growth and increase in ICT investment
Correlation coefficient = 0.66; T-statistic = 3.03. Source: ICT investment from sources quoted in Figure 1.1, MFP growth from OECD (2003b).

-1.5 -1.0 -0.5 1.0 0 0.5 14 12 10 8 6 2

0 4 Change in MFP growth from 1980-90 to 1990-2000 Change in ICT investment as % of GFCF, 1990-2000 Ireland Finland Denmark Sweden Australia Canada United States Netherlands Austria Italy Japan France Germany Spain 2. THE CONTRIBUTION OF ICT TO GROWTH

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Figure 2.10. Changes in GDP per hour worked in OECD countries, 1980-20011
a) Annual compound growth rates, in percentages, 1980-90 versus 1990-2001 b) Annual compound growth rates, in percentages, 1990-95 versus 1995-2001
1. Estimates for the 1980s are only available for 18 OECD countries, reflecting the availability of data on hours worked. Source: OECD; GDP and employment based on OECD Economic Outlook database, hours worked from OECD Employment Outlook.

1980-1990 1990-2001 7 4 3 0 5 6 2 1 Ireland Japan Germany Finland Denmark United States Canada Netherlands Sweden United Kingdom Korea Norway Belgium Australia Italy Countries where GDP per hour worked increased Countries where GDP per hour worked declined Greece France 1990-1995 1995-2001 6 4 3 -1 5 2 1 0 Ireland Japan Germany Finland Denmark United States Canada Netherlands Mexico Iceland Korea Portugal Belgium

Australia Italy Countries where GDP per hour worked increased Countries where GDP per hour worked declined France Switzerland United Kingdom New Zealand Norway Sweden Spain Greece 2. THE CONTRIBUTION OF ICT TO GROWTH
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Estimates of multifactor productivity growth are not available for many countries for the most recent years, as estimates of capital services are typically only available with some delay. Recent estimates of trends in MFP growth for a broad range of OECD countries are shown in Figure 2.12. These estimates confirm the evidence in previous OECD work, i.e. a structural improvement in MFP growth from the 1980s to the 1990s in Australia, Canada, Ireland, the Nordic countries, New Zealand and the United States. The aggregate productivity trends therefore continue to point to a structural improvement in productivity growth in certain OECD countries, e.g. Australia, Canada and the United States, all countries that are among the key examples of ICT-led growth. This suggests that the impacts of ICT on productivity could continue in the years to come and that ICT remains a key factor for overall growth performance. Figure 2.11. Recent trends in labour productivity growth, United States and Canada
Business sector, output per hour, percentage change from previous year
Source: United States from Bureau of Labour Statistics, “Productivity and Costs – Fourth Quarter and Annual Averages 2002”, 6 March 2003, www.bls.gov; Canada from Statistics Canada, “Labour Productivity, Hourly Compensation and Unit Labour Costs – Annual and Fourth Quarter 2002”, The Daily, 14 March 2003, www.statcan.ca

1998 6 5 4 3 2 1 0 1999 2000 2001 2002 Q1 United States Canada Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2. THE CONTRIBUTION OF ICT TO GROWTH

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Figure 2.12. Trends in MFP growth, 1980-90 versus 1990-2000
Business sector, percentage change at annual rate
Source: OECD (2003b), The Sources of Economic Growth in OECD Countries, Paris. See Scarpetta et al. (2000) for methodological details.

1980-1990 1990-2000 5 0 3 4 2 1 Ireland Japan Germany Finland Denmark United States Canada Netherlands Sweden Spain Norway Belgium Australia Italy Countries where trend MFP improved Countries where trend MFP declined

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Notes

1. The estimates in Figure 2.2 differ from those released in prior OECD work (notably Colecchia and Schreyer, 2001) due to data revisions in OECD countries, updates to the series, the change from estimates for the business sector to those for the economy as a whole, and some minor methodological changes that are discussed in Schreyer et al. (2003). 2. Although not necessarily to more rapid growth for the economy as a whole. See Schreyer (2001). 3. An international roadmap for the production of semiconductors is published by the International Technology Roadmap for Semi-conductors (ITRS). See http:// public.itrs.net/ 4. US computer prices have declined less since 1999 than they did between 1995 and 1999, which seems partly linked to reduced competitive pressure in the production of computer chips (McKinsey, 2001). 5. The large product variety also affects productivity comparisons. Some countries, such as the United States, use hedonic price indexes to capture rapid quality changes in the ICT-producing sector. This typically raises productivity growth for these sectors compared to countries that do not use these methods. However, the US hedonic price index can not simply be used (or adapted) for other countries, as the quality changes that are implicit in the US price index for ICT manufacturing may not be appropriate for a country producing only computer terminals or peripheral equipment. See Pilat et al., 2002, for details. 6. Data for 2001 show a sharp slowdown in ICT production in Finland, and consequently a decline in the contribution of this sector to aggregate productivity growth. 7. A more systematic method would be to examine the link between ICT use and productivity performance by industry. However, estimates of ICT capital by industry are currently only available for some countries. 8. Certain manufacturing industries, e.g. printing and publishing, are also intensive users of ICT. These are not distinguished here, as the discussion has typically focused more on ICT use in services. Van Ark et al. (2002b) provides evidence on productivity growth in ICT-using manufacturing. 9. Poor measurement of productivity in financial services may be partly to blame. The OECD is currently working with member countries to improve methods to capture productivity growth in this sector. 10. The differences between the various US studies are partly due to the data sources and methodology used, as well as the timing of various studies. 11. The estimates shown here are not adjusted for the business cycle. Previous OECD work suggested that the conclusions did not change much when trend-adjusted estimates of productivity growth were used in the analysis (see Scarpetta et al., 2000).
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Chapter 3
ICT and firm-level performance
Abstract. This chapter provides evidence on the contribution of ICT
use to business performance, based on detailed firm-level studies. It demonstrates that the use of ICT indeed contributes to improved business performance, but only when it is complemented by other investments and actions at the firm level, such as changes in the organisation of work and changes in workers skills. The chapter also shows that ICT is no panacea; investment in ICT does not compensate for poor management, lack of skills, lack of competition, or a low ability to innovate. Not all firms will therefore succeed in generating returns from their ICT investments; many will fail. In addition, drawing the benefits from ICT investment takes time. Moreover, there are important cross-country differences in firms’ use of ICT. Firms in the United States are characterised by a much higher degree of experimentation in their use of ICT than European firms; they take higher risks and opt for potentially higher outcomes.
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56 ICT AND ECONOMIC GROWTH: EVIDENCE FROM OECD COUNTRIES, INDUSTRIES AND FIRMS – ISBN 92-64-10128-4 – © OECD 2003 Does ICT use matter?
The previous chapter has shown that ICT investment contributed to growth in most OECD countries in the 1990s, and that ICT production contributed to growth in some OECD countries. It also showed that ICT-using industries in the United States and Australia experienced a strong increase in productivity growth in the second half of the 1990s, partly due to their use of ICT. Few other countries have thus far experienced similar productivity gains in ICT-using services, although some aggregate evidence also suggests that the growth in MFP may be linked to the productivity-enhancing benefits from the use of ICT. Nevertheless, much of the current interest in ICT is linked to the potential economic benefits arising from its use in the production process. If the rise in MFP due to ICT were only a reflection of rapid technological progress in the production of computers, semi-conductors and related products and services, there would not be effects of ICT use on MFP in countries that are not already producers of ICT. For ICT to have benefits on MFP in countries that do not produce ICT goods, the use of ICT would need to be beneficial too. The strongest evidence for the impact of ICT use comes from firm-level evidence, however. ICT use may have several impacts at this level. For example, the effective use of ICT may help firms gain market share at the cost of less productive firms, which could raise overall productivity. In addition, the use of ICT may help firms expand their product range, customise the services offered, or respond better to client demand; in short, to innovate. Moreover, ICT may help reduce inefficiency in the use of capital and labour, e.g. by reducing inventories. These effects might all lead to higher productivity growth. These, and related, effects have long been difficult to capture in empirical studies, contributing to the so-called “productivity paradox”. However, a growing number of firm-level studies provide evidence on such impacts, suggesting that the productivity paradox has largely been solved (Box 3.1). The diffusion of ICT may also have impacts that go beyond individual firms as it may help establish ICT networks, which produce greater benefits (the so-called spillover effects) the more customers or firms are connected to the network. For example, the spread of ICT may reduce transaction costs, which can lead to a more efficient matching of supply and demand, and enable the growth of new markets that were not feasible before. Increased use of ICT may also lead to greater scope and efficiency in the creation of knowledge, which can lead to an increase in productivity (Bartelsman and
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Box 3.1. The productivity paradox – has it been solved?
The Solow paradox, attributed to economist Robert Solow, who once observed that computers are everywhere except in the productivity data, was appropriate during much of the 1980s and early 1990s, when the rapid diffusion of computing technology seemed to have little impact on productivity growth (Solow, 1987). Many studies in the 1970s and 1980s showed negative or zero impacts of investment in ICT on productivity. Many of these focused on labour productivity, which made the findings surprising as investment in ICT adds to the productive capital stock and should thus, in principle, contribute to labour productivity growth. Later studies did find some evidence of a positive impact of ICT on labour productivity. Some also found evidence that ICT capital had larger impacts on labour productivity than other types of capital, suggesting that there might be spillovers from ICT investment. Studies over the past decade have pointed to several factors that contributed to the productivity paradox. First, some of the benefits of ICT were not picked up in the productivity statistics (Triplett, 1999). This is mainly a problem in the service sector, where most ICT investment occurs. For instance, the improved convenience of financial services due to automated teller machines (ATMs) is only counted as an improvement in the quality of financial services in some OECD countries. Similar problems exist for other activities such as insurance, business services and health services. ICT may have aggravated the problems of measuring productivity, as it allows greater customisation, differentiation and innovation in the services provided, most of which is difficult to capture in statistical surveys. Progress towards improved measurement has been made in some sectors and some OECD countries, but this remains an important problem in examining the

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impact of ICT on performance. A second reason is that the benefits of ICT use might have taken a considerable time to emerge, as did the impacts of other key technologies, such as electricity. The diffusion of new technologies is often slow and firms can take a long time to adjust to them, e.g. in changing organisational arrangements, upgrading the workforce or inventing and implementing effective business processes. Moreover, assuming ICT raises MFP in part via the networks it provides; it takes time to build networks that are sufficiently large to have an effect on the economy. ICT has diffused very rapidly in many OECD countries in the 1990s and many recent empirical studies find a larger impact of ICT on economic performance than studies that were carried out with data for the 1970s or 1980s.
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Hinloopen, 2002). These spillover effects would drive a wedge between the impacts of ICT that can be observed at the firm level and those at the sectoral or aggregate level. Combining these three levels of information, as is done in this study, helps to shed light on this issue. This chapter examines the evidence on the role of ICT use on the basis of firm-level evidence. The next section summarises evidence on the impact of ICT on firm performance, whereas the third section examines the factors that affect the adoption of ICT and the size of ICT’s impact on firm performance. Section four explores some evidence on cross-country differences at the firm level, whereas a final section looks at the link between firm-level evidence and more aggregate data.

The impacts of ICT at the firm level

A number of studies have summarised the early literature on ICT, productivity and firm performance (e.g. Brynjolfsson and Yang, 1996). Many of these studies found no, or a negative, impact of ICT on productivity. Most of these studies also primarily focused on labour productivity and the return to computer use, not on MFP or other impacts of ICT on business performance. Moreover, most of these studies used private sources, since official sources were not yet available (see Annex II). Recent work by statistical offices, using official data, has provided many new insights in the role of ICT. To help guide this work with firm-level data, OECD worked closely with an expert group, composed of researchers and statisticians from 13 OECD countries (Box 3.2). This group worked with the OECD Secretariat to generate further evidence on

Box 3.1. The productivity paradox – has it been solved? (cont.)
A third reason is that many early studies that attempted to capture the impact of ICT at the firm level were based on relatively small samples of firms, drawn from private sources. If the initial impact of ICT on performance was small, such studies might find little evidence, as it would easily get lost in the econometric “noise”. It is also possible that such samples were not representative of the total population. Moreover, several studies have suggested that the impact of ICT on economic performance may differ between activities, implying that a sectoral distinction in the analysis is important. More recent studies based on large samples of (official) data and covering several industries are therefore more likely to find an impact of ICT than earlier studies. In addition, early studies used a wide variation of data on ICT and ICT diffusion, often of unknown quality. Much progress has been made in recent years in measuring ICT investment and the diffusion of ICT technologies, implying that the range of available data is broader, more robust and statistically sounder than previous data.
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the link between ICT and business performance. Their work and that of other researchers is reported in the remainder of this chapter.

The use of ICT and advanced technologies is positively linked to firm performance
There is evidence from many firm-level studies, and for many OECD countries, that ICT use has a positive impact on firm performance. These impacts can vary. Figure 3.1 illustrates a typical finding from many firm-level

Box 3.2. Participants in the OECD firm-level project on ICT and business performance

This study was conducted by the OECD Directorate for Science, Technology and Industry in co-operation with experts from 13 member countries. The main contacts were:

Australia: Dean Parham and Paul Gretton (Productivity Commission), Sheridan Roberts (Australian Bureau of Statistics). Canada: John Baldwin (Statistics Canada). Denmark: Peter Bøegh Nielsen (Statistics Denmark). Finland: Petri Rouvinen (ETLA – Research Institute of the Finnish Economy) and Mika Maliranta (ETLA and Statistics Finland). France: Thomas Heckel (INSEE). Germany: Thomas Hempell (ZEW Centre for European Economic Research). Italy: Fabiola Riccardini, Carlo DeGregorio and Alessandro Zeli (ISTAT), Carlo Milana (ISAE – Institute of Studies for Economic Planning). Japan: Kazuyuki Motohashi (Research Institute of Economy, Trade and Industry and Hitosubashi University). Netherlands: Eric Bartelsman (Free University of Amsterdam), George van Leeuwen and Henry van der Wiel (CPB Netherlands Bureau of Economic Policy Analysis). Sweden: Anders Wiberg (IPTS – Swedish Institute for Growth Policy Studies) and Anders Hintze (Statistics Sweden). Switzerland: Maja Huber (Swiss Federal Statistical Office) and Heinz Hollenstein (KOF – Institute for Business Cycle Research). United Kingdom: Tony Clayton and Kathryn Waldron (Office for National Statistics), Jonathan Haskel and Chiara Criscuolo (University of London). United States: B.K. Atrostic and Ron Jarmin (Center for Economic Studies, US Bureau of the Census) and Patricia Buckley (US Department of Commerce).
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studies that ICT-using firms have better productivity performance. It shows that Canadian firms that used either one or more ICT technologies had a higher level of productivity than firms that did not use these technologies. Moreover, the gap between technology-using firms and other firms increased between 1988 and 1997, as technology-using firms increased relative productivity compared to non-users. The graph also suggests that some ICT technologies are more important in enhancing productivity than other technologies; communication network technologies being particularly important. Figure 3.2 illustrates another important finding, based on findings from Australian firm-level data (Gretton et al., 2002). It shows that the use of computers has a positive effect on MFP growth in the mid-1990s, i.e. before the peak in ICT investment, with considerable variation across industries. The evidence shown in Figures 3.1 and 3.2 is confirmed by many other studies (Box 3.3) that also point to other impacts of ICT on economic performance. For example, firms using ICT typically pay higher wages. In addition, the studies show that the use of ICT does not guarantee success; many of the firms that improved performance thanks to their use of ICT were Figure 3.1. Relative productivity of advanced technology users and non-users
Manufacturing sector in Canada, 1988 versus 1997
Note: The following technology groups are distinguished: Group 1 (software); Group 2 (hardware); Group 3 (communications); Group C1 (software and hardware); Group C2 (software and communications); Group C3 (hardware and communications); Group C4 (software, hardware and communications). 1. The graph shows the relative productivity on technology users compared to groups not using any advanced technology. Source: Baldwin and Sabourin (2002).

1988 1997 1.50 1.45 1.40 1.35 1.30 1.25 1.00 1.20 1.15 1.10 1.05 12 3 C1 C2 C3 C4 Labour productivity relative to non-users Technology group1 3. ICT AND FIRM-LEVEL PERFORMANCE

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already experiencing better performance than the average firm. Moreover, the

benefits of ICT appear to depend on sector-specific effects and are not found in equal measure in all sectors.

ICT can help firms to gain market share

There is also evidence that ICT can help firms in the competitive process. For the United States, Doms et al. (1995) found that increases in the capital intensity of the product mix and in the use of advanced manufacturing technologies were positively correlated with plant expansion and negatively with plant exit. For Canada, Baldwin et al. (1995a) found that establishments using advanced technologies gained market share at the expense of nonusers. Technology users also enjoyed a significant labour productivity advantage over non-users, except for establishments that only used fabrication and assembly technologies. Relative labour productivity grew fastest in establishments using inspection and communications technologies and in those able to combine and integrate technologies across the different stages of the production process. Technology users were also able to offer higher wages than non-users. Figure 3.2. Estimated contribution of ICT to multifactor productivity growth in Australia
1994-95 to 1997-98, in percentage points
Source: Gretton et al. (2002).

Computer use and Internet alone Computer use, Internet and computer use interactions 0.35 0.30 0.25 0.20 0.15 0.10 0 0.05 0.14 0.04 0.14 0.14 0.09 0.09 0.29 0.06 0.11 0.14 0.07 0.12 0.09 0.17 0.14 0.28 0.13 0.18 Manufacturing Wholesale trade Retail trade Accom., cafes and restaurants Transport and storage Cultural and recreational services Property and business services Group total Construction 3. ICT AND FIRM-LEVEL PERFORMANCE

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Box 3.3. The impacts of ICT on firm performance – selected studies
Evidence on the impacts of ICT on firm performance can be found in many studies. For example, a study for the United States using data from technology surveys (Doms et al., 1997) found that the most technologically advanced plants paid higher wages prior to adopting new technologies and were more productive, both prior to and after the adoption of advanced technologies. Another study (McGuckin et al., 1998), found that firms that use advanced technologies exhibit higher productivity, even when controlling for factors such as size, age, capital intensity, labour force skills, industry and region. More productive plants used a wider range of advanced technologies and used them more intensively than other plants. The study also found that while the use of advanced technologies can help improve productivity, plants

that perform well were more likely to use advanced technologies than those that performed poorly. Moreover, the process of technology adoption was not smooth and characterised by substantial experimentation in the choice of technology. More recent studies for the United States focused more on ICT and broadly confirmed these findings. Stolarick (1999a, 1999b) used IT investment data from the Annual Survey of Manufactures to explore the link between IT spending and productivity in manufacturing. Stolarick (1999a) found a positive relationship between IT spending and productivity, but one that varied between industries, and concluded that industry mix was thus an important explanatory factor driving aggregate findings. Stolarick (1999b) found that low productivity plants sometimes spend more on IT than high productivity plants, in an effort to compensate for poor productivity performance. The evidence is not restricted to the United States. For France, Greenan and Mairesse (1996) matched firm data with data from surveyed employees on computer utilisation. They found very significant and positive effects linking computer use and labour productivity. In a more recent study, Crepon and Heckel (2000) used data on ICT investment at the firm and found that the effects of computer diffusion on growth were concentrated in a number of industries. In a more recent study, Biscoup et al. (2002) used firm-level data to focus on the impact of the decline in computer prices on marginal costs and the demand for labour and skills. They found that the fall in the price of computers is associated with an upward shift in the demand for skilled workers and a negative shift in the demand for unskilled workers. This effect was specific to computers and could not be found for other types of capital. The study found a high elasticity for computers, which may be due to inputs such as organisational change or embodied technology.
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In a more recent study for Canada, Baldwin and Sabourin (2002) found that a considerable amount of market share was transferred from declining firms to growing firms over a decade. At the same time, the growers increased their productivity relative to the declining firms. Those technology users that were using communications technologies or that combined technologies from several different technology classes increased their relative productivity the most. In turn, gains in relative productivity were accompanied by gains in

Box 3.3. The impacts of ICT on firm performance – selected studies (cont.)

For Italy, Milana and Zeli (2001) investigated how ICT affects production performance and technical efficiency. They found a correlation between ICT and technical efficiency in the majority of industrial sectors considered. In general, positive correlations were found in all four groups of industries defined on the basis of R&D intensity of production. De Gregorio (2002) found that micro-enterprises, i.e. enterprises with fewer than 10 employees, that had high ICT endowments tended to be characterised by higher innovation, R&D, training, strong inter-enterprise relations, higher productivity and higher earnings. De Panizza et al. (2002) found that ICT adoption in Italy was associated with previous performance of the firm. A larger number of studies have been carried out for Canada. Baldwin and Diverty (1995) linked panel data from the Census of Manufacturers to data from a technology survey. They found that plant size and plant growth were closely related to the incidence and intensity of technology use, an indication that technology use is closely linked to the “success” of a plant. Another study (Baldwin et al. 1999) provided an intertemporal perspective on the use of these advanced technologies on the basis of the 1989, 1993 and 1998 technology use surveys for Canada. Among its findings are that increased use of advanced communications technologies in the 1993-1998 period was linked to the facts that these plants had superior performance in the 1980s. Moreover, foreign-owned plants had higher rates of technology adoption than domestic-owned plants in 1989 with the gap widening from 1989 to 1993. In addition, industries that innovated with regards to machinery and equipment or intermediate products that are diffused to other sectors tended to make greater use of advanced technology, suggesting that these two go hand in hand. Bartelsman et al. (1996) used data from a technology use survey in the Netherlands. The study found that adoption of advanced technology is associated with higher labour productivity, higher export intensity, and larger

size. Firms that employed advanced technologies in 1992 had higher productivity and employment growth in the preceding period.
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market share. Other factors that were associated with gains in market share were the presence of R&D facilities and other innovative activities.

Computer networks play a key role

Some ICT technologies may be more important to strengthen firm performance than others. Computer networks may be particularly important, as they allow a firm to outsource certain activities, to work closer with customers and suppliers, and to better integrate activities throughout the value chain (Atrostic and Gates, 2001). These technologies are often considered to be associated with network or spillover effects. In recent years, more data have become available on this technology. For the United States, Atrostic and Nguyen (2002) were the first in linking computer network use (both EDI and Internet) to productivity. The study found that average labour productivity was higher in plants with networks and that the impact of networks was positive and significant after controlling for several production factors and plant characteristics. Networks were estimated to increase labour productivity by roughly 5%, depending on the model specification. Atrostic et al. (2002) confirmed these findings. Similar work has been carried out for Japan. Motohashi (2001) used the Basic Survey on Business Structure and Activities, which provides information about the networks being used by the firm, certain organisational characteristics of the firm (e.g. the degree of outsourcing), and the occupational structure of the firm. He found that the impact of direct business operation networks, such as production and logistic control systems, on productivity was much clearer than that of back office supporting systems, such as human resource management and management planning systems. Firms with networks were also found to have a larger share of white-collar workers and to outsource more production activities. Atrostic et al. (2002) also provided evidence for Japan and found that both interfirm and intrafirm networks are correlated with higher MFP levels in firms. Open networks, such as the Internet, as well as EDI networks, were particularly important. Work in Germany has also focused on computer networks. Bertschek and Fryges (2002) were one of the first studies to examine the decision to implement business-to-business (B2B) electronic commerce. They showed that skills and firm size both have a positive and significant impact on e-commerce use. International competition, as measured by exports, also affects the decision to implement B2B, as does the firm’s previous use of EDI. The most significant effect is linked to networks; the more firms in an industry that already use B2B, the more likely it is that the firm will also implement B2B. For the United Kingdom, Criscuolo and Waldron (2003) examined the role of computer networks using a similar approach as Atrostic
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and Nguyen (2002). They found that the use of networks had an important impact on productivity growth, but primarily through electronic purchasing, not through selling. This result confirms that networks can help firms improve the management of their supply chain.

Firms in the services sector also benefit from ICT

The work with firm-level data is also broadening to the services sector, where ICT use is more widespread than in manufacturing. For example, Doms, Jarmin and Klimek (2002) constructed a new linked dataset for US retail trade, bringing together a range of different sources. The study’s results show that growth in the US retail sector involved the displacement of traditional retailers by sophisticated retailers introducing new technologies and processes, thus confirming the sectoral evidence on the US distribution sector discussed in Chapter 2. The impacts of ICT on performance in different sectors of the economy may also be linked to the specific technologies that are being used in different sectors. Figure 3.3 presents evidence for the United Kingdom, which suggests that financial intermediation is the sector most likely to use network Figure 3.3. Use of ICT network technologies by activity, United Kingdom, 20001

Percentage of all firms, business weighted
1. Broadband includes xDSL and all other broadband connections. Source: Clayton and Waldron (2003).

100 90 80 70 60 50 0 40 30 20 10 % Transport and comm. Distribution Manufact. Construct. EDI (any comb.) Own website (any comb.) Intranet (any comb.) Broadband Hotels and restaurants Finance Intranet, Internet & own website EDI, Internet & own website Internet (any comb.) Internet only Intranet, EDI, Internet & own website Real estate and buss. serv. All activities 3. ICT AND FIRM-LEVEL PERFORMANCE

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technologies, including broadband technology, and also the sector to use combinations of network technologies. The combination of several network technologies shows that these sectors are intensive users of information and thus have the greatest scope to benefit from ICT. There is also growing evidence for other OECD countries that ICT can be beneficial to service sector performance. For Germany, Hempell (2002a) showed significant productivity effects of ICT in the German service sector. Experience gained from past process innovations helped firms to make ICT investments more productive. ICT investment may thus have contributed to growing productivity differences between firms, and potentially also between countries. A comparative study for Germany and the Netherlands (Hempell et al., 2002) confirmed the link between ICT and innovation in the German service sector, and also found such a link for the services sector of the Netherlands. Moreover, the study found that ICT capital had a significant impact on productivity in the Netherlands’ services sector. In another study for the Netherlands, Broersma and McGuckin (2000) found that computer investments have a positive impact on productivity and that the impact is greater in retail than in wholesale trade. The study also found that flexible employment practices in retail trade were related to computer use. For Australia, Gretton et al. (2002) found positive impacts of ICT use on labour and MFP growth in several services sectors, in both sectoral and firm-level analysis.

Factors that affect the impact of ICT

The evidence summarised above suggests that the use of ICT does have impacts on firm performance, but primarily, or only, when accompanied by other changes and investments. Early studies on the rates of return to ICT investment suggested that the returns to ICT were relatively high compared to other investments in fixed assets. This is now commonly attributed to the fact that ICT investment is accompanied by other expenditures, which are not necessarily counted as investment. This includes expenditure on skills and organisational change. This is also confirmed by many empirical studies that suggest that ICT primarily affects firms where skills have been improved and organisational changes have been introduced. The role of these

complementary factors is also raised in the literature on co-invention (Bresnahan and Greenstein, 1996), which argues that users help make investment in technologies, such as ICT, more valuable through their own experimentation and invention. Without this process of “co-invention”, which often has a slower pace than technological invention, the economic impact of ICT may be limited. The firm-level evidence also suggests that the uptake and impact of ICT differs across firms, varying according to size of firm, age of the
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firm, activity, etc. This section looks at some of this evidence and discusses the main complementary factors for ICT investment.

ICT use is complementary to skills

A substantial number of longitudinal studies address the interaction between technology and human capital, and their joint impact on productivity performance (Bartelsman and Doms, 2000). Although few longitudinal databases include data on worker skills or occupations, some address human capital through wages, arguing that wages are positively correlated with worker skills. For the United States, Krueger (1993) used cross-sectional data and found that workers using computers were better paid than those that do not use computers. Dunne and Schmitz (1995) found that workers employed in establishments that use advanced technologies also paid higher wages. Doms et al. (1997) found no correlation between technology adoption and wages, however, and concluded that technologically advanced plants paid higher wages both before and after the adoption of new technologies. A more recent study by Luque and Miranda (2000) found that technological change in US manufacturing was skill-biased. For France, some studies are also available. The French data include details about worker characteristics, which allow more detailed analysis. Entorf and Kramarz (1998) linked a variety of official INSEE statistics to examine the interaction between computer use and wages. They found that computer-based technologies are often used by workers with higher skills. These workers became more productive when they got more experience in using these technologies. The introduction of new technologies also contributed to a small increase in wage differentials within firms. Caroli and Van Reenen (1999) found that French plants that introduce organisational change were more likely to reduce their demand for unskilled workers than those that did not. Shortages in skilled workers might therefore reduce the probability of organisational changes. Greenan et al. (2001) also found evidence of a skill bias in the use of computers. They examined the late 1980s and early 1990s and found strong positive correlations between indicators of computerisation and research on the one hand, and productivity, average wages and the share of administrative managers on the other hand. They also found negative correlations between these indicators and the share of bluecollar workers. For the United Kingdom, Haskel and Heden (1999) used the UK’s Annual Respondents Database (ARD) together with a set of data on computerisation. They found that computerisation reduces the demand for manual workers, even when controlling for endogeneity, human capital upgrading and technological opportunities. Caroli and Van Reenen (1999) found evidence for the United Kingdom that human capital, technology and organisational
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change are complementary, and that organisational change reduced the demand for unskilled workers. Studies for Canada also point to the complementarity between technology and skills. For example, Baldwin et al. (1995b) found that use of advanced technology was associated with a higher level of skill requirements. In Canadian plants using advanced technologies, this often led to a higher incidence of training. They also found that firms adopting advanced technologies increased their expenditure on education and training. A followup study (Baldwin et al., 1997) found that plants using advanced technologies paid higher wages to reward the higher skills required to operate these technologies. A more recent study (Sabourin, 2001) found that establishments adopting advanced technologies often reported labour shortages of scientists, engineers and technical specialists. However, the most technologically

advanced establishments were often able to address these shortages. For Australia, Gretton et al. (2002) found that the positive benefits of ICT use on MFP growth were typically linked to the level of human capital and the skill base within firms, as well as firms’ experience in innovation, their application of advanced business practices and the intensity of organisational change within firms. For Germany, Falk (2001b; 2001c) found that firms with a higher diffusion of ICT employed a larger fraction of workers with a university degree as well as ICT specialists. A greater penetration of ICT was negatively related to the share of both medium and low-skilled workers. The majority of these micro-level studies thus confirm the complementarity between technology and skills in improving productivity performance. Many also found that computers are a skill-biased technology, i.e. increasing the demand for skilled workers and reducing the demand for unskilled workers. This relationship can also be discerned at the aggregate level, although the causality is not clear; countries with a high share of highly skilled ICT workers in total occupations have had higher investment in ICT than those with fewer highly skilled ICT workers (Figure 3.4). A few studies have also looked at other worker-related impacts. For example, Luque and Miranda (2000) found that the skill-biased technological change associated with the uptake of advanced technologies also affects worker mobility. The larger the number of advanced technologies adopted by a plant, the higher is the probability of exit of the worker. Their interpretation is that workers at technologically advanced plants have higher unobserved ability, and therefore can get a higher opportunity wage when they exit. This finding has been confirmed in other studies for both France and the United States (Entorf and Kramarz, 1997; Doms et al., 1997). The other mechanism at work is that less skilled workers tend to be pushed to plants that are less technologically advanced.
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Closely linked to human capital is the role of organisational change. Studies typically find that the greatest benefits from ICT are realised when ICT investment is combined with other organisational changes, such as new strategies, new business processes and practices, and new organisational structures. In the past, workers were required to perform specialised tasks within the framework of standardised production processes. In today’s economy, they are often given responsibilities in different domains, for which multiple skills and the ability to work in teams are required. This phenomenon is reflected in the large variety of new work practices that are being implemented by firms. These include, inter alia, teamwork, flatter management structures, and employee involvement and suggestion schemes. The common element among these practices is that they entail a greater degree of responsibility of individual workers regarding the content of their work and, to some extent, a greater proximity between management and labour. Because such organisational change tends to be firm-specific, empirical studies show on average a positive return to ICT investment, but with a huge variation across organisations. Several US studies with official statistics have addressed ICT’s link to human capital and organisational change. Black and Lynch (2001) found that the implementation of human resource practices is important for productivity, e.g. giving employees greater voice in decision-making, profitsharing mechanisms and new industrial relations practices. Unionised firms that adopt these practices were found to have higher productivity than firms Figure 3.4. ICT investment is associated with high skills in ICT
Source: ICT investment from sources quoted in Figure 2.1; ICT occupations from OECD (2002), Measuring the Information Economy.

6 5 4 3 2 1 0 01243 Share of highly-skilled ICT workers in total occupations, 1999 ICT investment as a % of GDP, 1999

Correlation = 0.68 T-statistic = 3.04 Luxembourg Finland Spain Austria United Kingdom Netherlands Belgium Germany Denmark Italy Greece United States France Sweden 3. ICT AND FIRM-LEVEL PERFORMANCE

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that were not unionised, while unionised firms that did not adopt these practices had lower productivity. They also found that productivity was higher in firms with a large proportion of non-managerial employees that use computers. In another study, Black and Lynch (2000) found that firms that re-engineered their workplaces to incorporate high-performance practices experienced higher productivity and higher wages. A positive and significant relationship was also found between the proportion of non-managers using computers and productivity. Capelli and Carter (2000) examined the determinants of wage outcomes and found that higher wages were associated with computer use and teamwork. This was particularly the case with frontline workers who are often the target of high-performance work practices. For Germany, Bertschek and Kaiser (2001) explored the impact of ICT and organisational change on performance. They found that changes in human resource practices, such as the enhancement of teamwork and the flattening of hierarchies, did not significantly affect firm’s output elasticities with respect to ICT capital, non-ICT capital and labour. The study also found no evidence of significant differences in returns to scale. It did, however, find that the introduction of organisational changes raised overall labour productivity. Studies in Germany have also explored the link between ICT use, organisational change and human capital. Falk (2001a) used results from the 1995 and 1997 Mannheim Innovation Panel in Services (MIP-S). He found that the introduction of ICT and the share of training expenditures were important drivers of organisational changes, such as the introduction of total quality management, lean administration, flatter hierarchies and delegation of authority. The study found that organisational changes had a positive impact on actual employment and on expected employment, apart from unskilled groups. The prospects for such organisational changes may be affected by policy barriers, however. In a 2000 survey of German firms, more than 23% of firms outside the ICT sector cited legal restrictions as a barrier to the adoption of ICT and 19% of non-ICT firms mentioned internal resistance within the firm as a barrier to uptake (Hempell et al., 2002). For France, Greenan and Guellec (1998) found that the use of advanced technologies and the skills of the workforce were both positively linked to organisational variables. Organisations that enabled communication within the firm and that innovated at the organisational level seemed better able to create the conditions for a successful uptake of advanced technologies. Moreover, these changes also seemed to increase the ability of firms to adjust to changing market conditions through technological innovation and the reduction of inventories. For the United Kingdom, Caroli and Van Reenen (1999) used the Workplace Industrial Relations Survey, which included questions about the introduction of micro-electronic technology and organisational change. The
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study found that organisational change, technology and skills were complementary. More specifically, it found that organisational change reduced the demand for unskilled workers; that such change was retarded by increases in regional skill price differentials; and that organisational change had the largest productivity impacts in establishments with larger initial skill endowments. For the Netherlands, Broersma and McGuckin (2000) also found

that computer use was linked to the introduction of flexible employment practices, e.g. greater use of temporary and part-time workers. For Switzerland, Arvantis (2003) investigated the influence of ICT, new practices of workplace organisation, formal education and job-related training on firm productivity. The econometric results show that ICT and human capital are positively correlated with productivity; the effect of organisation is also positive but not statistically significant. Moreover, firms with a high share of highly skilled employees are those with a high productivity of ICT; new organisational practices did not seem to contribute to a higher productivity of either ICT or human capital.

Firm size and age affect the impact of ICT

A substantial number of studies have looked at the relationship between ICT and firm size. This relationship can go in different ways. The first question is whether there is a difference in the uptake of ICT by size classes. This question has been addressed in a large number of studies in many countries, e.g. Dunne (1994) for the United States, Baldwin and Diverty (1995) for Canada, or Bartelsman et al. (1996) for the Netherlands. Most of these find that the adoption of advanced technologies, such as ICT, increases with the size of firms and plants. Figure 3.5 confirms this result for the United Kingdom, with recent data for a variety of network technologies used in different combinations. It shows that large firms of over 250 employees are more likely to use network technologies such as Intranet, Internet or EDI than small firms; they are also more likely to have their own Web site. However, small firms of between 10 and 49 employees are more likely to use Internet as their only ICT network technology. Large firms are also more likely to use a combination of network technologies. For example, over 38% of all large UK firms use Intranet, EDI and Internet, and also have their own Web site, as opposed to less than 5% of small firms. Moreover, almost 45% of all large firms already use broadband technologies as opposed to less than 7% of small firms. These differences are partly due to the different uses of the network technologies by large and small firms. Large firms may use the technologies to redesign information and communication flows within the firm, and to integrate these flows throughout the production process. Some small firms
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only use the Internet for marketing purposes. Moreover, skilled managers and employees often help in making the technology work in large firms (Gretton et al., 2002). There is also a question whether ICT has an effect on the size of firms or changes the boundaries of firms over time. This question is linked to the expectation that ICT might help lower transaction costs and thus changes the functions and tasks that should be carried out within firms and those that could be carried out outside the firm boundaries. This issue has been researched by only few firm-level studies, most of which use private data. For example, Hitt (1998) found that increased use of ICT was associated with decreases in vertical integration and increased diversification. Moreover, firms that were less vertically integrated and more diversified had a higher demand for ICT capital. Motohashi (2001) found that firms with computer networks outsourced more activities. The link between size and age is also important, as it provides a link to firm creation. Dunne (1994) found that the impact of age on the likelihood of adopting advanced technologies was quite small. Luque (2000) confirmed this result, but found that age may have a role depending on plant size. Small new plants were more likely to adopt advanced technologies than small old plants. Figure 3.5. Use of ICT network technologies by size class, United Kingdom, 2000
Percentage of all firms, business-weighted
Source: Clayton and Waldron (2003).

100 90 80 70 60 50 0

40 30 20 10 % Broadband Internet (any comb.) Intranet (any comb.) EDI (any comb.) Own website (any comb.) Internet only 10-49 employees 50-249 employees > 250 employees Intranet, EDI and Internet Intranet, EDI, Internet and own website Total EDI, Internet, and own website 3. ICT AND FIRM-LEVEL PERFORMANCE
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Ownership, competition and management are important

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Firm-level studies also point to the importance of ownership changes and management in the uptake of technology. For example, a study by McGuckin and Nguyen (1995) for the food processing industry found that plants with above-average productivity were more likely to change owners and that the acquiring firms also tended to have above-average productivity. Plants that changed owners typically improved productivity following the change. Moreover, ownership changes appeared associated with the purchase or integration of advanced technologies and better practices into new firms. These results were confirmed by Baldwin (1995) in a study for the Canadian manufacturing sector. Some studies also point to the impact of competition. A study by Baldwin and Diverty (1995) found that foreign-owned plants were more likely to adopt advanced technologies than domestic plants. For Germany, Bertschek and Fryges (2002) found that international competition was an important factor driving a firm’s decision to implement B2B electronic commerce. These findings should be linked to the results of several firm-level studies that show that the implementation of advanced technologies can help firms to gain market share and may reduce the likelihood of plant exit (e.g. Doms et al., 1995; Doms, Jarmin and Klimek, 2002; Baldwin et al., 1995a; Baldwin and Sabourin, 2002). Stolarick (1999b) found that low productivity plants may sometimes spend more on IT than high productivity plants, in an effort to compensate for their poor productivity performance. The study suggests that management skill should therefore be taken into account as an additional factor when investigating the IT productivity paradox.

ICT use is closely linked to innovation

Several studies point to an important link between the use of ICT and the ability of a company to adjust to changing demand and to innovate. The possibility of such a link is also visible in aggregate data; those countries that have invested most in ICT also have the largest share of patents in ICT (Figure 3.6). The best example of this link is found in work on Germany by ZEW, as this draws on innovation survey results. For example, Licht and Moch (1999) draw on the Mannheim Innovation Panel in Services (MIP-S). They found that

information technology has important impacts on the qualitative aspects of service innovation, but not on productivity. Hempell (2002a) also used this survey and found that firms that had introduced process innovations in the past were particularly successful in using ICT; the output elasticity of ICT capital for these firms was estimated to be about 12%, about four times that of
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other firms. This suggests that the productive use of ICT is closely linked to innovation in general, and to the re-engineering of processes in particular. Moreover, the introduction of ICT has many similarities with innovation, as it is risky and uncertain, with potentially positive outcomes. Studies in other countries also confirm this link. For example, Greenan and Guellec (1998) found that organisational change and the uptake of advanced technologies increased the ability of firms to adjust to changing market conditions through technological innovation. For the Netherlands, Hempell et al. (2002) found that services firms that engaged in permanent non-technological innovation benefited more from ICT than those that did not.

The impacts of ICT use often only emerge over time

Given the time it takes to adapt to ICT, it should not be surprising that the benefits of ICT may only emerge over time. This can be seen in the relationship between the use of ICT and the year in which firms first adopted ICT. Figure 3.7 shows evidence for the United Kingdom. It shows that among the firms that had already adopted ICT in or before 1995, close to 50% bought using electronic commerce in 2000. For firms that only adopted ICT in 2000, less than 20% bought using e-commerce. The graph also suggests that firms move towards more complex forms of electronic activity over time; out of all firms starting to use ICT prior to 1995, only 3% had not yet moved beyond the straightforward use of ICT in 2000. Most had established an Internet site, or Figure 3.6. ICT investment is accompanied by rapid innovation in ICT
Source: ICT investment from Figure 2.1; ICT patents from OECD (2002), Measuring the Information Economy.

0 10 20 40 30 30 28 26 24 22 20 10 18 16 14 12 Share of ICT patents in all patents, 1998 ICT as a % of non-residential investment, 1998 Correlation = 0.59 United States T-statistic = 2.84 Japan Canada Australia United Kingdom Sweden Spain Portugal Netherlands Italy Ireland Greece Germany France Denmark Belgium Austria 3. ICT AND FIRM-LEVEL PERFORMANCE

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bought or sold through e-commerce. Out of the firms adopting ICT in 2000, over 20% had not yet gone beyond the simple use of ICT. The role of time also emerges from analysis for Australia. Gretton et al., 2002 used firm level information on productivity growth and the duration of computer use to examine the dynamics of the impact of the introduction of

computers. They found that computers had a positive effect on MFP growth that varied between industries (Figure 3.2). They also found that the positive effect was largest in the earlier years of uptake but appeared to taper off as firms returned to “normal” growth after the productivity boost of the new technology. This indicates that the ultimate productivity effect from adoption of ICT is a step up in levels, rather than a permanent increase in the rate of growth. However, further technical developments can set further productivityenhancing processes in motion.

Does the impact of ICT at the firm level differ across countries?
Cross-country studies on the impact of ICT at the firm level are still relatively scarce, primarily since many of the original data sources were of an ad hoc nature and not comparable across countries. In recent years, the growing similarity of official statistics is enabling more comparative work, which has been further encouraged in the recent OECD work with statistical Figure 3.7. Relationship between the year of ICT adoption and the current degree of e-activity
As a percentage of all firms adopting ICT in specific year, business-weighted
Note: The graph shows the percentage of firms engaged in a specific type of e-activity in 2000, out of all the firms starting to use ICT in that year. Source: Clayton and Waldron (2003).

1996 60 50 40 30 20 10 0 1997 1998 1999 2000 1994 1995 Use ICT Have a website Current level of e-activity (% of firms) Year that company started using ICT Buy using e-commerce 3. ICT AND FIRM-LEVEL PERFORMANCE

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offices. An example of such a study is a recent comparison between the United States and Germany (Haltiwanger et al. 2002), that examines the relationship between labour productivity and measures of the choice of technology. Figure 3.8 illustrates some of the empirical findings, distinguishing between different categories of firms according to their total level of investment and their level of investment in ICT. The first panel shows that firms in all categories of investment had much stronger productivity growth in the United States than in Germany. Moreover, firms with high ICT investment (groups 4 and 6) had stronger productivity growth than firms with low (groups 2 and 5) or zero ICT investment (groups 1 and 3). The second panel of the graph shows that firms in the United States have much greater variation in their productivity performance than firms in Germany. This may be because US firms engage in much more experimentation than their German counterparts; they take greater risks and opt for potentially higher outcomes. Hempell et al. (2002) provide an international comparison of ICT impacts in the services sector in Germany and the Netherlands. They found that ICT capital deepening raises labour productivity in both countries and that investment in ICT capital appears to be complementary to innovation in both countries. They also found some differences, e.g. innovation had a more direct impact on productivity in Germany than in the Netherlands. Other international comparisons of business performance and the impact of ICT are currently underway on the basis of microdata (Atrostic et al., 2002); these should contribute to further insights and help explain cross-country differences in the benefits that are being drawn from ICT.

Concluding remarks on the firm-level evidence

Examining the role of ICT at the aggregate, sectoral and firm level raises some difficult questions (see Gretton et al., 2002). The firm-level evidence suggests that ICT use is beneficial – though under certain conditions – to firm performance in all countries for which micro-level studies have been conducted. However, the aggregate and sectoral evidence is less conclusive about the benefits of ICT use. It shows that investment in ICT capital has

contributed to growth in most OECD countries, and that the ICT-producing sector has contributed to productivity growth in some OECD countries. There is, however, little evidence that ICT-using industries have experienced more rapid productivity growth, the United States and Australia being the major exceptions. There are several reasons why this may be the case and why aggregate evidence may differ from firm-specific evidence: 1. Aggregation across firms and industries, as well as the effects of other economic changes, may disguise some of the impacts of ICT in sectoral and
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Figure 3.8. Differences in productivity outcomes between Germany and the United States

Note: Differences are in logs and are shown relative to a reference group of zero total investment and zero investment in ICT. The groups are distinguished on the basis of total investment (0, low, high) and ICT investment (0, low, high). Group 1 has low overall investment and zero ICT investment. Group 2 has low overall investment and low ICT investment. Group 3 has high overall investment and zero ICT investment. Group 4 has low overall investment and high ICT investment. Group 5 has high overall investment and low ICT investment. Group 6 has high overall investment and high ICT investment. Source: Haltiwanger, Jarmin and Schank (2002).

1.0 0.9 0.8 0.7 0.6 0.5 0 0.4 0.3 0.2 0.1 0.4 0.3 0.2 0.1 0 -0.1 -0.3 -0.2 Group 1 United States Germany Relative productivity Group 2 Group 3 Group 4 Group 5 Group 6 Investment group A. Relative differences in labour productivity, compared to reference group Group 1 United States Germany Differences in standard deviation Group 2 Group 3 Group 4 Group 5 Group 6 Investment group B. Relative dispersion in labour productivity, compared to reference group 3. ICT AND FIRM-LEVEL PERFORMANCE

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aggregate analysis that are more evident from firm level analysis. This may also be because the impacts of ICT depend on other factors and policy changes, which may differ across industries. Regulatory reform in specific sectors and specific countries, financial services for example, may already have allowed ICT to strengthen performance, while lack of reform may still hold back productivity change in other sectors or countries. The size of the aggregate effects over time depends on the rate of development of ICT, their diffusion, lags, complementary changes, adjustment costs and the productivity-enhancing potential of ICT in different industries (Gretton et al., 2002). 2. The firm-level benefits of ICT may be larger in the United States than in other OECD countries, and thus show up more clearly in aggregate and sectoral evidence. The results from the comparison between Germany and the United States, presented above, suggest that this may indeed be the case. Given the more extensive diffusion of ICT in the United States, and its early start, this interpretation should not be surprising; in particular if it takes time before the benefits from ICT become apparent. Moreover, the conditions under which ICT is beneficial to firm performance, such as sufficient scope for organisational change, might be more firmly

established in the United States than in other countries. 3. Measurement may play a role as well. The impacts of ICT may be insufficiently picked up in macroeconomic and sectoral data outside the United States, due to differences in the measurement of output. For example, the United States is one of the few countries that have changed the measurement of banking output to reflect the convenience of automated teller machines. Since services sectors are the main users of ICT, inadequate measurement of service output might be a considerable problem. Improvements in measurement may make some of the benefits of ICT more clearly visible (Annex I). 4. Countries outside the United States may not yet have benefited from spillover effects that could create a wedge between the impacts observed for individual firms and those at the macroeconomic level. The discussion above has already suggested that the impacts of ICT may be larger than the direct returns flowing to firms using ICT. For example, ICT may lower transaction costs, which can improve the functioning of markets (by improving the matching process), and make new markets possible. Another effect that can create a gap between firm-level returns and aggregate returns is ICT’s impact on knowledge creation and innovation. ICT enables more data and information to be processed at a higher speed and can thus increase the productivity of the process of knowledge creation. A greater use of ICT may thus gradually improve the functioning of the economy.
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Such spillover effects may already have shown up in the aggregate statistics in the United States, but not yet in other countries. 5. The state of competition may also play a role in the size of spillover effects. In a large and highly competitive market, such as the United States, firms using ICT may not be the largest beneficiaries of investment in ICT. Consumers may extract a large part of the benefits, in the form of lower prices, better quality, improved convenience, and so on. In other cases, firms that are upstream or downstream in the value chain from the firms using ICT might benefit from greater efficiency in other parts of the value chain. For example, Criscuolo and Waldron (2003) demonstrate large productivity impacts for firms purchasing through computer networks, not for firms selling through networks. In countries with limited competition, firms might be able to extract a greater part of the returns, and spillover effects might thus be more limited. Further cross-country research may help to address these questions, and provide new insights in the extent of ICT-related spillovers. The empirical evidence presented in this chapter and Chapter 2 also allows a number of general conclusions to be drawn. First, while ICT investment has dropped off during the recent slowdown, it is likely to increase once the recovery gets underway. Technological progress in ICT goods and services is continuing at a rapid pace, driving prices down and contributing to a wide range of new services and applications. For example, the release of increasingly powerful microprocessors is projected to continue for the foreseeable future, which will encourage ICT investment and support further productivity growth. The level of ICT investment is likely to be lower than that observed prior to the slowdown, however, as the 1995-2000 period was characterised by some one-off investment peaks, e.g. investments related to Y2K and the diffusion of the Internet (Gordon, 2003). Second, further technological progress in ICT production should imply a continued positive contribution of the ICT sector to MFP growth, notably in those countries with large ICT-producing sectors. Third, productivity growth in the United States, Canada and Australia, examples of ICT-led growth, has continued to be strong during the recent slowdown, suggesting that part of the acceleration in productivity growth over the second half of the 1990s was indeed structural. Finally, ICT networks have now spread throughout much of the OECD business sector, implying that will increasingly be made to work to enhance productivity and business performance. But these effects will also depend on whether policy makers can foster a business environment that enables firms to make smart and effective use from the technology.
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ANNEX I

Some implications for statistics
This study uses a range of new statistics, many of which have only existed for a short period. The use of these statistics allows some feedback on their relevance and applicability, e.g. as regards surveys on ICT use by businesses and surveys of electronic commerce. The work has also highlighted some remaining constraints in the analysis of ICT’s impact on business performance. The statistical implications of the project are several. First, the project has demonstrated the importance of databases that enable researchers and statisticians to link firm-level data derived from different statistical surveys. These databases are of particular importance since the impact of ICT depends on the use of a range of complementary investments and factors, such as skills, organisational change, management and competition. Examining any of these factors in isolation is of limited use. Statistical offices should therefore consider the potential for linking databases when designing new statistical surveys. Common firm identifiers and sample frames are important for this to happen and point to the need for integrated business registers. Databases that allow firms to be tracked over time are also highly relevant. They provide crucial insights in firm creation and destruction, and in the changing fortunes of firms, as well as the factors which influence firm dynamics. Second, data constraints still limit the scope for comparative analysis. Many of the current sources are not yet sufficiently comparable to allow largescale cross-country comparisons. However, more limited comparative studies are possible and provide important insights in cross-country differences. Moreover, data on certain key variables, such as organisational factors and skills, are currently only available for a limited number of countries, making international studies quite difficult. Not all variables that are of potential interest are available from statistical surveys; many variables are not available for the same periods; and combining several sources typically limits the sample of firms.
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Third, the work has shown that ICT’s impact remains difficult to capture at the aggregate and sectoral level in many services sectors, due to (well known) problems in the measurement of output. Further statistical work in these areas (e.g. financial services, business services and health) should be a priority. Firm-level studies demonstrate that productivity growth in services is positively affected by ICT, which appears to contradict the sectoral evidence in many countries. Work is now underway in many countries to address this area through the development of better deflators and output measures. Finally, certain areas offer scope for further progress. For example, surveys that focus on the specific use of different ICT technologies by businesses, e.g. as regards the technologies being used and the businesses processes being affected, may offer greater prospects for examining the impact of ICT than more general surveys on ICT and Internet use. Most firms already use ICT and the Internet, and this is no longer a characteristic that helps to distinguish well performing from poorly performing firms. The relationship between ICT and the ability to innovate is potentially also of great interest, but has not yet been explored in many studies. Linking innovation surveys and ICT surveys to production surveys can provide important insight into the long-term benefits of ICT. Furthermore, surveys that provide qualitative evidence on the perceived impacts of ICT at the firm level, and that are currently under development in some OECD countries, may be a helpful complement to existing surveys and data collections as they may avoid some of the measurement problems noted above. Finally, studies in some countries have successfully linked employer and employee data to explore the role of skills and worker characteristics. Much has been achieved in recent years, but data linking and longitudinal analysis offer a great potential for future statistical analysis, with potentially important policy implications.
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ANNEX II

Data for firm-level studies
Most of the early work with firm-level data on ICT and business performance, and a considerable amount of work by academic researchers, is based on private data for a sample of firms. For example, Brynjolfsson and Hitt (1997) examined more than 600 large US firms over the 1987-94 period, partly drawing on the Compustat database, while Bresnahan, Brynjolfsson and Hitt (2002) examined over 300 large US firms from the Fortune 1000. Similar studies with private data exist for other countries. Work with these private sources has helped generate interest in this area of analysis and has given an important impetus to the development of official statistics on ICT. However, private sources suffer from a number of methodological drawbacks. First, the representativeness of the sample of firms is often not known, which may imply that the results of such studies are biased. Second, the quality of the data is not always known, since the data do not necessarily confirm with accepted statistical conventions and definitions. Over the past decade, the analysis in this area has benefited from the establishment of longitudinal databases in statistical offices. These databases cover much larger and statistically representative samples than private data, which is important given the enormous heterogeneity in plant and/or firm performance (Bartelsman and Doms, 2000). These data allow firms to be tracked over time and can be linked to many surveys and data sources. Among the first of these databases was the Longitudinal Research Database of the Center of Economic Studies (CES) at the US Bureau of the Census (McGuckin and Pascoe, 1988). Since then, several other countries have also established longitudinal databases and centres for analytical studies with these data. Examples include Australia, Canada, Finland, France, the Netherlands and the United Kingdom. The data integrated in these longitudinal databases differ somewhat between countries, since the underlying sources are not the same. However, many of the basic elements of these databases are common. The basic source for productivity-related analysis in most countries is typically a
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production survey or census, such as the US Annual Survey of Manufactures. These data typically cover the manufacturing sector, although longitudinal databases increasingly cover the service sector as well. In recent years, statistical offices and researchers working with these data have increasingly become involved in analytical work on ICT’s contribution to economic performance and productivity. The first of these studies typically used technology use surveys, such as the Survey of Manufacturing Technology in the Netherlands or the United States, and the Survey of Advanced Technology in Canada (see Vickery and Northcott, 1995, for an overview of these surveys). Other studies used data on IT investment derived from production or investment surveys. In recent years, more data on ICT have become available, e.g. from surveys of ICT use and e-commerce undertaken in many OECD countries. Moreover, innovation surveys, such as the Community Innovation Survey, often include some survey questions on computer use that can, in principle, be used for empirical analysis. Finally, several countries have other special surveys that touch on aspects of ICT use by firms. In principle, such surveys can also be used for more detailed analysis. More detail is available on the specific sources in each country is shown in Table A2.1.
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Table A2.1. Key databases for firm-level statistical analysis on ICT and business performance
Longitudinal databases Production, employment Technology use surveys Innovation surveys Research and Development Other sources

on ICT use Electronic Commerce Other surveys used Australia Business longitudinal survey,1994-95 – 1997-98 Economic activity survey Survey on business use of ICT, 1997-2001 Canada Longitudinal manufactures research file; Longitudinal employment analysis programme Annual survey of manufactures Survey of innovation and advanced technology 1993; 1998 SAT 1996/1999 survey of innovation Denmark 1995-99 enterprise statistics; 19951999 account statistics 1998 survey on enterprise use of ICT Database for labour market research (IDA) Finland Longitudinal data on plants in manufacturing Annual industrial statistics, business register on plants Community innovation surveys R&D surveys E-commerce surveys Employee statistics France Annual survey of enterprises (EAE); BRN employer file; SUSE firm accounts Community innovation surveys (CIS) R&D surveys Survey Organisational change and informatisation (COI) Annual social declarations (DADS); Employment structure survey Germany (ZEW) Service sector business survey Mannheim innovation panel Survey on ICT use and skill shortages

ZEW CATI survey for 2000 Italy Survey on economic and financial accounts R&D assets from enterprise account ICT assets and investment from enterprise accounts E-commerce survey 3. ICT AND FIRM-LEVEL PERFORMANCE
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Table A2.1. Key databases for firm-level statistical analysis on ICT and business performance (cont.)
Longitudinal databases Production, employment Technology use surveys Innovation surveys Research and Development Other sources on ICT use Electronic Commerce Other surveys used Japan Basic survey on business structure and activities R&D surveys Basic survey on business structure and activities (BSBSA) E-commerce survey Survey of IT workplaces (SITW) Netherlands Microlab data CBS (CEREM) Production survey, 1978-1999 Automation survey, 1987-97 CIS 1994-96, 1996-98, 2000 Quadrennial, from 1985 onwards Investment in fixed assets, 1993-99 Switzerland Advanced manufacturing survey, 1996 Innovation survey, every 3rd year since 1990 2002 survey on ICT and e-commerce 2000 survey on ICT and organisational change

United Kingdom ONS business data bank/ Annual respondents databank (ARD) Annual business inquiry 1998-2001 CIS 1997 and 2000 R&D surveys 2000-2001 ICT capital expenditure, e-commerce and software spending from ABI supplement E-commerce surveys 2000-2001 Workplace industrial relations survey United States Longitudinal research database, Longitudinal business database Census/survey of manufactures; SSEL economic census Survey of manufacturing technology, 1988, 1991, 1993 National science foundation R&D surveys Computer spending from ASM; Business expenditure survey, computer network use from ASM supplement EQW national employer survey

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Chapter 4
Policy implications
Abstract. This chapter draws implications from the empirical
evidence presented in previous chapters for policy makers. It argues that governments should reduce unnecessary costs and regulatory burdens on firms to create a business environment that promotes productive investment. This involves policies to enable organisational change, to strengthen education and training systems, to encourage good management practices, and to foster innovation, e.g. in new applications, that can accompany the uptake of ICT. Moreover, policy should foster market conditions that reward the successful adoption of ICT; a competitive environment is key for this to happen. Governments will also need to work with business and consumers to shape a regulatory framework that strengthens confidence and trust in the use of ICT, notably electronic commerce. Policies to foster growth in services are important too, as ICT offers a new potential for growth in the service sector,

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providing that regulations that stifle change are adjusted or removed. Finally, the report reaffirms the importance of economic and social fundamentals as the key to lasting improvements in economic performance. A short set of conclusions completes the report.
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T

he OECD Growth Study provided a number of recommendations on policies

to seize the benefits of ICT and foster economic growth (OECD, 2001a). This included, inter alia, policies to increase competition in telecommunications, to enhance skills and encourage labour mobility, to reduce obstacles to workplace changes, and to build confidence in the use of ICT. The Growth Study also concluded that ICT is not the only factor explaining growth disparities, and that policies to bolster ICT will not on their own steer countries on to a higher growth path. Strengthening growth performance will require a comprehensive and co-ordinated set of actions to create the right conditions for future change and innovation, including policies to strengthen fundamentals, to foster innovation, to invest in human capital and to stimulate firm creation. The present study reaffirms these conclusions and provides further evidence on the appropriate policies to seize the benefits of ICT.1

Strengthening competition in ICT goods and services
The evidence presented in previous chapters provides new insights in the factors that influence a firm’s decision to invest in ICT. Firms will decide to invest in ICT if they can make smart and effective use of their investment, and expect sufficient returns. These returns are determined by several factors, some of which can be influenced by policy makers. One important factor is the cost of the investment in ICT itself. The available evidence suggests that differences in the costs of the technology continue to play a role in determining investment patterns. Estimates of relative price levels of ICT investment for 1999 still showed a considerable variation across the OECD area (OECD, 2002c). This variation is considerably smaller than in 1993 or 1996 (OECD, 2001a), but still suggests that the United States had among the lowest price levels for ICT equipment and software. Barriers to trade, in particular non-tariff barriers related to standards, import licensing and government procurement, may partly explain the cost differentials. The higher price levels in other OECD countries may also be associated with a lack of competition within countries. In time, however, international trade and competition should further erode these cross-country price differences. Policy could help to accelerate this trend, by implementing a more active competition policy and measures to promote market openness, both domestically and internationally.
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The investment and diffusion of ICT do not just depend on the cost of the investment goods themselves, but also on the associated costs of communication and use once the hardware is linked to a network. Increased competition in the telecommunications industry, thanks to extensive regulatory reform, has been of particular importance in driving down these costs. Liberalisation, and the competition it has generated, has brought tremendous benefits to OECD countries and users. Prices have declined, and continue to do so in certain market segments. Technological diffusion and new service development have been rapid, and continue to grow. Incumbent telecommunication carriers have adjusted to the new market conditions by increasing efficiency and improving levels of service. A large number of new entrants have entered the market, and while some have failed, the number of market players in many OECD countries remains large. But efforts to improve competitive conditions have not yet been sufficient. The OECD growth report called on countries to increase competition and continue with regulatory reform in the telecommunications industry to enhance the uptake of ICT. The evidence presented in this report shows that this recommendation will continue to be important in the years to come (OECD, 2003a).

Fostering a business environment for ICT adoption

A competitive environment is more likely to lead a firm to invest in ICT, as a way to strengthen performance and survive, than a more sheltered environment. Moreover, the state of competition influences firms’ decisions to implement ICT applications, such as electronic commerce. Many firms do not engage in e-commerce because the market is considered too small, or because their products are not considered suitable for electronic commerce. In other cases, electronic commerce is seen as a rival to existing business models. These concerns can be genuine, but may also reflect a conservative attitude. Existing firms may wish to retain their current business model and avoid the risks associated with new investments and new business models. Start-up firms can help instil greater dynamism, introduce new business models, and invigorate mature industries. Policies to enhance firm creation are key in such markets. The previous chapters showed that ICT is technology that has the potential to transform firms. They can use it in smart ways to improve performance, but not all firms will succeed in making the necessary changes that are needed to make the technology work. Competition and creative destruction are key in selecting the successful firms and in making them flourish and grow. If firms that are able to make ICT work succeed and grow, the benefits for the economy as a whole are greater than if poorly performing firms survive. Chapters 2 and 3 demonstrated cross-country differences in experimentation that may be important for firms wishing to gain benefits
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from their investments in ICT (Bartelsman et al. 2002). Allowing room for such experimentation is important. New firms in the United States seem to experiment more with business models than those in other OECD countries; they start at a smaller scale than European firms, but grow much more quickly when successful. This may be linked to less aversion to risk in the United States, linked to its financial system, which provides greater opportunities for risky financing to innovative entrepreneurs. Moreover, low regulatory burdens enable US firms to start at a small scale, experiment, test the market and their business model, and, if successful, expand rapidly. Moreover, if they do not succeed, the costs of failure are relatively limited. In contrast, firms in many other OECD countries are faced with high entry and exit costs. In a period of rapid technological change, greater scope for experimentation may enable new ideas and innovation to emerge more rapidly, leading to faster technology diffusion. Investment in ICT relies not on only competition and the cost of ICT, but also on the complementary investments that need to be made by firms to draw the benefits from ICT, e.g. in changing the organisation of functions and tasks, or in training staff. These complementary investments are often much more costly than the initial outlays for ICT investment goods. Brynjolfsson and Hitt (2000), for example, suggest that USD 1 of ICT investment may be associated with USD 9 of investment in intangible assets, such as skills and organisational practices. Adapting the organisation of functions and tasks to ICT can be particularly costly to firms, as it often meets with resistance within the firm, and may be limited by legal constraints. Social partners and government can work together to ensure that a virtuous circle of human resource upgrading, organisational change, ICT and productivity is set in motion. This depends on workers being given a sufficient “voice” in the firm. A closer contact between management and employees can help build a highskill, high-trust enterprise climate that facilitates change. This may also require ensuring that working time legislation and employment regulations do not hamper such change, and that collective bargaining institutions are adapted to the new environment. Matching the skills of workers to the new technology also requires considerable investment. For ICT to be developed and used effectively, and network externalities to materialise, the right skills and competencies must be in place. Having a good supply of qualified personnel helps, but education policies, important as they are, need to be supplemented with actions to foster lifelong learning. Policies aimed at enhancing basic literacy in ICT, at building high-level ICT skills, at lifelong learning in ICT, and at enhancing the managerial and networking skills needed for the effective use of ICT, are particularly relevant. Moreover, a certain degree of labour mobility is needed

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to seize the new opportunities associated with ICT, which may require changes to regulations in some countries. Another implication relates to management. Firm-level studies typically find that firms that get most out of their investment in ICT are those that firms that were already performing well in terms of gains in productivity and market shares. These firms improved performance by investing in ICT, by innovating and by adapting their organisation and workforce.2 In contrast, many firms that invested much in ICT received no returns at all, as they were attempting to compensate for poor overall performance. This reinforces the view that ICT is no panacea, and also points to a role for management. While governments cannot directly influence management decisions, it can help create framework conditions for good management. Frameworks for good corporate governance also play a role in this context. Policies to seize the benefits of ICT rely on fundamental economic and social stability to succeed. All of the policy areas discussed in this paper are interlinked and depend on each other. But those countries that have managed to seize the benefits of ICT were able to do so because they had been getting their fundamentals right. They owed their economic success to sound macroeconomic policies, well-functioning institutions and markets, and an orientation to build a more open and competitive economic environment. Studies for Australia, one of the key examples of ICT-driven growth, emphasise the interaction between structural reform and the uptake of ICT (Parham et al., 2001). By contrast, in those countries whose growth performances appeared to lag, some of the fundamentals were perhaps missing or were at best so weak as to make it difficult to harness the new dynamism, such as not having the right institutional set-up for new business creation.

Boosting security and trust

Businesses, governments, consumers and key infrastructures increasingly rely on the use of information networks, which are often interconnected at the global level. This raises new issues for security as these electronic networks need to be stable and ready for safe, secure and reliable use under all conditions. Legal uncertainties (uncertainty over payments, contracts, terms of delivery and guarantees) remain a barrier to electronic commerce. Likewise, business-to-consumer transactions are hampered by concerns about security of payments, opportunities for redress, and the privacy of personal data. For all users, whether businesses or consumers, the security and reliability of systems and information networks is important. Much work is currently underway to address these concerns. Authentication and certification mechanisms are being developed to help
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identify users and safeguard business transactions. To counter computer viruses, hacking and other threats, OECD has drawn up new and comprehensive security guidelines that are current ly awaiting implementation by OECD countries. These guidelines aim to promote a “culture of security” in the operation of information systems and networks. With the growth of business-to-consumer e-commerce transactions, consumer complaints regarding the online environment are growing. The OECD privacy and consumer protection guidelines are an important step towards an international consensus on core protections. Continued efforts to implement these guidelines are key and will require that governments, business and civil society work together. Further exploitation of information technologies can enhance consumer trust, by facilitating access to information and improving the ability of users to protect themselves, e.g. through privacy enhancing technologies. But for any trust-related tool or measure to have a positive impact on trust, consumers and users must be aware of, and understand the protections afforded. Education and awarenessraising policies are therefore important. Moreover, ensuring that current laws and regulations are effectively enforced in cross-border situations is a major challenge. Some of the slowness to do business (personal or otherwise) via the

Internet is to do with attitudes. Governments can help to change these by using ICT applications themselves. Tendering public services, providing digital public services, collecting taxes or procuring goods and services online can help increase government efficiency and enhance access to public services, while having the additional benefit of building public confidence and strengthening demand.

Unleashing growth in the services sector
ICT has already brought many benefits and has the potential to bring more. The service sector is particularly important in drawing the benefits from ICT, since industries such as wholesale and retail trade, financial and business services are among the most important investors in ICT. It is in these “old economy” sectors, not in the ICT sector, that the long-term impacts of ICT use may be most important. Evidence for the United States and Australia shows that ICT has already enabled productivity growth in some of these industries. Policies must take better account of the needs and characteristics of the services sector if they are to promote growth (OECD, 2001c). Competition and business dynamism in many services sectors remains limited due to regulatory burdens, reducing pressures to strengthen performance. Moreover, sector-specific regulations may reduce the development of new ICT applications and may limit the capability of firms to seize the benefits of ICT.
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Further reform of regulatory structures is needed to promote competition and innovation and to reduce barriers and administrative rules for new entrants and start-ups. International competition is also important, and will require the reduction of trade and foreign investment barriers in services. Firm-level studies show that foreign-owned firms are often the first to adopt new technologies.

Harnessing the potential of innovation and technology diffusion
ICT is closely linked to the ability of firms to innovate, i.e. introduce new products and services, new business processes, and new applications. Firms that have already innovated achieve much better results from ICT than those that have never innovated. Moreover, ICT has helped facilitate the innovation process, for example in speeding up scientific discovery. ICT has also fostered networking, which has enabled greater outsourcing of R&D and enabled informal learning between firms, which is key to innovation in services firms. Policies to harness the potential of innovation, as outlined in the OECD Growth Study, are thus important in seizing the benefits of ICT. Moreover, such policies help foster the kind of innovative environment in which new growth opportunities will flourish. To strengthen innovation, policy needs to give greater priority to fundamental research, improve the effectiveness of public R&D funding and promote the flow of knowledge between science and industry.

Concluding remarks

Despite the slowdown in the economy and parts of the ICT sector, ICT has emerged over the past decade as a key technology with the potential to transform economic and social activity. It has already led to more rapid growth in countries where appropriate policies to reap the benefits from ICT have been put in place. Moreover, continued technological change should bring many more benefits in the future. All OECD governments can do more to exploit this technology, by fostering a business environment that encourages its diffusion and use and by building confidence and trust. However, policies to bolster ICT will not on their own lead to stronger economic performance. Indeed, economic performance is not the result of a single policy or institutional arrangement, but a comprehensive and co-ordinated set of actions to create the right conditions for future change and innovation. Policies to strengthen economic and social fundamentals are of great importance in drawing the benefits from ICT. The policy implications arising from this report thus reaffirm and elaborate those of the OECD growth report. Policymakers have to be prepared to invest time and political capital in meeting these challenges. Many of the countries that already reaped the
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benefits from ICT in the 1990s reaped the fruits of their earlier efforts, e.g. in

liberalising the telecommunications industry or in improving their business environment. Policy action will also require further examination of a range of thorny, yet unresolved issues. There is a major knowledge gap regarding which impact, if any, ICT has on the functioning of markets, including digital markets, e.g. in reducing transaction costs and changing the respective market power of different parties. A better understanding of ICT’s impact on innovation, as well as society’s ability to deal with ICT will also be essential. Further examination of the impacts of ICT on economic performance will also require appropriate statistics. This report has benefited from new data, which have contributed to many new insights. Further work with firm-level data may be particularly important, as such studies demonstrate that ICT is no panacea, but depends on a range of other changes in the way firms go about their business.

Notes

1. Other implications for policies to seize the benefits from ICT emerge from other OECD work, notably the OECD 2003 Communications Outlook; work on security, trust and consumer protection; as well as a forthcoming study on the economic impacts of electronic business. The policy conclusions from that work and the work contained in this paper are summarised in a short booklet for the OECD 2003 Ministerial Council Meeting, entitled “Seizing the Benefits of ICT in a Digital Economy”. This chapter primarily summarises the policy implications that can be drawn from the empirical analysis presented in this report. 2. The management literature provides extensive discussions on how firms can make ICT work in their particular environment. These issues are not discussed here, as government policy has little role in influencing these corporate processes.
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1. Improving Rural Livelihoods in Bhutan through Addressing Identified Information Needs Testing the viability and robustness of Wireless Fidelity (WiFi) for offering various information services for the purpose of social and economic development Start Year: 2005 | Amount: $ 417,050.00 | Country: Bhutan 2. Networking Distance Learning Technology Engines for Research Determining the most effective means to develop and deliver distance learning technologies to make education more accessible and culturally sensitive Start Year: 2005 | Amount: $ 1,615,400.00 | Country: Cambodia, Hong Kong, India, Indonesia, Lao PDR, Mongolia, Pakistan, Philippines, Sri Lanka, Thailand, Viet Nam 3. Monitoring the Digital Divide - Phase III Building capacity of southern researchers to develop a comprehensive

Barry Zaher
ID: 90135 Added: 2005-10-26 13:03 Modified: 2005-10-26 13:03 Refreshed: 2011-02-24 23:42

framework with which to monitor progress in ICT use for development purposes Start Year: 2004 | Amount: $ 265,000.00 | Region: LAC: Latin America and the Caribbean, MENA: Middle East and North Africa, SSA: Sub-Saharan Africa, Asia, Multiregional 4. Access to Knowledge - Copyright as a Barrier to Accessing Books, Journals, and Teaching Material Examining the impact of copyright on access to knowledge in both print and digital educational materials and developing capacity of stakeholders to advocate for reforms Start Year: 2004 | Amount: $ 137,000.00 | Country: Indonesia, Thailand 5. Internet Governance Scoping Study Establishing a forum for dialogue with area stakeholders in order to generate a regional perspective on Internet Governance to contribute to WSIS II Start Year: 2004 | Amount: $ 198,000.00 | Region: Asia 6. Information Society and Sustainable Development: Next Generation Policy Directions Engaging the policy and research communities in forging linkages between the information society and sustainable development Start Year: 2004 | Amount: $ 270,500.00 | Country: Brazil, Costa Rica, Egypt, Fiji, India, Kenya, Philippines, South Africa

7. Research into the Development and Effective Use of ICT-enabled Rural Extension System in Afghanistan Harnessing ICTs for improved access to information, enhanced agriculture and livestock production, and localization of Internet content Start Year: 2004 | Amount: $ 581,310.00 | Country: Afghanistan

8. ICT Governance for Poverty Reduction In September 2003, IDRC convened a meeting of experts in the use of ICTs for poverty reduction, including Nobel laureates in economics and specialists in gender, social and economic development and ICTs. In The Harvard Meeting, they agreed on both the nec Start Year: 2004 | Amount: $ 1,210,000.00 | Region: LAC: Latin America and the Caribbean 9. Impact of ICTs on Poverty Alleviation in Rural Pondicherry, India Determining whether new, innovative ICTs can improve economic sustainability of previous phases and contribute to improvements in the education and health sectors Start Year: 2004 | Amount: $ 497,640.00 | Country: India 10. Sri Lanka Virtual Village: A Socio-anthorpological and Technology Study on the "Last Mile" Determining the most technologically sustainable and culturally sensitive way to integrate low-cost wireless technology into rural communities Start Year: 2004 | Amount: $ 479,900.00 | Country: Sri Lanka 11. Learning from ICT4D Research to Enhance Policy-Making (Philippines) Documenting and disseminating the lessons learned from ICT4D projects in the Philippines in order to enhance ICT policymaking to benefit the under-served Start Year: 2004 | Amount: $ 325,000.00 | Country: Philippines 12. PAN Localization Localizing online content by developing translation tools, local-language applications, and locally relevant content Start Year: 2003 | Amount: $ 1,220,920.00 | Country: Afghanistan, Bangladesh, Bhutan, Cambodia, Lao PDR, Nepal, Sri Lanka 13. International Open Source Network Increasing awareness about Open Source Software and creating a regional network to exchange information and develop a common agenda towards proliferating open source software and applications Start Year: 2003 | Amount: $ 202,050.00 | Region: Asia

14. ICT Supported Distance Teacher Education in Bhutan Evaluating the impact of ICT on quality and access of distance teacher education Start Year: 2003 | Amount: $ 234,000.00 | Country: Bhutan 15. PAN ICT R&D Grants Program Providing funds for researchers to bring innovative research ideas to life and create ICT-based solutions to development problems Start Year: 2001 | Amount: $ 1,053,270.00 | Region: Asia 16. Digital Review of Asia Pacific Employing the knowledge and expertise of local authors to provide an overview of the use of ICTs for socioeconomic development Start Year: 2001 | Amount: $ 216,500.00 | Country: Afghanistan, Bangladesh, Bhutan, Cambodia, China, Fiji, Hong Kong, India, Indonesia, Japan, Korea (Republic of), Lao PDR, Malaysia, Mongolia, Myanmar, Nepal, Pakistan, Papua New Guinea, Philippines, Singapore, Sri Lanka, Thailand, Tonga, Vanuatu, Viet Nam, Brunei, Australia, East Timor, Macau, New Zealand, Taiwan, Pacific

Islands, Cook Islands, Micronesia (Federated States of), Kiribati, Marshall Islands (Republic of the), Nauru, Niue, Palau, Tuvalu, Samoa, Solomon Islands 17. ICT for Rural Development in Mountainous and Remote Areas of Northern Pakistan Broadening the reach of economic and educational opportunities through the application of ICTs Start Year: 2004 | Amount: $ 673,707.00 | Country: Pakistan 18. Strategy for National ICT Policy (Mongolia) Conducting research to assist in the integration and strengthening of ICT policy development in Mongolia Start Year: 2002 | Amount: $ 113,200.00 | Country: Mongolia 19. Impact of ICTs in Rural Areas (India) - Phase II Creating a network of Rural Knowledge Centres to expand access to information and technology in rural Pondicherry Start Year: 2001 | Amount: $ 290,900.00 | Country: India 20. ICT - Supported Distance Education in Indonesia Assessing the impact of ICT-supported distance learning on student satisfaction and completion rates Start Year: 2001 | Amount: $ 258,000.00 | Country: Indonesia 21. Impact of Policy Environment Factors on the Electronic Commerce Development in Vietnam Investigating the policy environment and how it affects the acceptance and application of e-commerce by government agencies, enterprises, and grassroots organizations Start Year: 2001 | Amount: $ 151,859.00 | Country: Viet Nam 22. Pan-Bangladesh (Village Internet Program)

Start Year: 1997 | Amount: $ 359,685.00

| Country: Bangladesh

23. 100505 - ICT Policy Monitor Building civil society awareness of ICT policy issues Start Year: 2000 | Amount: $ 280,300.00 | Region: LAC: Latin America and the Caribbean 24. Introducing Internet- based Distance Education in Mongolia Conducting research, development and experimentation with web-based instruction methods and technologies for distance education Start Year: 2001 | Amount: $ 250,000.00 | Country: Mongolia 25. Impact of ICT on Poverty Alleviation in Rural Pondicherry (India) Start Year: 1997 | Amount: $ 214,120.00 | Country: India

26. Rural Development Communications Network Start Year: 1997 | Amount: $ 119,210.00 | Country: Afghanistan, Bangladesh, India, Indonesia, Lao PDR, Malaysia, Myanmar, Nepal, Pakistan, Philippines, Sri Lanka, Thailand, Viet Nam

27. Asian NGO Coalition Electronic Network Start Year: 1998 | Amount: $ 120,970.00 | Country: Bangladesh, India, Indonesia, Japan, Malaysia, Nepal, Pakistan, Philippines, Sri Lanka, Thailand

Document(s) 5 of 7
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Nir Kshetri
University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics September 4, 2009 Abstract: ICT projects and institutions in developing countries superimpose in a complex interaction. The acceptance of an ICT project by various stakeholders and the contribution to economic development are functions of such interaction. In general, a successful implementation of an ICT project undertaken in a developing country requires significant institutional adjustments. Drawing upon institutional theories, this paper investigates how regulative, normative and cognitive legitimacy in developing countries influences the ICT economic development nexus. We use a multiple case study research design. The findings of this paper suggests that the root causes of success or failure of ICT projects are nature of institutional components such as sanctioning and monitoring power, social norms and cognitive programs of stakeholders. We have examined interrelationships among orientation of an ICT project (economic elite centered vs. socially disadvantaged group centered); the nature of institutions and institutional adjustments associated with the project; diffusion pattern of the technology and resulting contribution to development. Working Paper Series

Date posted: September 05, 2009 ; Last revised: February 27, 2010 Suggested Citation
Kshetri, Nir, The Institution ICT Economic Development Nexus: Two Cases (September 4, 2009). Available at SSRN: http://ssrn.com/abstract=1468641

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Nir Kshetri (Contact Author) University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics ( email ) 401 Bryan Building Greensboro, NC 27402-6179

United States 336-334-4530 (Phone) 336-334-4141 (Fax)

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