Do Investments in ICT Help Economies Grow?: A Case of Transition Economies

Do Investments in ICT Help Economies Grow?: A Case of Transition Economies

Sergey Samoilenko (Averett University, USA)
Copyright: © 2019 |Pages: 24
DOI: 10.4018/978-1-5225-6367-9.ch003


A common assumption behind investments in information and communication technologies (ICT) is that of the resultant improvements in productivity. To substantiate this assumption with empirical evidence in the context of transition economies (TE), the authors use time series data sets spanning the period from 1993 to 2008 to inquire into the impact of investments in telecoms on total factor productivity (TFP). Results indicate that the improvements in productivity of the most of TEs in the sample was inconsistent and not based on the increase in the levels of investments and labor. Additionally, the results of the data analysis suggest that the dominant source of growth in productivity is not static, but changes over time. While in an earlier period (1993-2002) of transition, TEs grew based on technological change, it is efficient utilization of the already available technology that became a dominant source of growth in the later (2003-2008) period of transition.
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The overall tendency associated with the outcome of investments in Information and Communication Technologies (ICT) is to expect an increasingly greater “bang for a buck.” No longer ICT is viewed as a tool of an automation, but rather it is expected to be an agent of transformative change (Balcı, Medeni & Nohutçu, 2013; Abu Tair & Abu-Shanab, 2014). This expectation holds true regardless of the scale of implementation of ICT- be it a case of a bank (Haider & Tang, 2016) or a single economy (Eilu & Auma, 2017), or a group of economies (Samoilenko, 2016). Such expectations are well substantiated by the examples of the impact of investments in ICT on the macroeconomic bottom line in the United States (Oliner & Sichel, 2000; Van Ark et al., 2002; Jorgenson, 2003) and in some of the OECD countries (Colecchia & Schreyer, 2002; Van Ark et al., 2002).

But in the context of transition economies (TE) the outcomes of investments in ICT are mixed (Dewan & Kraemer, 2000), and more evidence is needed that such investments can be effectively and efficiently transformed into significant macroeconomic outcomes (Heeks, 2009). The case of TEs is not unique, for while some European economies increased their level of adoption of ICT in the period around 1998-2002, their levels of productivity actually started to decline, thus demonstrating the disparities in the outcomes of investments in ICT among economies (Daveri, 2002). Such a reduction in growth, even among well-heeled developed countries, clearly requires TEs to demonstrate that their limited technical, financial and human resources are not wasted (Indjikian & Siegel, 2005). The term transition economy refers to a country in the process of transitioning from a centrally planned economy to a market-oriented economy. It does not mean, however, that all TEs constitute a homogenous group in terms of the level of economic development. The World Bank, for example, groups some of them with the developed, and some with the developing countries, depending on the level of industrialization

In order to explore whether investments in ICT can impact the macroeconomic outcomes in the context of TEs, in this study we utilize the research framework of neoclassical growth accounting that is widely used in Information Systems (IS) research (McGuckin & Stiroh, 2002; Brynjolfsson & Hitt, 1996). Within the context of this framework, an increase in the macroeconomic bottom line (e.g., GDP) can come from two sources. The first source is represented by the “white-box” components, such as the available levels of capital (e.g., investments in ICT) and labor (e.g., ICT workforce). The origins of the “white-box” component are clear-cut and transparent. The second source is reflected by Total Factor Productivity (TFP), a “black-box” component origin and composition of which is less clear.

Resultantly, if we are to conceptualize the growth in GDP as a function of capital investments, labor, and “something else”, then within the framework of neoclassical growth accounting the term “something else” is represented by TFP, where it serves as the residual (often referred to as Solow’s residual) term capturing that contribution to GDP that is left unexplained by the inputs of capital and labor.

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