THE ECONOMIC IMPACTS OF ICT: LESSONS LEARNED AND NEW CHALLENGES

1. THE ECONOMIC IMPACTS OF ICT: LESSONS LEARNED AND NEW CHALLENGES Eurostat conference on The Knowledge Economy, Luxembourg, 8-9 December 2005 DIRK PILAT dirk.pilat@oecd.org ECONOMIC ANALYSIS AND STATISTICS DIVISION, DIRECTORATE FOR SCIENCE, TECHNOLOGY & INDUSTRY, OECD

2. The questions • Why are we interested in the economic impacts of ICT? • How can we examine these impacts? Which data are available? • What have we learned so far?: • From aggregate data. • From industry-level data. • From micro (firm-level) data. • What are the challenges and what can be done to address them?

3. Why are we interested? • ICT is now considered an important driver of economic growth. • There is evidence that the growth resurgence in some countries, e.g. Australia and the United States, was partly due to ICT. • But questions remain on why the growing uptake of ICT has not yet led to stronger economic performance in many EU countries. • This has clear implications for policy. • Possible impacts from ICT: • ICT investment – more and better capital helps workers improve productivity. • ICT production – rapid technological progress in ICT manufacturing and ICT services can boost economic growth. • ICT use – effective use may help firms in strengthening innovation, improve business processes and efficiency, etc.

4. What data are available? • Data on ICT investment at the aggregate and activity level: • this helps points to the contribution of ICT to capital deepening • and can be used in so-called growth accounting studies. • Data at the industry level: • ICT production – contribution of this sector to overall performance. • ICT-using industries (e.g. services) – have industries that heavily use ICT improved performance as their take-up of ICT increased? • Data at the firm level: • Surveys on ICT use by firms. • Allows examination of impacts of ICT use on firm performance. • Can be linked to other aspects of firms, e.g. basic firm characteristics, organisational factors, innovation, data on skills. • A wide range of methods can be used (Table 1).

5. The economic impacts of ICT- what have we learned?

6. Countries have not invested to the same extentICT investment as % of non-residential investment) Source: OECD, Science, Technology and Industry Scoreboard, 2005.

7. Australia, the UK, the US and small EU countries have benefited strongly from ICT investment, France, Germany and Italy only little(contribution to GDP growth, in percentage points) Source: OECD Productivity Database, September 2005.

8. ICT manufacturing is only important for some countries(average annual contribution to labour productivity growth, in %) Source: OECD STAN database, September 2004.

9. Productivity growth in ICT services (telecom and computer services) picked up in some OECD countriesAnnual average contribution to labour productivity growth, in % Source: OECD STAN database, September 2004.

10. Productivity growth in ICT-using services has only increased in some OECD countries(average annual contribution to labour productivity growth, in %) Source: OECD STAN database, September 2004.

11. Summing up the evidence from aggregate and industry-level approaches • Provides insights in the relative contribution of ICT investment, ICT production, and ICT-using industries. • Helps point to the impact of ICT on overall economic growth. • Provides some insights in cross-country differences. • But is of little help in understanding behaviour and mechanisms through which ICT affects performance. • Firm-level analysis can add new insights.

12. Firm-level perspectives – some OECD work, based on co-operation with 13 OECD countries

13. Large variety of methods and data • Data based on combination (linking) of sources: • Data on economic performance often from production surveys; • ICT from investment surveys, specialised ICT and e-commerce surveys, innovation surveys, computer network use survey. • Additional data, e.g. on organisation, skills & innovation. • Methods include: • Labour productivity (level or growth) regressions. • Estimates of production functions. • Variety of methods and data can help strengthen evidence. • The studies point to many important interactions.

14. Examples of some studies (1) Hollenstein: What determines ICT uptake by firms? • Study for Switzerland, shows that ICT is linked to other firm-level factors. • Firms that adopt ICT: • Anticipate benefits from improved customer-orientation and lower costs. • Have overcome problems in financing and skills. • Have a high capacity to absorb new knowledge (linked to human capital and innovation). • Are faced with strong competition and in markets with a high level of uptake of ICT. • Also introduce new forms of work organisation.

15. Example of some studies (2) Gretton, et. al: The impacts of ICT in Australia • The use of ICT raised aggregate multi-factor productivity by about 0.2% points – over and above impacts of ICT capital. • Impacts are largest in finance and insurance. • Impacts taper off over time – they are largest a few years after adoption. • Complementary factors play a large role in explaining firm’s success with ICT – human capital, experience with innovation, use of advanced business practices and intensity of organisational restructuring. • Early users of ICT are large firms with skilled managers. • Firms with high openness to trade use more ICT.

16. Example of some studies (3) Hempell, et al. : The link between ICT and innovation • Comparative study with comparable data for Germany and the Netherlands from innovation surveys. • Key question: do firms that engage in complementary innovation benefit more from investment in ICT? • In both countries, returns to ICT investment are much higher when accompanied by innovation at the firm level. • Continuous innovation leads to higher returns than occasional innovation efforts. • This is also the case in the services sector.

17. Example of some studies (4) Maliranta and Rouvinen: The impacts of ICT in Finland • The additional productivity of ICT-equipped workers ranges from 8 to 18% (after controlling for many other factors). • This effect is higher in young (new) firms and in the ICT-producing sector. • Manufacturing firms benefit mostly from internal networks (e.g. local area networks), whereas service firms benefit most from external networks (e.g. the Internet). • Organisational factors are important, as suggested by the greater productivity effects in new firms. • Selection also plays a role – not all firms succeed – having a dynamic business sector is important.

18. Example of some studies (5) Clayton, et al.: Impacts of e-commerce in the UK • Computer networks for trading have positive impacts on productivity. • E-buying has positive impacts on output growth, whereas E-selling has negative impacts. • This is likely due to pricing effects – e-buyers can source more competitively, e-sellers may loose out. • In some industries, e-commerce seems to have contributed to lower prices, perhaps due to greater price transparency and more rapid reactions of suppliers.

19. Key findings from the firm-level studies • ICT has positive impacts firm performance – networking technologies are particularly important. • The effective use of ICT requires appropriate skills. • Organisational change is key to making ICT work. • Competition drives the uptake of ICT. • Not all firms succeed – entry, exit and experimentation are important. • ICT use is closely linked to innovation. • Large firms and multinationals often use more sophisticated forms of ICT – the potential benefits may be larger. • The impacts of ICT only emerge over time.

20. Challenges

21. Challenges and responses: the aggregate and industry level • Aggregate level: • Time series with data on investment in ICT are not yet available for all OECD countries. • Existing data are not yet fully comparable, e.g. for software investment. • Only some countries use deflators that adjust for quality change. • Industry level: • Output measurement in ICT-producing sectors is difficult, due to rapid quality changes. • Poor output measurement in ICT-using sectors, notably services, may imply that ICT use will not be reflected in productivity growth. • Follow-up: more attention for output and productivity measurement by NSOs, OECD and Eurostat (e.g. EUKLEMS project, OECD workshop on Productivity Measurement).

22. Challenges and responses: the firm level (1) • A. ICT measurement must be kept up to date: • Inform surveys of ICT use with outcomes from analytical work – which variables are important, which are uniform across firms. • Technological change, for example: • Convergence means that services are increasingly independent of any particular device.(We may not be able to infer use from asking about a device.) • Convergence (Divergence?) also enables users to employ devices in ways that were not intended. (We may not be able to infer use from knowing what a device was intended to do.) • Service suppliers may not be covered by national surveys • Follow-up: evaluate and revise existing surveys at regular intervals • Who: NSOs, Eurostat and OECD.

23. Challenges and responses: the firm level (2) • B. NSOs will need to enable linking of firm-level data : • ICT is linked to other changes in firm behaviour, e.g. innovation, organisational change, skills, entry and exit. • Understanding these factors and their impact on performance requires that data can be linked. • Data linking also has direct advantages to statistical offices, as it can reduce respondent burden (certain data may be available from other sources) and improve data quality (data may be checked from independent sources). • How: Unified business register with common firm identifiers. Establishment of linked and longitudinal databases. • Who: NSOs.

24. Challenges and responses: the firm level (3) • C. Develop more meaningful indicators from existing surveys: • Basic aggregations of micro data do not always provide helpful insights. • Different aggregations on the basic of existing surveys can help, e.g. on the year of ICT adoption and the degree of e-business (Clayton and Waldron, 2003). • Who: NSOs, analysts/researchers with access to micro data. • D. Address new questions with firm-level data, e.g.: • Link between innovation and ICT; • Impacts of ICT in the services sector; • Role of new firms; • Impacts of e-business processes and broadband technologies. • Who:Researchers with access to firm-level data, possibly sponsored by policy institutions, the EC or the OECD.

25. Challenges and responses: the firm level (4) • E. Engage in more international comparisons of firm-level data: • Cross-country studies can point to important differences in firm behaviour that may be due to policies and institutions. • Comparable data (e.g. model surveys on ICT use) help. • Studies comparing EU with non-EU countries could be important. • How: Consortium of researchers with access to firm-level data, ensuring that the confidentiality of the micro data is guaranteed. • Who: Analysts/researchers with access to national micro data, sponsored by international organisations such as OECD and EC.

26. Conclusions • We’ve learned a lot about the economic impacts of ICT in recent years. • More can be done, and most can be done with existing data. • A joint effort by countries, Eurostat and the OECD on this topic could prove highly beneficial.

27. Thank you. Contact: dirk.pilat@oecd.org