ICT productivity and firm propensity to innovative investment: Evidence from Italian microdata

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Abstract

Employing a large and detailed data set from Italian manufacturing firms, we provide some insight into the link between information and communication technology (ICT), productivity and the innovative level of investment. Our results support the hypothesis that ICT is different from conventional capital in the rate of technological progress, the compatibility between old and new capital and the extent of learning by doing. We compute ICT marginal productivity across different clusters of firms and its impact on output growth. Depending on their attitude to innovation, firms are found to be appreciably more ICT productive when non-leading technologies are adopted. We find that ICT has a disproportionately wide impact on growth compared to the share in total investment that it represents.

Introduction

A number of scholars have explored the link between ICT and productivity growth at firm level. Although some research concludes that ICT has negative or insignificant effects (Loveman, 1994, Berndt and Morrison, 1995 among others), since the beginning of 1990s there has been growing consensus that there is a strong positive link (Barua and Lee, 1997, Lehr and Lichtenberg, 1999, Brynjolfsson and Hitt, 2000a, Greenan et al., 2001).

Research on ICT productivity has been carried out in various ways and can be summarised under three general headings: workplace and labour reorganisation, bias in the estimations, and vintage capital models.

According to a wide range of studies ICT requires significant workplace and labour reorganisation at firm level. ICT is only a small component of a complex set of causalities (skill, infrastructure, organisation, diffusion, adoption, adaptation, etc.) which include both tangible and intangible aspects. If such ‘complete cluster of associate complements’ do not improve together, many ICT benefits may be lost and ICT becomes mainly a cause of higher costs rather than improving output (Brynjolfsson and Yang, 1997, Bresnahan et al., 2002).

Several contributions focus on ‘skill-biased’ technological change, according to which investment in ICT is associated with reductions in the workforce and an increase in the demand for highly educated workers as well as in workplace reorganisation (Black and Lynch, 2001, Bresnahan et al., 2002, Caroli and Van Reenen, 2002, Acemoglu, 2002, Piva et al., 2005, Pini and Santangelo, 2005).

Some research argues that low ICT productivity may come from the bias in the econometric estimation, which is a result of the peculiarities of ICT. Siegel (1997) shows that investment in ICT can cause changes in output and labour quality, which are not properly accounted for when estimating the growth of the real output and inputs. Thus it gives rise to a measurement error in the dependent variable and biases ICT productivity estimates.

A third line of research reconsiders ICT productivity in the light of vintage capital models. It argues that the characteristics of ICT may exacerbate learning problems when new capital is introduced in the production process (Cooley et al., 1997). Yorukoglu (1998) emphasises that information technology intrinsically differs from conventional capital in the rate of technological advance, the compatibility between old and new capital and the extent of learning by doing. ICT investment is lumpier than conventional capital and requires larger and more frequent learning. Using a model where replacement (i.e. the substitution of expired capital for new and more innovative one) is explicitly considered, he finds large drops in productivity at replacement dates. Since learning-by-doing is implicitly associated with the level of innovation the new capital embodies, he concludes that learning by doing, together with the very nature of information technology, may be at the cause of the downward bias of ICT productivity estimates.

In this paper we investigate the link between the innovative level of investment and ICT productivity in a large and detailed sample of Italian firms during the period 1995–97. Focussing on the additional contribution of ICT investment to productivity, we find evidence of such compatibility problems. These appear to be more severe when firms replace traditional with more innovative capital.

The introduction of new technology has a twofold effect on productivity. On one hand, the technology embodied in new and more efficient capital has positive effects on productivity. On the other technological improvements brings uncertainty due to learning and re-organisational effects. These negatively affect ICT returns.

Following up this idea, we specifically distinguish firm investment behaviour according to the allocation of additional or substitutive capital, on one hand, and innovative or technologically standardised capital, on the other. We explore whether such behaviour, and a firm’s technological investment aptitude, have any role in explaining ICT productivity.

In line with the prescriptions of vintage capital models, firms display a far greater ICT productivity if they adopt non-latest technology. In fact, rapid technological improvements in ICT capital exacerbate standardization problems, which implies that there is weak compatibility between different vintages of capital. Conversely, little and non-frequent investment favours the exploitation of apprentisage dynamics, which are not continuously interrupted by changes in the composition of capital quality.

We find that ICT has a disproportionately wide impact on growth contribution compared to the share in total investment that it represents.

We are unable to distinguish between various types of capital, and neither ICT capital stock nor the dynamic structure of ICT investment are available from the data set. Information about ICT expenditure is displayed at three-year level (1995–1997), preventing us from either deflating ICT prices or constructing the ICT capital stock. Our main methodological concern is thus to look for a measure of ICT productivity which does not depend on ICT capital stock measurement (i.e. hedonic prices and perpetual inventory methods).

A Partial Price Change procedure is adopted working at price rather than output level. This method measures the productivity changes through price variations without constructing the capital stock or quantifying its degree of vintage. This makes this work different from the common empirical analyses, in which the discussion on productivity is based on longer time series and on more standardized ways of deflating ICT prices. Exploiting the rich information about firm investment behaviour in the dataset, we estimate the additional contribution of ICT and non-ICT capital, thus advancing our knowledge of the state of ICT productivity in Italy.

The paper is organised as follows: Section 2 contains a description of the data set. Section 3 outlines the methodology employed. Section 4 provides the main econometric findings for ICT productivity. Section 5 puts forward some considerations on the contribution of ICT to output growth. Section 6 contains the conclusions and policy implications.

Section snippets

The data

The data used in this paper come from the Survey of Manufacturing Firms (SMF) carried out by Mediocredito Centrale (1997). The SFM considers a stratified sample of Italian firms with 11–500 employees. It also includes all manufacturing firms with more than 500 employees. Given the consistently high number of very small firms in Italy (particularly considering the zero employees firms) and also bearing in mind that services industries are not included in the survey, generalizations based on this

TFP calculation

In this section we derive a measure of TFP. Our starting point is that data do not provide information on the quality of ICT investment nor on its dynamic structure. Information on ICT expenditure is displayed at a three-year level (1995–1997), while data on the stock of ICT capital are not provided. A direct consequence of having only a single three-year vector for ICT investment is that we cannot deflate ICT. For similar reasons construction of ICT capital stock (applying hedonic prices for

Estimation of ICT returns

In order to obtain the return on ICT capital the PP Eq. (11) is (OLS) estimated:

ICT contribution to output growth

Given the average value of IICT/Y (0.012) and of the marginal product of ICT capital, its contribution to output growth is straightforward, at approximately 0.50% (1/2 × 0.814 × 0.012) per annum. These values are smaller than those generally found in the US. This may be due to the lower share of ICT assets as part of total capital stock, 2.1 vs. 7.4 in the US in 1996 (Schreyer, 2000). It should be noted that in Italy (as in some other European countries) ICT investment has been concentrated in the

Concluding remarks

This work is a small contribution towards understanding the link between ICT productivity and firms’ investment behaviour. When investment is mainly guided by replacement, the average firm behaves notably worse than the others. Such firms have much lower ICT productivity than the low-replacing (i.e. high-introducing) ones. For the latter ICT appears particularly efficient. However, such efficiency is linked to the technological level, which is consistently different in the two groups.

A similar

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    We are grateful to Michele Polo, Valentino Benedetti and Luca Deidda for useful discussions. Special thanks to the anonymous referees for valuable comments on earlier versions. We wish to thank the participants at the ‘Knowledge and Regional Economic Development’ Conference (Barcelona, 09–11 June, 2005) where this paper has been discussed. The usual disclaimers apply.

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