Information and communications technology: The Effects of ICT on Economic Growth
Much attention has been given to how much IT affects the growth of an economy (see Jorgenson 2001). As is well known, IT can transform our economic system by increasing productivity and stimulating economic growth. At the firm level, there are four mechanisms or channels through which IT investment affects the growth of an economy. The first channel is that the IT industry itself grows dramatically, and the nations where the IT industry occupies a leading position may have more than one leading growth sector. In the decade between 1995 and 2005, many nations’ portion of revenue derived fromthe IT sector in their totalGDP increased. For example, even in the case of China achieving an 8 percent annual growth rate during that decade, the growth of the IT sectors was faster than the overall economic growth. Accordingly, the expansion of IT sectors affects the growth of the economy positively.By the second channel, IT can facilitate the catch-up process by activating the diffusion process of technologies. According to Antonelli (1990), developing countries can take advantage of the opportunity of catch-up by overcoming asymmetry and disequilibrium of information through the diffusion of IT. The third relation between IT and economic growth is that developed IT affects the integration and efficiency of markets and it stimulates economic growth. This is called the market integration effect. In the finalmechanism, IT improves the management and decision-making processes of companies. Additionally, ICT helps firms gain market share, raise overall productivity, expand their product range, customize the services offered, respond better to client demand, and reduce inefficiency.
Economies that successfully implement new ICT may be able to overcome barriers that have long held them back in their contribution to the global trade. The rapid spread of the Internet has opened up previously unavailable commercial and political information. In particular, ICT has reduced many of the transaction costs of participating in subcontracting through business-to-business interaction, and it facilitates the operations of low-cost suppliers of IT servicesbasedindevelopingcountries.Inotherwords, IT can increase total output eventually through reduced transaction costs. Enough constructed IT infrastructure decreases the cost of information, and in the long run itmakes themarketmore effective. Lessdeveloped countries face a higher cost to obtain information because their information market is less efficient than in developed countries.
IT investments have specific features. A decreased telecommunications cost can be used to decrease costs associated with decisions to distribute resources between cities and rural communities.The decreased telecommunications costs make the use of a larger quantity of information possible, which contributes to better decision making. It increases the opportunity for arbitrage and makes the financial market more efficient. Finally, decreased cost can provide more information about market prices. Even if ICT spread in similar ways in different places, one would not expect similar economic benefits from it. Only with a regulatory environment, the availability of appropriate skills, the ability to change organizational setups, and the strength of accompanying innovations in ICT applications can the benefits of IT be maximized. The magnitude of complementary policies for IT investment must be expanded. Such policies aimto enhance the conditions for developing the economy, through provision of infrastructure, prohibition ofmonopoly in the telecommunications market, allowing for new entrants, enacting efficient laws and regulations, and providing a high-quality education system.
Edquist and Henrekson (2007) examined productivity growth following the three major technological breakthroughs: the steam power revolution, electrification, and the ICT revolution. The authors distinguish between sectors producing and sectors using the newtechnology and find a long lag fromthe time of the original invention until a substantial increase in the rate of productivity growth can be observed, as well as strong evidence of rapid product price decreases over time. The highest productivity growth rates are found in the ICT-producing industries, which may be explained by the ICTs’ more rapid rate of technological development compared with previous breakthroughs.