This study by the Sectoral e-Business Watch is expected for June 2008.
The ongoing diffusion of new ICT and e-business technologies and services among firms is a striking example of the possible dynamics of technological change and economic development. Economic theory suggests that the adoption and diffusion of new technologies can be spurred by many different drivers and can have far-reaching consequences. Most fundamentally, it may change the type of products and services that are offered and traded, and it may change the structure of the economy. Virtually all economic spheres can be affected by such changes, including innovation dynamics, productivity and growth, the development of market structures, firm performance, and the composition of and demand for labour.
Acknowledging the importance of the ongoing economic transformation driven by ICT, the aim of the Sectoral e-Business Watch is to continue monitoring and analysing the economic impact of ICT and to formulate policy recommendations.
We note that providing a microeconomic context for this topic is still a huge task, the purpose of this special report is essentially threefold: (1) to report on the methodology, theoretical and empirical model specifications and data sets used; (2) using an industrial economic policy perspective, to provide a synopsis of the empirical results obtained (incl. results from selected cross-sectional comparisons); and (3) to present conclusions and policy recommendations on how to increase the competitiveness of sectors through the use of ICT despite existing barriers.
On the conceptual level, there exists a clear link between the adoption of new e-business technologies and innovation. e-business and ICT investments in general can enable process innovations if the implementation of new ICT succeeds, the routines are changed, and the new system is actually utilised. ICT investments can also enable product or service innovations at the enterprise level. In micro-economic terms, a product innovation corresponds to the generation of a new production function. A process innovation, on the other hand, can be viewed as an outward shift of an existing supply function, which corresponds to lower variable costs in the production of an existing product or service, and is therefore a productivity increase.
The coverage of sectors by means of empirical economic analysis is, on the one hand, determined by the shortlist of sectors agreed upon and, on the other hand, by the availability of sufficient data to perform the econometric analysis foreseen. Data requirements depend on the concrete approach chosen (see below for an overview). Hence for this study, we adopt a flexible and essentially data-driven research process, where the aim is to find new and robust results on the relative impact of certain drivers of adoption and diffusion of ICT and e-business and the impact of the spread of ICT and e-business on the economy.
This conceptualisation of ICT as an enabler of innovation allows a market-based, economic approach to study the impact of ICT on company and industry performance and employment dynamics as well as on the competitiveness of the sector. The new Sectoral e-Business Watch will focus on investigating possible consequences of ICT and e-business in the following areas at the sectoral level:
Innovation: ICT-driven innovation activity is central to the subsequent effects of ICT economic impact. As General Purpose Technologies (GPT), ICT have radical effects for downstream innovation. There is virtually no industry in modern society that does not rely heavily upon ICT and that has not in some way been transformed by it. Based on the US example, a high propensity to use ICT enhances productivity in ICT-using sectors by enabling organisational changes, creating greater product quality and variety and increasing convenience.
Productivity: ICT may be characterised as a typical GPT that has a wide range of applications and a large impact on economic activity. It has been shown that ICT has productivity increasing effects in both the user-sectors and in the ICT producing sector itself. In particular, ICT has positive effects on labour productivity and total factor productivity. An important finding is that ICT-induced productivity effects vary significantly between sectors and among countries. For example, the largest productivity growth effect occurs in the ICT-producing sectors themselves, and only smaller effects in other business sectors. Furthermore, so far only few countries have clearly seen an upsurge in productivity growth in those sectors of the economy that have invested most in ICT. European industries are said to have experienced much slower productivity growth, compared to the U.S., although they also invested heavily in ICT. Studies of the impact of ICT on firm-level productivity stressed that ICT investments must be combined with complementary investments in work practices, human capital, and firm restructuring to have an impact on performance. Because these complementary investments and organisational changes are highly firm-specific, returns to ICT investments strongly vary across organisations.
Employment dynamics: The impact of ICT on employment is another issue that calls for attention. The central question is if technological change and an increasing use of ICT creates or destroys jobs. There is no unambiguous answer, and recent research has emphasised that employment effects vary with the level of analysis (firm, sector, national economy) and the type of innovation (product vs. process). A common belief is that because innovation and an increasing use of ICT are related to growth, the two would solve the unemployment problem. However, innovations and ICT investments might lead to productivity growth without leading to GDP growth. The employment effects can be very different for productivity and GDP growth. Thus, according to the common conceptual framework, ICT investments can result in product or process innovations with diverse implications for employment effects.
Composition of the workforce: In addition to the quantity impact of innovation on employment, there also exists a quality aspect. The question is what kind of jobs are created or destroyed by innovation? A large literature on technical change and skills finds that technical change is biased towards skilled workers as it replaces unskilled labour and increases wage inequality and polarisation. Unskilled jobs have long been declining in absolute terms in Europe and growing only slowly in the US, while jobs for skilled workers are created at a faster pace in most countries. Thus, the application of ICT may increase the demand and wages for skilled labour and decrease for unskilled labour. It might be expected that ICT impact on the workforce composition will vary from industry to industry.
Market structure: The deployment of ICT has a great impact on market structure of some industries. On the one hand, for example, recent growth in the retail sector and some service sectors involved the displacement of traditional players by sophisticated organisations introducing new technologies and processes. Similar situation can be observed in the tourism industry where improved technologies and new web functionalities substitute products and services originally provided by traditional service providers like travel agencies and tour operators. In the past few years, online tourism players progressively crowded out traditional travel agencies. A common feature of this transformation are scale effects in the adoption of many ICT products by service companies. On the other hand, ICT creates an opportunity for small firms to operate in market niches, which were previously unexploited. Thus, the deployment of ICT might result in a variety of outcomes in terms of structural change within industries.
Value chain: According to the transaction cost theory, decreasing costs of search, evaluation and monitoring of competing suppliers should lead to a shift toward markets as a form of organising economic activity. Consequently, the diffusion of ICT has introduced innovative ways of doing business and has led to the re-shaping of firms’ boundaries and changing the constellations of value chains. Studies indicate that ICT leads to a change in firm boundaries and encourages firms to depend less on hierarchies and to conduct more transactions at arm's length and decrease the level of integration. Outsourcing of manufacturing has some important implications for companies’ competitiveness in the long run. As most sub-contractors that take over the responsibility for new product development and innovation are located mainly outside of Europe, European producers concentrating on supply chain and customer management reduce their R&D activities and become dependent on suppliers for new product delivery. Depending on the industry, this will lead to a decreasing role of manufacturing activities within Europe, which should be closely monitored in order to shape future economic policies.
Current state-of-the-art of research will be taken as a starting point. A set of hypotheses regarding ICT impact on the above mentioned factors will be formulated and tested econometrically. The next task will then be to collect data that can be used to perform the tests, and after that to proceed with the estimation of the models. After the estimation of the models has been done, model specification tests will be performed in order to check the models’ accuracy and performance. Only in those cases where the results from the diagnostic tests are satisfactory, hypothesis testing will be carried out, thus assessing the validity of the theoretical predictions. Finally, the outcomes of the empirical analyses will be used for making predictions and assessing policy implications.
A thorough assessment of the above outlined ICT impacts requires an appropriate methodological design of the empirical analysis. In order to cover all relevant aspects of the ICT economic consequences, the empirical examination should concentrate on sector-specific characteristics regarding ICT use and take into account other factors facilitating the ICT-driven changes and dynamics of thereof.
Sectoral focus
The economic impact of ICT is closely linked to the extent to which different ICT applications have spread across industries. This is partly because most ICT are network technologies, i.e. the more people use it, the more benefits they generate. Consequently, despite the fact that a single firm is interested in the benefits it can derive from ICT use, the high level of ICT usage in one industry leads to positive externalities at the sector level. Furthermore, industry-specific factors determine the speed of ICT diffusion and the type of applications being adopted. Consequently, sectoral characteristics influence not only the intensity of ICT use, but the economic impact of ICT as well. This calls for a disaggregated (sectoral) level of analysis.
Extensive approach
So far, the problem of determining the impact of ICT is rooted in the fact that the use of ICT influences firm performance primarily when accompanied by other changes and investments, which are not necessarily classified as such. This includes, for example, investments in skills, organisational change or external expertise. Another factor contributing to the positive impact of ICT usage is innovation. Users often help make investment in ICT more valuable through their own experimentation and invention. Without this process of co-invention, which often has a slower pace than technological innovation, the economic impact of ICT would be more limited. Thus, the analysis will not only focus on the diffusion of ICT, but will aim to account for factors accompanying the process of ICT adoption. Particular emphasis will be placed on skill development and organisational change.
Dynamic perspective
The results of the recent empirical research suggest that the returns to ICT investments usually do not occur immediately, but rather with a significant time lag. Computers make a positive and significant contribution to output growth at the firm level, but the implied returns increase if longer time differences are taken into account, which suggests that time-intensive complementary investments into organisational restructuring have to be undertaken. Furthermore, the ICT potential to increase productivity and operational efficiency does not remain constant. The positive effects are particularly strong in the early stages of technology use and then tend to diminish. Thus, the adoption of particular technology is a step in levels, rather than a permanent increase in the rate of growth. Consequently, the analysis will account for the dynamics of ICT-driven change.
Analytical techniques
Analytical techniques, which will be considered for their suitability to assess the impact of ICT on economic performance, include the following:
The econometric analysis will use different data sources, depending on the study dimension. This includes data collected by the SeBW as well as external databases. These (external) databases are described in more detail in Section 3.3.3 (Data analysis - analytical approach).
The main sources for the analysis of economic impacts on productivity and employment will be the EU KLEMS database. The EU KLEMS Growth and Productivity Accounts are a database enabling an analysis of the relationship between skill formation, technological progress and innovation on the one hand, and productivity, on the other. The EU KLEMS Growth Accounts include measures of economic growth, productivity, employment creation, capital formation and technological change at the industry level for European Union member states from 1970 onwards.
The main source for studying the relations between ICT and innovation, market structure and value chain characteristics will be the SeBW surveys (mainly the two surveys on manufacturing sectors and on retail, transport & logistics).
