Information Technology and Productivity: Results and Policy Implications of Cross-Country Studies

Technology has long been held to contribute to economic growth through productivity improvement, but early studies of information technology (IT) investments and economic growth found no significant relationship. Indeed, despite large IT investments, national productivity growth in the United States declined in the 1970s and 1980s, leading some to call the situation a productivity paradox. The most persuasive theoretical explanation for the paradox is that IT investments generally have been too small a percentage of the inputs to the economy to have measurable effect. By the mid-nineties, however, IT investments had grown to 4-5% of GDP in the U.S. and many developed countries. Recent empirical studies at the company and country levels have shown that information technology is positively related to corporate and national economic performance. Analysis of data from 43 countries over 11 years presented in this paper, as well as other recent analyses, show a positive and significant relationship between growth in IT investments and growth in both GDP and labor productivity, even when controlling for growth in non-IT investments. While none of the studies support the hypothesis that IT investment might dramatically speed up development, they clearly show that persistent, growing IT investment does pay off for countries. The fact that investment in IT use can lead to economic payoffs has policy implications for countries seeking to realize those payoffs. Many countries have focused on promoting IT production rather than IT use. However, this analysis argues that there are gains to the whole economy from investment in IT use as opposed to only a single industry sector from IT production. Moreover, there are sectors of the IT industry that are closely linked to local IT use, specifically the information services industry. These activities, referred to as "production close UNU Wider paper 2-99 3 to use," not only help countries achieve effective use of IT, but they also offer significant opportunities for developing local IT industries. Policies that emphasize IT use and production close to use are likely to benefit developing countries that otherwise might be left behind in the emerging information age. To realize these benefits, countries need to develop national capabilities, in the form of human resources and information infrastructure. An appropriate mix of short-term and long-term policies is needed to create a national environment in which payoffs from IT investments can be achieved.

  • Authors: Kenneth L Kraemer & Jason Dedrick
  • Year: 1999
  • Organisation: University of California
  • Publisher: ITR
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