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This study presents an economic assessment of the causes underlying the adoption and use of information and communication technologies (ICT), their impact on innovation and on the economic performance of firms in selected sectors in the EU. The assessment is based on empirical analyses at the firm and sector level, recent literature, expert interviews and case studies. The study focuses on the following sectors which had been selected as priorities for the work of the Sectoral e-Business Watch in 2007/08:
The starting point of the analysis was the premise that ICT is an enabler of innovation and productivity growth, which should ultimately translate into economic performance. Thus, conceptually, the analysis proceeds along an "ICT value chain" which structures the ICT-induced value added process into three main steps:
For each step of this ICT value chain, an initial set of hypotheses was specified, based on a literature review. The relevance of each hypothesis was then empirically tested at the firm and sector level, using different statistical methods. As complementary evidence, some case studies were conducted about the ICT usage and impact in individual companies. The results of the case studies were linked with the evidence from the statistical analysis.
The first step was to discuss factors that could have an impact on whether companies adopt ICT. This includes, for example, the relationships between structural characteristics of markets and ICT adoption by companies in this market. In particular, the analysis focuses on potential links between the level of competition and ICT adoption, and between value chain characteristics such as the relationship between suppliers and buyers and the diffusion of advanced ICT systems. The following hypotheses were tested:
Hypothesis A.1: Increasing rivalry in the market determines the adoption of ICT.
Hypothesis A.2: Firms maintaining long-term relationships with suppliers and customers are more likely to use technologies supporting inter-firm collaboration, in comparison with their peer-group in the same sector.
The results for the transport and logistics services sector and for retail provide some evidence that increasing competition between firms (i.e. rivalry in the market) induces companies to use more ICT. In these sectors, companies seem to use ICT in order to cut costs and look for innovative ways of conducting business (A.1). For the other sectors, the relation between competition levels and ICT adoption was not significant.
Regarding value chain characteristics, the empirical analysis does not provide evidence for the hypothesis that companies with a regular suppliers and customers base are more likely to adopt and use ICT applications (A.2). However, this does not imply that relationships between firms per se do not have an impact on ICT adoption. In fact, the case studies provide interesting examples. For example, one company uses an ICT-based SCM to facilitate the shift from a single supplier to changing ones in order to reduce its dependency on a single firm. In another case, a company reports that firms of a certain size and with considerable market position can no longer refuse to implement modern corporate management systems in order to effectively interact with business partners.
Finally, the analysis finds strong evidence across all sectors that large firms are significantly more likely to use ICT than small and medium size enterprises.
The next step was to analyse the ability of firms to use ICT for innovating products, services and business processes. Particular emphasis was placed on the role of a firm’s internal capacities such as knowledge stock and skills, and on the collaboration within and between firms. It was also analysed if ICT use affects a company’s decisions to outsource non-key activities and how ICT diffusion is correlated with organisational changes. The following hypotheses were tested:
Hypothesis I.1: Firms characterised by a higher share of employees with a university degree are more likely to conduct ICT-enabled innovations, in comparison with their peer-group in the same sector.
Hypothesis I.2: Firms that use ICT applications to exchange information or collaborate with business partners are more likely to introduce ICT-enabled innovations, compared with their peer-group in the same sector.
Hypothesis I.3: ICT use is positively correlated with organisational changes.
Hypothesis I.4: ICT endowment is positively correlated with outsourcing.
For all sectors covered by the study, the empirical analysis demonstrates that once a company has started to use ICT, the intensive use of electronic information exchange systems such as SCM systems as well as employee skills increase the likelihood that a company achieves ICT-enabled innovations (I.1). For the steel and chemical industries, skills requirements clearly focus on IT-practitioners. In the furniture, retail and transport services sectors, the share of employees with higher education was found to be more significantly linked with innovation dynamics than the employment of IT practitioners in the company. For chemical and retail companies, results indicate that ICT-enabled product and service innovations are less likely in small firms.
Across all sectors, intensive ICT users are also more likely to change their organisational structure and to outsource non-core activities (I.3, I.4). Concerning the type of ICT used by a firm, software applications seem to have the strongest impact on ICT-enabled organisational change in all sectors (I.2). ICT infrastructure such as the available hardware applications and internet connection capacity is found to be of significant relevance for furniture and retailing, too. The results also suggest that employee skills are an important requirement for firms to realise ICT-enabled organisational change.
The important role which ICT plays for enabling product and service innovations as well as outsourcing of non-core activities is also demonstrated in several of the case studies.
At the final segment of the ICT value chain, it was analysed if ICT-enabled innovation was linked with a better performance of companies, and if such improvements induced overall productivity growth at the sector level. Therefore, the following hypotheses were tested:
Hypothesis P.1: ICT-enabled innovations are correlated with a firm’s turnover.
Hypothesis P.2: ICT endowment is positively correlated with a change of market share.
Hypothesis P.3: ICT-capital investment has become a key element in growth of value added and labour productivity, while the importance of non-ICT-capital investments has been declining.
Hypothesis P.4: TFP growth has accelerated together with increased investment in ICT-capital, especially in ICT-using service industries like retailing, wholesale and banking.
Regression analyses based on micro-data clearly demonstrate that ICT use increases the turnover of firms in all sectors (P.1). For firms of the chemical sector, retailing and transport services, there is also evidence for a positive impact of ICT use on market shares (P.2).
At the sector level, however, these results are much less pronounced. In fact, there appears to be almost no evidence for a positive direct relationship between ICT capital investments and value added growth and only modest evidence for a relevant impact of ICT capital on labour productivity (P.3), while it was found that even aggregate labour productivity growth in the EU has slowed down since 1980.
The results from growth accounting do not allow clear statements regarding the link between the growth of TFP and the ICT capital stock. The estimation results identify a significant impact of autonomous technical change only for steel and banking. For the former, ICT capital per TWH does have a significant positive impact on labour productivity as well. Hence, the respective hypothesis (P.4) can be confirmed only for steel.
Nevertheless, the combination of firm- and sector-level analysis suggests that ICT capital does have an indirect impact on labour productivity and thus enables firms to improve their performance: at the firm level, there is strong evidence that a larger ICT capital stock increases the likelihood that a firm will outsource certain activities. At the sector level, the analysis identifies outsourcing as a key factor for labour productivity growth. In the context of the ICT value chain this can be seen as a channel through which ICT capital enables firms to increase labour productivity. These results are significant for all sectors, but we find the strongest evidence for retailing, chemical and steel.
Overall, the observed differences in the impact of ICT at the firm and sector level can be explained by the presence of a lag effect. At the firm level, certain firms assume a leading role in adoption and use of ICT. Those firms are technology leaders, which seek to secure the benefits of the first mover. At the sector level, the assessment is less pronounced since not all firms within a sector are ICT leaders. Hence, aggregate and representative information for all firms seems to suggest that the effect of ICT on performance is much weaker.
In fact, the degree to which firm-level and sector-level results deviate indicates to which extent ICT is used by only a small number of innovative firms rather than by most of the companies in the sector. Against this background, the observed differences in this study seem to suggest that there remains a significant degree of still unexploited economic potential from increased ICT usage.
Finally, the report finds strong evidence that large firms are significantly more likely to use ICT than small and medium size enterprises (SMEs) are. Given the other key findings, this also implies that large firms are more likely to introduce ICT-enabled innovations more often than their smaller competitors. In other words, it implies that the gap in ICT use between SMEs and large firms (the so-called digital divide) will increase rather than narrowing down.
From a policy perspective, these key findings demonstrate that more targeted measures to foster ICT adoption and usage in the EU are urgently needed. Most alarmingly, the analysis confirms the well-known observation that labour productivity growth in the EU is declining. Since at the same time, SMEs are less likely to adopt ICT, and thus to benefit from ICT-enabled innovation and productivity increase, this implies that a significant part of European firms is unlikely to see ICT-induced improvements in economic performance. Thus, policy makers should foster their efforts to improve the business environment in which decisions on ICT adoption and usage are taken. This includes three main objectives:
Fully integrated common markets
Despite significant political efforts, the EU markets for goods, services, labour and capital are still rather fragmented due to various country-specific regulations and legislation. As a consequence, companies cannot simply develop an implement uniform strategies and solutions at a European scale.
Improvement of education, training of e-skills and life-long learning
ICT-specific skills are found to be of key importance for utilising the potential of ICT capital investments. Obviously, supply of sufficient skills and expertise is still rare and needs to be improved by means of consolidated efforts which involve industries, governments and education institutions of all Member States.
Stimulation of ICT adoption by SMEs
The main barrier for ICT adoption by SMEs appears to be a lack of awareness of the possibilities and benefits that ICT could offer. A lot of information may be available, but the complexity of the issue is difficult to come by; the information cannot be adequately communicated. Again, this requires multi-national co-operations between governments, industry representatives (e.g. chambers of commerce) and the ICT-producing industry.
It is uncontested that these issues have already been identified by policy before and have been on the agenda of the European Commission for a long time. Nevertheless, the findings of this analysis clearly show that there remains a long way to go until the related objectives can be fully achieved. Hence, the study confirms the continued need to address these objectives, possibly with more consolidated efforts along the lines suggested. The evidence of this study can be used in political discussions to support and substantiate the need for stronger market integration, improvements in education and SME support, as well as to demonstrate the costs of not-acting.