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					ICT, the Internet, and Economic Performance:
  Empirical Evidence and Key Policy Issues

                Donald Siegel
            Professor of Economics
       Rensselaer Polytechnic Institute
Prepared for UNCTAD and UNECE Conference
               October 20, 2003
 Empirical Studies of the Impact of ICT on
  Economic Performance
 Empirical Studies of the Impact of ICT on
   Wages, Labor Composition (“Skill-Biased”
   Technological Change-SBTC), and the Work
 Computers and the Internet as a General
  Purpose Technology (GPT)
 Conclusions and Policy Recommendations
          Investment in ICT and Economic Performance
                     Levels of Aggregation
 Plant Level
 Firm Level
 Industry Level
 National Level
                Indicators of Economic Performance
 Profitability
 Market Share
 Stock Prices (Short and Long-Term Measures)
 Productivity
   Labor Productivity (Partial Productivity)
   Total Factor Productivity
Estimating The Contribution of Computers to Economic Growth
        Augmented Production Function Approach
                     Qi = f (Ki, Li Mi, Ci)
where: Q=output
         K=stock of physical capital
         L=labor input
         C=the stock of computer capital
         i=the unit of analysis (e.g., firm, industry, nation)

                    Two Approaches:
 Parametric-Estimate the Marginal Product or Output
  Elasticity of Computers
 Non-Parametric- “Growth Accounting”-Analyze the
  Sources of Output Growth-(Jorgenson and Stiroh (2000)
Estimating The Contribution of Computers to Economic Growth
  Typical Parametric Studies (Brynjolfsson and Hitt (1996)):
Cobb-Douglas Production Function-Constant Returns to Scale:
           Q = A eλt K L(1- )C
where: λ is a disembodied rate of growth parameter and  and  are
        output elasticities of capital and labor, respectively

Key parameter:  the output elasticity of computer capital
                     = (∂Q/ ∂C)(C/Q)

Typical Non-Parametric Studies (Siegel 1997)):
Differentiating the Production Function w.r.t. time (t) and
re-arranging terms leads to:

            PRODGROWTH = λ + ρ(C/Q)
Econometric Studies of the Impact of ICT on Productivity-
                  U.S. Based Studies
   Author(s)       Level of Aggregation              Results
 Dunne, Foster,        Plant-Level         Positive Association Between
Haltiwanger, and                              Computers and Labor
 Troske (2000)                            Productivity, Which Appears to
                                             be Growing Over Time

Brynjolfsson and       Firm-Level         “Excess” Returns to Computer
  Hitt (1996)                                  Capital and Labor

  Siegel and         Industry-Level       Positive Correlation Between
Griliches (1992)                          Investment in Computers and
                                                   TFP Growth
 Jorgenson and       Aggregate-Level      Growth Contribution of ICT
  Stiroh (2000)                           Increased Substantially in the
                                                 mid-late 1990s
Econometric Studies of the Impact of ICT on Productivity-Non-US Studies
   Author(s)       Level of Aggregation               Results
Licht and Moch         Firm-Level            Terminals Have a Positive
(1999)-Germany                               Impact on Productivity in
                                           Goods Industries, But Not in
                                             Services. Strong Positive
                                          Relationship Between PCs and
                                          Productivity in Manufacturing
                                                    and Services
  Gera, Gu, and       Industry-Level       Positive Correlation Between
   Lee (1999)-                            Investment in Computers and
    Canada                                  Labor Productivity Growth
 Greenan and           Firm-Level         Impact of Computers is Positive
Mairesse (1996)-                           and at Least as Large as For
    France                                    Other Types of Capital.
                                          Returns Appear to be Higher In
                                                 Services Than in
        Econometric Studies of the Impact of ICT on
             Productivity-”External” Effects

 Author(s)         Level of                Results
Morrison and    Industry-Level    “External” Investments in
Siegel (1997)                      Computers by Related
                                  Industries (Suppliers and
                                    Customers) Enhance
                                   Productivity in a Given
       Key Stylized Facts Regarding ICT and SBTC
Strong Evidence in Favor of SBTC  Positive
 Correlation Between Some Proxy for Technological
 Change and Shifts in Wages and Workforce
 Composition in Favor of Highly Educated Workers
Wage Premium of Slightly Less Than 20% in Most
  OECD Countries
Investment in ICT Explains Approximately 33%-50%
  of the Increase in Returns to Education
In Some Countries, the Demand for Computer-Literate
  Workers is Increasing More Rapidly Than Supply
The Gap in Earnings Between Workers Who Use a
  Computer and Those That Do Not Appears to Have
       Key Stylized Facts Regarding ICT and SBTC-
              International Evidence (cont.)
           Berman, Bound, and Machin (1998):
 Strong Evidence of Pervasive SBTC in OECD Countries-
 Patterns Are Quite Similar Across Countries

                Berman and Machin (2000):
Comparison of SBTC in Developed and Developing
Analysis of “Technology Transfer” from Developed
 (OECD) to Developing Countries
Evidence of “Transfer” of Skill-Biased Technologies from
 High Income to Middle Income Countries, But Not From
 High Income to Low Income Countries
Less Evidence of SBTC in Developing Countries
      Evidence on SBTC in Developing Countries
           (From Country-Specific Studies)
Korea: Workers in Industries With Rapid
 Technological Change Are Paid More
Mexico, Taiwan, Colombia, Malaysia: Wages and
 Training Tend to Be Higher in Industries
 Experiencing Rapid Technological Change
Singapore: The Rise of the “Knowledge
 Economy” Appears to Explain The Increase in
 the Returns to Education
Vietnam: If Work Requires Computer Skills,
 Wages Are 10-14% Higher
           ICT and Organization Change
          Siegel (1999)-Firm-Level Study
 Implementation of new ICT Associated With
  Organizational Change
 Implementation of new ICT Associated With
   Increases in Training and Skill Upgrading
 Implementation of new ICT Associated With
  Enhanced Employee Empowerment
 Major Obstacles to Additional Investments in New
   High Cost of Customizing Software to Fit Company
   Difficulties in Quantifying Benefits
   Some Firms Also Report Shortages of Skilled Workers
                ICT and Organization Change
                 Brynjolfsson and Hitt (2000)
ICT Reduces the Cost of Coordination, Communication,
 and Information Processing
ICT is Associated with a “Cluster” of Complementary
 Organizational Changes/Practices
   Transition from mass production to “flexible”
     manufacturing technologies
   Changing Interaction With Suppliers
   Transforming the Firm
     Replacing Back-Office Jobs and Increasing the
         Importance of Front-office Skills and Leadership
   Changing Interaction With Suppliers
   Decentralized Decision Making and Enhanced
 Computers/Internet as a General Purpose Technology (GPT)

GPTs-Technologies That Cause Dramatic Economic Changes by
Stimulating New Applications and Industries and Rejuvenating
Existing Sectors  Strengthens the Rationale for Government

Examples of GPTs: Steam Engine, Electric Dynamo,
                  Lasers, Computers

Computers/Internet as a GPT
                  Creation of New Industries:
 Internet Service Providers
 Network Communications Equipment
 Consulting Services
         Conclusions and Policy Recommendations
 ICT Appears to Be Generating High Social Returns
  (Although Not Quite As High As Those Associated With
  R&D, But Still Quite High)-Not Showing Up As Much In
  Aggregate Statistics Because Productivity Gains Are In
 ICT Has Transformed the Workplace in Many Industries
  and Increased the Returns to Education in
  Developed and Developing Countries (To a Lesser Extent)
 Developing Countries Appear to Be Falling Further
  Behind in the Digital Divide, as Well as in the “Learning"
     Conclusions and Policy Recommendations (cont.)
Increased Demand for ICT Workers May Not be Met in
 Many Developing Countries (Role of Outsourcing)
Important For Policymakers in Developing Countries To
  Invest in Infrastructure That Complements/Supports Use
  of ICT (Physical and Educational):
   Low-Cost, High-Bandwith Internet Connections
   Internet Security
   Ensure That Educational System Addresses Skill
Important For Developing Countries To Foster
 Institutions That Complement/Support Use of ICT
     Conclusions and Policy Recommendations (cont.)
Developed Countries-Public-Private Partnerships Have
 Been Useful in Alleviating Innovation Market Failures

Public-Private Partnerships in Developing Countries Can Be
Useful for:
Better Access to Financial Capital
Enhancement of Human Capital
Stimulating the Development and Extension of Networks
  That Increase the Returns to ICT and E-Business

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