The role and impact of ICT on economy growth

Title: The Role and Impact of ICT on Economy Growth





1.0 Introduction

2.0 Literature and theories

3.0 Role and Impact of ICT on Economy Growth

3.1  Role and Impact of ICT investment  

3.2  Measurement of ICT contribution to economic growth

3.3  Policy implication boosting economic growth

4.0 Future Research

5.0 Conclusions

6.0 References


Use of information to the discretion of the prediction of economic growth driven by investments in the Information and Communication Technology(ICT). This paper discuss on the use of ICT that contributes to the economic growth and how it being measured. Prediction analysis resulting to empirical studies and research had been carried out between ICT and economic growth found there is both mixed results depending on the methodology of the research engaged and geographical landscape or situation that should be considered. The analysis of  estimates reveal a significant impact on economic growth of investments in ICT towards specific region implies whereby countries seek to enhance their economic growth, they need to implement specific policies that facilitate investment in ICT. A proposed future research has been made in this paper that could help to ensure the role and impact of ICT to spur the economy growth with the continuing trend that is growing is also given.

1.0    Introduction

This research paper is to examine whether ICT role and impact to the economy growth. Though there is so many debate about whether it does help in the progress over the past decade on the increase in the impact of economy and the way people work, communicate and spend time across countries around the world, however, research will explain that in the past decade several methods have been used to analyze the impact of ICT on economy growth. Studies throughout 1990s showed that increasing investment in this field constantly resulted in emergence of positive relationship between economic growth and information technology. However, there is much research is needed due to the challenges to ensure how much ICT has contributed to economic growth to the country as well as the global levels. Study is needed to investigate the impact of ICT on economic growth on a global basis by examining all countries with significant expenditure on ICT over the past decade.

This study aims to investigate the relationship between economic growth and ICT in developed and developing countries as well. The methodology of „Measuring the contribution of ICT to economy growth and productivity“ is based on original work by Solow (1957) and (Jorgenson and Griliches (1968)) and later extended by (Alia Oliner and Sichel (2000) ) and (Jorgenson and Stiroh (2000)). ICT can impact economic growth through four major channels referred to by (Jalava, Pohjola 2002): (i) Production of ICT goods and services, which directly contributes to the aggregate value added generated in an economy; (ii) Increase in productivity of production in ICT sector, which contributes to overall productivity in an economy Total Factor Productivity (TFP); (iii) Use of ICT capital as input in the production of other goods and services; (iv) Contribution to economy-wide TFP from increase in productivity in non-ICT producing sectors induced by the production and use of ICT (spillover effects). One of the example looking into Finland economic growth based on analysis by (Jalava, Pohjola 2005) that ICT is the source of output and also productivity growth to Finland thus impacting the improvement of the GDP and economic growth.

In developing countries, SMEs industries are challenged by the globalization of production and shift in the importance of the various determinants to competitiveness. By spreading the information and communication technologies (ICT) complement with the ever decreasing prices for communication, markets in different parts of the world become more integrated. The influence of ICT has led many comment on the argument that these technologies are creating a new economy in which information is the most critical resources that provides competitive advantages in all sectors such as manufacturing and even more in the services sectors. From performance perspective, the competitiveness effect of ICT is derives from the impact that ICTs have upon the productivity of the factor inputs. ICT can improve the efficiency and increase productivity by separate ways including, improving efficiency in resource allocation, reducing transaction costs and technical improvement that leads to the shift of the production functions. Referring to Moodley (2002) conducted an in-depth quantitative and qualitative analysis of the use of B2B e-commerce by manufacturing firms in South Africa and his study is based on 120 firm level interviews and 31 interviews with industry experts. The evidence indicates that the incidence of use is fairly low. From the analysis, 87% of the firms had access to the Internet, only 49% of the firms had a corporate website and only 22% was using the Internet for order taking. The findings enables him to come to a conclusion that e-commerce is not yet an important strategic objective for most South African firms.

Hoon (2003) explored the impact of ICT investment on economic growth using a cross-country analysis based on data from 56 developing countries for the years 1970–1998 and found that ICT positively contributes to economic growth in the developing world. While van Ark and Piatkowski (2004) analyzed IT investment patterns and their impact on economic performance in two sets of countries regarded as being at different levels of economic development: the 15 countries of the European Union (‘‘old“ Europe) and 10 Central European economies under accession (‘‘new“ Europe). They had come to a conclusion that there is a trend moving into the convergence of investment in IT between ‘‘old“ and ‘‘new“ Europe. Investment in IT capital was also found to be the vital factor affecting productivity growth in both sets of countries. There is studies made from this developed world with a strong evidence of a strong positive correlation between IT and economic performance, IT-induced changes in workforce composition in favor of highly skilled or educated workers and organizational changes that allow firms to implement IT more effectively and efficiently. Using the new data from after 1995, Jorgenson and Vu (2005) found that the contribution of ICT capital to world GDP had more than doubled and now accounts for 0.53 per cent of the world average GDP growth of3.45 per cent. The percentage was higher for the group of G7 countries, where ICT investments contributed with 0.69 per cent to a GDP growth of 2.56 per cent during 1995–2003.

Therefore, this research paper intends to discuss and find out more about what and how the roles of ICT plays a major part to contributes and have an impact on the economics performance and growth across globally.


2.0    Literature and Theories

Literature review by Avgerou (2001) stated that ICT is a necessity for taking part in today’s global economy and as such the role of ICT in the emerging global market cannot be over-emphasised. ICT has the potential to integrate the whole world economies in other words demolishing the barriers created by time and distance. It will ease the trade in goods and services and encouraging investment by the creation of new sectors of enterprises, new revenue streams and new jobs. Meng & Li (2002) maintain that the role of the ICT industry in developing countries is far from clear as developing countries are still short of capital investment and knowledge, thus they will lag behind in ICT-industry development and diffusion in comparison to the industrialized nations. This late adoption of ICT might translate into a competitive advantage for the developing countries since they to learn from the experience of the developed countries while adopting the latest generation technologies. However, they will benefit from not incurring the learning and experimentation cost that typically characterised the adoption of new technologies by the early adopters referred by (Wong, 2002).

Early macro level studies, going back to late 1980s and early 1990s, indicated that ICT’s share in productivity and economic growth was very small (Roach, 1987, 1989, 1991; Oliner and Sichel, 1994; Jorgenson and Stiroh, 1995). Macro-economic studies showed that investments in ICT had a considerable effect on the productivity of labor force and economic growth as well (Jorgenson,2001, Oliner and Sichel, 2004, Jorgenson and Stiroh, 2000). Gordon (2000) attributed that productivity growth of the 1995-2000 period to business cycles, whereas Stiroh (2001) and some others show that business cycles had little Influence on productivity growth during those years. Results sometimes diverge due to different methodologies employed. For example, Jorgenson and Stiroh (1995, 2000), 47 Jorgenson (2000), and also Oliner and Sichel (1994, 2000) use a „growth accounting framework“ in which they separate ICT capital from non-IT capital, and focus mainly on business cycles. Mankiw, Romer, and Weil (1992) using data from 42 developing and 24 high income developed countries over the period of 1985-1999 and also Pohjola (2001) using Panel Data Modeling, found that ICT/GDP effect on growth in these countries was meaningful and positive in high income countries, positive but not meaningful in developing countries.

Sotiris and Papaioannou (2004) explored the effects of ICT on productivity and economic growth in both developing and developed countries over the time period of 1993-2001, using a „production function“ framework and foreign direct investment (FDI) as a proxy for ICT and concluded that FDI has a positive and meaningful effect on productivity and economic growth and that the effect was greater in developing countries, and positive but not meaningful when all the courtiers were lumped together. Pohjola (2001) drawing data from more than 36 countries over different continents concluded that in more prosperous and industrial countries, there was a highly positive and meaningful relationship between ICT and economic growth, but there was no evidence of such a relationship in developing countries. Dewan and Kraemer (2000) suggest that the gap is due to low levels of IT investment in developing countries and also a lack of complementary assets such as knowledge-based structures for developing the use of IT goods.The impact of ICT on economic growth and development, however, attracted the attention of researchers. Studies had been conducted as well in Taiwan by (Wang, 1999), China (Meng & Li, 2002), United States (US), the Organisation for Economic Cooperation and Development (OECD) countries (Colecchia & Schreyer, 2002), Britain (Dolton &  Makepeace, 2004) and the Asian region Jussawalla, 1999) is done to determine the role played by the ICT sector on economic growth.

3.0    Role and Impact of ICT on economy growth

It may be too early to tell how the role of ICT in growth and productivity performance will develop in the first decade of the 21st century. However, initial assumption was that ICT will continue to be a driver of economic growth. When the world entered a new era from half of the 20th century, introducing computers to the market and combining with the field of information and communications, computers linked to the telephone and television – and „ICT“ revolution occurred. The ICT has some effects on different economic variables. In fact ICT will influence both supply and demand side of the consumer’s economic behavior through utility function and from supply perspective on producer’s behavior through production functionality that will be affected. ICT together with other infrastructure components will result in capital deepening, re-organization of economic processes thus increasing the economic growth and productivity factors in developing countries. Looking thru developing countries, there is not enough competitive space and the majority of market is under the government control, therefore, ICT effects on economic growth and productivity is observed. This research paper focuses on three areas: (a) the role and impact of ICT investment on the efficiency of economic growth; (b) measuring the contribution of ICT investment to economy growth and analyzing the variation of the ICT contribution across countries; (c) policy implications related to each country’s efforts to encourage investment in ICT towards boosting the growth of economy.

Economic growth is the increasing ability of the nation or countries to produce good and service quoted by Miles (2001). The function of ICT enabling products or goods of services to be produced within a shorter period of time with all the computerised system. It improves efficiency in delivering services rapidly. With the evolution of ICT with best technology and management practice coupled with the increasing use of labor, land, capital and resources available, ICT is perceived to contributes to the impact of economy growth, thus resulting in development of countries growth by technology. ICT are becoming major factor for economic growth. By enabling „virtual mobility“, ICT provide the means to undertake many of the activities that have so far needed physical transport quote by (Lake, 2004). Use of email , e-commerce and online transaction for banking or any other activities had tremendously reduce the amount of time for transportation, hence, saves money. According to Lake (2004), increasing use of information and communication technologies (ICT) is changing with nature on the the use of virtual mobility that distance appears less important, but insists that mobility connection should remains.

Prior to showing the result of ICT impacting economy growth, this research paper will examines some of the past data studies done. In order to  measure economic growth, metrics used are the GDP (Gross Domestic Product) which determines the value of output produced within a country during a time period and the GNP (Gross National Product) which also identifies the value of output produced within a country plus net property income from abroad (Bized, 2004).

Example of Countries where ICT had impacted on economic growth over period of time
















Contribution of ICT





















Real Output Growth





















A study by Coleccia and Schreyer (2001) cited by Kanamori et al (2004) provided the results below on the contribution of ICT to economic growth.

                                      Fig 1: Results from Past Studies

Source: Coleccia and Schreyer (2001) cited by Kanamori et al (2004)

From the data analysis from past results on the studies done by Coleccia and Schreyer (2001), what conclusion we can make is that for example countries like USA, between 1990-1995 with the contribution of ICT at 0.27 percentage point of economic growth, the real output growth at the period of time is showing 2.12, but in comparison to year 1996-1999 period the contribution of ICT is at 0.47 percentage point of economic growth, the real output growth at the period of time is showing 3.48. There is significant improvement in the increased of Real Output Growth thru the drive of contribution on ICT. Thus, this explained how ICT can impact on the economy growth.

There is another study made on how the ICT contribution to the real output growth of a post communist county, Poland by Piatkowski (2003). In Poland, ICT investment contributed on average 0.47 of a percentage point or 8.9% of GDP growth and 12.7% or 0.65 of a percentage point contribution to labour productivity between 1995-2000. In the year 2001, Poland had grown their economy in comparison lower and middle income nations, in terms of ICT spending per GDP

This paper will also work on analysis to confirm and reaffirms the findings on policy implication of IT investment to boost the economy growth. The main policy conclusions that can be drawn are:

1. Strengthening competition in ICT goods and services:Competition in ICT goods and services requires attention, as continued technological change is creating new challenges to competition in many markets.

2. Improvement on business environment: This includes having an  environment that provides access to finance, allows firms to change the organisation of functions and tasks, helps workers acquire the skills they need in a rapidly changing global environment, and promotes good management practices. Rigid regulations of product and labour markets that impede re-organisation or competition between firms also need to be addressed. The experience of countries such as Australia shows that structural reform is key in harnessing the new dynamism that is associated with ICT. Firm creation also needs to be fostered. Experimentation and competition are key in selecting those firms that seize the benefits of ICT and in making them flourish and grow. In the current time of rapid technological change, greater scope for experimentation may enable new ideas and innovation to emerge more rapidly, leading to faster technology diffusion. Barriers to the entry, exit and growth of firms therefore need to be addressed whereas competition needs to be strengthened. Competition not only helps lower the costs of ICT products and services, which fosters diffusion, it also strengthens pressures on firms to improve performance and change conservative attitudes.

3. Security and trust: Concerns on security, privacy and authentication continue to affect the uptake and use of ICT and should remain a priority for policy.

4. Barriers to the effective use of ICT in services:Sector-specific regulations reduce the development of new ICT applications and limit the capability of firms to seize the benefits of ICT. Further reform of regulatory structures is needed to promote competition and innovation, and to reduce barriers and administrative rules for new entrants and start-ups.

5. Innovation:ICT is closely linked to the ability of firms to innovate, i.e. introduce new products, services, business processes, and applications. Firms that have already innovated achieve much better results from ICT than those that have never innovated. Policies to harness the potential of innovation are thus of great importance in seizing the benefits of ICT. To strengthen innovation, policy needs to give greater priority to fundamental research, improve the effectiveness of public R&D funding and promote the flow of knowledge between science and industry.


4.0    Future research

In the recent development, research on the impact of ICT on economic growth have so far focused on their results on the statistics that dated between 1990 and 2000. No research has so far been done from the year 2000 to 2010 (recently) to justify the link between the contribution of ICT in economic growth and the real output growth for that period as what was done from the period of 1990 – 2000. Although the assumption is that the trend is still continuing (Cette et al, 2004), it would be essential to identify the changes in statistics that have taken place from the early 2000 to the current year.

We also foresee that the use of broadband and recent developments in mobile telephony and for the new businesses thru cloud computing recently being a hype to the business world have made business processes so much easier, thus, this signifies that ICT investments might be catching up with the needs and demands of the ever changing business environment to retain the trend of profits that is associated with them. It is also vital for us to do comparative analysis that would help identifying why the reasons for the difference in ICT contribution to economic growth, amongst developed and developing nations. This would assist developing and slow moving nations in pin pointing areas for concern and improvements to catch-up with the developed nations.

Future research should mainly focus on more of data collection in order to do measurement analysis from developed and developing countries over every period of time constantly such every 5 year period to recent as with the evolution of ICT how does that it really gives a major impact to the real output growth (GDP) on this nations. This enables us to make even in-depth research about the role ICT contributes to the economy with the actual data that had been collected.

5.0    Conclusions

Main conclusion prior to this study is that there is positive impact of ICT on economic growth and performances of already developed countries as compared to developing countries. Due to the huge contribution of the use of ICT in economic growth, we can conclude that businesses play a major role in ensuring the usage of sufficient technology to ensure their processes faster, cost effective and increases their production levels. It is equally important for businesses to know that an increased in productivity could only be achieved if fuelled by steady and rapid improvements in ICT performance referred by (Cette et al, 2004). Large impact of ICT capital is due to an extraordinary acceleration in ICT investments between 1990-2000 induced by a combination of rapid falling prices of ICT products and services complement with the large demand for ICT fuelled by high economic growth in the 1990’s and substantial pent-up demand due to infrastructure under investment in ICT.

ICT is the key driver to the economic growth, there is no doubt, therefore, major nations government takes a major role in promoting the benefits associated with the use of ICT, but it is imperative to set up some independent bodies that would be actively involved in monitoring, giving feedback and develop improvement on ICT performance in the economy. ICT had been proven to consumers and business to reduce transportation costs and all this can be achieved through regular technical optimization with the prime quest for speed, security and multifunction complete with a dynamic management with strong development focuses. Flexibility in international trade and laws is crucial factors in ensuring that businesses are able to import ICT goods of their choice and specification, from different parts of the world. The adoption of ICT and the consequent increased productivity and economic growth induced by it has been described as the dawn of the new economy. The astounding high rate of productivity in the US for example, which occurred at the same as well with the rapid diffusion and production of ICT directly led to the term new economy. In a broader sense the term would describe everything that is recent and new in the economy. It would imply that old economic rules like the limits of maximum production capacity and the traditional trade-off between inflation and employment would be invalid as a result of efficiency arising from the adoption of ICT. The major driving force of this new economy has been described as ICT (van Ark, 2002; Meng & Li, 2002). There is more research and development in ICT that must be encouraged and measured against the needs and demands of the market. Governments should invest in the creation of ICT industries, and in the diffusion of ICT products and services referred by Smith (2002).

Prior to all the studies and fact findings by most of the researchers with all the data collection analysis, I truly believe that there is definitive reason to conclude that with ICT in most of the industries across developed countries, it will thus impact on the economic growth, however, in developing countries it showing the positive significant result on how ICT has an impact to the economy.

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