Summary and Policy Implications for the Paper “ICT Productivity

and Firm Propensity to Innovative Investment: Evidence from Italian

Microdata”
Rovshan M. Mukhrumbaev1 and Aung Kyaw Oo2
Technology Management Economics and Policy Program, College of Engineering,
Seoul National University, San 56-1, Shilim-dong, Kwanak-Gu,
Seoul, 151-742, South Korea

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

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

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

1
PhD Candidate, phone: +82-10-5817-9999, E-mail: ravshanshah@yahoo.com
2
PhD Candidate, phone: +82-10-2893-1424, E-mail: akoo@snu.ac.kr
(2006), Colecchia and Schreyer (2001), Ark B. et al (2002), Jalava and Pohjola (2005),
Becchetti et al (2003). However Chowdhury and Wolf (2003) shows that ICT
investment has a negative impact on labor productivity and does not have any
significant impact on enterprise’s return. Among these all interesting readings Atzeni
and Carboni (2006) have been chosen by authors to summarize and give policy
implications. This paper provides some insight into the link between ICT, productivity
and the innovative level of investment and this was one of the reasons to choose this
paper among the others.
The next parts of the essay provide brief summary to Atzeni and Carboni (2006) and
give policy implications.

SUMMARY

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

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

Results
By their research, the rate of return on ICT capital is found to be 0.814, and which
implies that putting one additional dollar of ICT capital into service yields roughly
$ 0.40 of output per annum. Regarding the quality adjustment problem, they found weak
correlation between ICT and quality changes in labor. ICT productivity is about eight
times greater than that of non-ICT investment. Interpretation of the magnitude of their
research results refers to gross and not net investment. Depreciation without being
considered could lead to a downward bias in the results.
High-innovative firms have, in fact, an ICT coefficient of 2.0. Although the difference
in group coefficients is wide, it seems that it is the low-REP and high-INNO group that
strongly determines overall low-replacing group ICT productivity. The low-REP and
low-INNO group ICT investment share in total output is less than half that of its
corresponding low-REP and high-INNO counterpart.
It was found out in the paper that improvements in the workforce through a higher
demand for more educated labour have a positive impact on productivity. This may
explain the low coefficient in the highly innovative firms. While for ‘standard’
investment skills do not play a paramount role and firms have high productivity, for
innovative investment, where complementing workers’ ability is crucial, the problem
emerges consistently. Capital renewal is not the best strategy if skills are not
complemented properly. In spite of its lower importance, ICT investment accounts for a
relevant share of output growth when compared to non-ICT investment.

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

POLICY IMPLICATIONS
Nowadays ICT is becoming as one of the main part in our life and in many
industrialized countries. By spending millions of dollars in IT, many countries try to
achieve significant economic growth and better living environment. We can see recent
empirical studies which show a positive and significant relationship between growth in
ICT (IT) investment and growth in national economic performance. As a last part of this
essay we would like to give several policy implications regarding IT and ICT
investment and its impact to overall economic growth.
Based on the results of the analysis, Atzeni and Carboni (2006) and also Schreyer
(2000), Oliner and Sichel (2000) and Oulton (2002) came to conclusion that ICT
relatively far more important than other form of capital investment. However, these
analyses considered for Italian, United States and United Kingdom’s data, which means
that ICT became more important than the other form of capital investment in developed
countries. In our opinion, these finding should encourage not only for developed
countries but also for developing countries to promote IT investment. Additionally, for
developing countries, developing human recourses and infrastructure is needed to
support effective use of the technology.
Another statement in policy implications of Atzeni and Carboni (2006) is that ICT is
much more important than non-ICT in determining output growth. We agree with this
statement with respect to Italy and some other developed countries such as Korea, Japan
and United States. However, if we consider developing or least developed countries,
which focus on, for instance, agricultural or other sectors, this statement can not be
appropriate at least in short-run, because, in early stages of introduction new
technologies, higher level of skills is needed due to the risks and complexity of the
necessary learning processes. We also can not argue against the statement of Atzeni and
Carboni (2006), because in long-run this statement can be appropriate for developing
and least developed countries.
It was also found out from the paper that the dataset was only for the short period of (3)
years. If it were available for longer period, the interrelationship and causal relationship
between the ICT investment and the productivity and growth of the firms can be more
visible and analyzed. In addition, not including the service sector firms in the research
makes the dataset incomparable between the two different industries.
In the paper, in addition, the researchers confirmed that investing in non-leading
technologies appears to be both more remunerative and more effective in terms of
output growth than investing in ladder technology. It can be said that no new ICT
investment could be reliably established with the expectation that quick-and-tangible
increasing returns will be certain unless the investment is accompanied and
complemented with the simultaneous skill-improvement in human capital in the
respective firms. However, it can be referred from the research paper and from other
academic findings that ICT investment is much more important and productive, at least,
than any other forms of capital investment.
Gera et al (1999) found out that IT investments are much more important at the margin
than non-IT investment for labor productivity in Industries in both Canada and the
United States. And also, when they estimate the impact of aggregate (the sum of IT and
non-IT investments) net investment and aggregate replacement investment separately on
productivity growth, the net investment rate is found to have a strong positive impact on
productivity growth, while the replacement investment rate is not significant. They
found no evidence of decreasing returns to IT investments in US industries.
It is often argued that Italy’s technological gap is mainly due to its sectoral
specialization: textile, clothing, leather and food industries are low-tech sectors, whose
production technology requires a limited use of advanced capital, as ICT (Bugamelli
etal 2004) . They have identified two possible impediments to ICT investment that are
firm-specific: the availability of skilled workers and the need for implementing re-
organizations of the internal functioning of the firm, which act as capital adjustment
costs.
Lastly, we would like to give additional policy implication to the paper written by
Atzeni and Carboni (2006). In the fast growing industry of developed and developing
countries many segments of the industry are dominated by incumbents and there are
many high entry barriers for newcomers. In order to realize the potential benefits of
Information and Communication Technologies in developed and developing countries,
we suggest for the countries to weight the value of promoting IT production and ICT
use. The policies such as providing financial and other incentives to producers can also
be appropriate.
Moreover, firms in any manufacturing industries (perhaps service industries alike
included) should pay great attention not to invest hurriedly in any cutting-edge
technology so as to upgrade the facility and infrastructure of the plant without knowing
exactly the drawbacks of that technology to their respective firms. As it was shown in
this research paper, all the dataset are based and compared with the EU, Canada and
United States and conclusions were drawn from the perspective of the developed
countries. It is obvious from the fact that the institutional and organizational
establishments between developed and developing worlds are not the same like one
another, and so copying and applying the productive and useful model in developed
atmosphere will not result in the same benefits in the developing world. As a matter of
fact, digital divide between the two worlds is the culprit and as long as the differences in
utilization, infrastructure and opportunity of ICT remains existed, perceptions and
expectations on ICT-related investments will be troublesome not only for the start-ups
but for the mature firms as well.

REFERENCES
Atzeni G. E. and Carboni O. A. (2006), ICT productivity and firm propensity to
innovative investment: Evidence from Italian microdata; Information Economics
and Policy, 18 (2006) 139 – 156.
Spencer P. (2002), The impact of information and communication technology
investment on UK productive potential 1986 – 2000: New statistical methods and
test; The Manchester School Supplement, 1463 – 6786, 107 – 126.
Oulton N. (2002), ICT and productivity growth in the UK; Oxford Review of Economic
Policy, 18 – 3
Meijers H. and Hollanders H. (2001), Investments in intangibles, ICT-hardware,
Productivity Growth and Organizational Change: An Introduction; Background
paper on the New Kind – project: New Indicators for the Knowledge Based
Economy; Second Draft; IST – 1999 – 20782.
Piatkowski M. (2003), The contribution of ICT Investment to Economic Growth and
Labor Productivity in Poland 1995 – 2000; Transformation, Integration and
Globalization Economic Research; Working Paper Series; No. 43.
Sharpe A. (2006), The relationship between ICT investment and productivity in the
Canadian economy: A review of the evidence; Centre for the Study of Living
Standards; CSLS Research Report.
Colecchia A. and Schreyer P. (2001), ICT Investment and Economic Growth in the
1990s:A comparative study of the nine OECD countries; OECD Science,
Technology, and Industry Directorate and Statistics Directorate.
Chowdhury S. K. and Wolf S. (2003), Use of ICTs and the economic performance of
SMEs in East Africa; United Nations University and World Institute for
Development Economic Research; Discussion Paper – 2003/06.
Ark B. et al (2002), ICT investment and growth accounts for the European Union, 1980
– 2000; Final Report on “ICT and Growth Accounting” for the DG Economics and
Finance of the European Commission
Jalava J. and Pohjola M. (2005), ICT as a source of output and productivity growth in
Finland; Helsinki Center of Economic Research; Discussion Paper No. 52; ISSN
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Becchetti L. et al (2003), ICT investment, productivity and efficiency: Evidence at firm
level using a stochastic frontier approach; Centre for International Studies on
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Schreyer P. (2000), The contribution of information and communication technology on
output growth: A study of the G7 countries; STI Working paper, No.2; OECD
Oliner S. D. and Sichel D. E. (2000), The resurgence of growth in the late 1990s: Is
information technology the story?; Journal of Economic Perspectives 14, 3-22
Gera S., Gu W., and Lee F.C. (1999), Information Technology and Labor Productivity
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Issue on Service Sector Productivity and the Productivity Paradox, pp. 384-407.
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