macroeconomic impact of it adoption and diffusion1

JBICI Review No.8 101

MACROECONOMIC IMPACT OF IT ADOPTION AND DIFFUSION1

Masayuki Goto*Izuru Kimura**

Hirotsugu Sakai***

JBICI Review No. 8 November 2003 pp 101~129©2003 by Japan Bank for International Cooperation. All rights reserved.

Abstract

Since the latter half of the 1990s, InformationTechnology (IT) has been diffused dramatically allover the world in step with globalization. In theindustrialized countries, especially, it is recognizedthat IT diffusion has had a positive impact on macro-economic performance. This study aims to investigatethe mechanism of IT diffusion’s impact on the macro-economy, and look into the possibility of adoptingthe same mechanism for the developing countries,particularly in Asia. In order to analyze the impact ofIT diffusion, this study reviews the past relevantstudies, applies some macro-economic analysismodels , conducts interviews with privatecorporations, and simulates the impact by using aComputable General Equilibrium model.

The major findings of this study are as follows.- IT has been adopted in the Asian developing

countries and IT diffusion has had a positive impacton their macro-economies as well as on industrialized

countries. Asian developing countries have not,however, reached the stage of progress where thecapital deepening mechanisms increase laborproductivity.

- The results of the interview surveys with privatecorporations imply the required factors for thedeveloping countries to achieve an IT leadingeconomy as follows: (i) construction of high-techparks by the government, (ii) development of ITrelated human resources, (iii) expansion of venturecapital resources, (iv) creation of domestic IT demand,and (v) establishment of basic infrastructure.

- Rapid growth of IT industries alone in thedeveloping countries is insufficient to lead theirsustainable macro-economic development. Theoverall economic structure should be upgraded toachieve IT-oriented economic growth.

If the developing countries succeed inaccumulating human capital in line with IT adoptionand diffusion, they may follow the capital deepeningmechanisms, as the industrialized countries have

* Director, Remote Islands Development Division, City and Regional Development Bureau, Ministry of Land, Infrastructure andTransport (at writing: Senior Economist, JBIC Institute)

** Representative, Representative Office in Manila, JBIC (at writing: Development Policy Research Division, JBIC Institute)*** Mitsubishi Research Institute, Inc.

1 This paper was summarized and added some contents based on the report “Macroeconomic Impact of IT Adoption and Diffusion”which was implemented as Development Policy and Project Assistance Survey (SADEP). (Commissioned members of the researchteam were Hirotsugu Sakai (Research Center for Policy and Economy), Akiko Higashi and Poh Soon Lim (International ProjectDepartment, respectively) from Mitsubishi Research Institute, Inc. as well as Toshihisa Iida (Research Associate) from GlobalGroup 21 Japan, Ltd. Their belongings were at the time of their writing.) Refer to JBICI Research Paper No. 20 “MacroeconomicImpact of IT Adoption and Diffusion” for more in detail.In the course of carrying out this survey, a research committee was established chaired by Professor Shujiro Urata of the School ofSocial Science of Waseda University, and invited Mr. Kazunori Minetaki, Research Fellow at the Economic Research Center,Fujitsu Research Institute, and Assistant Professor Yoko Takeda of the Graduate School of Environment and Information Sciences,Yokohama National University as participants. Furthermore, at the workshop which took place at the time of compiling this report,Mr. Norihisa Ando, Representative of the Japan Office for Satiyam Japan Inc., and Assistant Professor Masanori Kondo of InternationalRelations Course, Department of Liberal Arts, International Christian University were also participated. Committee members andparticipants contributed to a great deal of appropriate guidance and beneficial comments for this survey.

102 Macroeconomic Impact of IT Adoption and Diffusion

followed them, in the medium and long term. It isimportant to understand that IT diffusion itself is nota goal but a measure to activate an economy.Therefore, establishment of basic infrastructure,development of human resources, support forentrepreneurs, and improvement of the general marketand trade environments are prerequisites to realizestable macro-economic development. However, it isdifficult for developing countries to take concretemeasures without support from the industrializedcountries.

Chapter 1 Introduction

Since the 1990’s the adoption and diffusion ofInformation Technologies (IT)2 has progressed on aglobal scale, bringing about major social andeconomic impacts. Especially in the U.S., IT adoptionand diffusion has brought about numerous positiveeffects for the macroeconomy such as an acceleratedrise in productivity, stable prices and continuedeconomic growth. Many other industrialized countrieshave also been able to utilize IT in the same mannerto improve their macroeconomic performances. Someof the positive impacts from IT adoption and diffusionhave also been realized in many developing nations.For example, India has seen tremendous growth forits software industry. Higher growth brought aboutby IT production also helped ASEAN countries escapesome of the after-effects of the Asian financial crisis.However, the fact remains that the developing nationshave not reached the same level of IT utilizationenjoyed by the industrialized nations.

In general, it has been said that IT adoption anddiffusion has brought about positive impacts for themacroeconomies of industrialized nations by raisingIT-related production and improving eff iciencythrough the use of IT. The question then is just what

mechanisms are used to bring about these positiveimpacts. Another question is can we expect to achievethe same impacts in the developing countries.

While keeping these questions in mind, this studyhas tried to determine the best policies for achievingsustainable economic growth in developing countries,mainly for the private economic sectors, through theuse of IT. Information was collected on IT adoptionand diffusion in each of the target countries,macroeconomic impacts were analyzed based oneconomic models. Corporate behavior was analyzedbased on interviews with various corporations andstructural change simulations and other methods wereemployed to analyze the mechanisms by which ITadoption and diffusion impacts the macroeconomies.Tests were conducted to obtain quantitative andqualitative understandings of the results.

The main target countries for this survey werethe industrialized nations of the U.S., Ireland, Swedenand Finland, and the developing nations of India,Malaysia, Bangladesh and China.

Chapter 2Current Status of Global IT Adoption

and Diffusion

IT spread rapidly from the second half of the 1990’sin step with the spread of globalization. This was aperiod of solid global economic growth, which manyhave attributed to the growth of IT. This wasparticularly true in the U.S., the leading IT nation,which saw accelerated macro labor productivity fromthe latter half of the 1990’s (Figure 1). Some of thepast research has pointed to capital deepening3 by theinformation service sector and the rise in Total FactorProductivity (TFP) as examples of direct impactsbrought about by IT adoption and diffusion (Table 2).

2 The term “IT” stands for Information Technologies, but it essentially refers to information processing technologies. Generally, thisterm includes the use of communication and network technologies, and therefore ICT (Information and Communications Technology)is probably the more suitable expression. ICT is becoming the generally accepted international term for information andcommunications technologies, but this study uses the term “IT”, which is still commonly used in Japan. Thus, for this study the term“IT” is synonymous with “ICT”.

3 Capital deepening means, for example, IT introduction brings a labor saving effect thus capital amount per unit of labor input hasincreased. In line with this meaning, it can be viewed as the effect of utilizing IT.


computer sector as well.Before providing an analysis of the impacts IT

adoption and diffusion has had on macroeconomies,this chapter will first provide a general overview ofthe current status of IT adoption and diffusion aroundthe world based on various statistical materials.

1. Progress of IT Adoption and Diffusion

There are various indicators of IT adoption anddiffusion such as the diffusion rate of fixed telephonelines, cellular phones, personal computers and Internetusage (number of users, number of hosts). Lookingat all of these indicators it is clear that American,European and Oceanian countries have made greatstrides in terms of IT adoption and diffusion, whilethe level of diffusion has remained low among thedeveloping countries in Asia and Africa (Table 1).

Figure 1 Growth of Non-agriculturalProductivity in the U.S.

125

100

80

60

40

34

125

100

80

60

40

3447 53 59 65 71 77 83 89 95 01

Index，1992＝100

Source: U.S. Department of Commerce (2002), Digital Economy 2002

Table 1 Factors in Increased Productivity in the U.S.

1973 ~ 1995 1995 ~ 2001 Acceleration (% points)

Labor productivity (%) 1.39 2.60 1.21

Contribution (% point)

Minus: Cyclical effects 0.02 –0.46 –0.48

Equal: Structural labor productivity 1.37 3.07 1.70

Minus: Capital services 0.72 1.29 0.57

Capital deepening of information services 0.41 1.01 0.60

Capital deepening of other capital services 0.31 0.28 –0.03

Contribution by improved quantity and quality of labor 0.27 0.31 0.04

Equal: Structural TFP 0.37 1.44 1.07

Minus: Computer sector TFP 0.18 0.35 0.16

Equal: Structural TFP excluding computer sector TFP 0.19 1.09 0.90

Source: Council of Economic Advisors “Economic Report of the President” (2002)

IT adoption and diffusion helps to raise theefficiency of all economic activities and makes amajor contribution to increased TFP outside of the

Figure 2 Number of PCs per 100 Inhabitants (2001)

0 5 10 15 20 25 30 35 40 45

Africa

Americas (north and south)

Europe

Oceania

Asia

Global Average

Source: ITU (2002)


There are also clear correlations between incomelevels, education levels and IT environments (Figure3). Looking at the target countries in this study, it canbe seen that the gap between U.S./European countriesand Asian countries was rather small at the start ofthe 1990’s, but has since grown. Even though Malaysiahas shown comparatively steady progress, India,Bangladesh and China still remain stuck at low levelsof IT adoption and diffusion.

One very interesting point is that whencomparisons are made using economic levels with afixed GDP (in this case a per capita GDP of $1,000)(Figure 4), the country with the greatest PC profusionbecomes Malaysia, followed by China, Sweden andFinland. On the other hand, the country with the lowestlevel of PC profusion is Bangladesh, followed byJapan. This would suggest that there are two types ofcountries, those countries that have seen a spread of

IT after having already achieved economic growth andthose countries that are now seeing economic growthalong with the growth of IT (or possibly IT adoptionand diffusion is the main driver behind their economicgrowth).

2. Overview of E-commerce

There has been tremendous growth in e-commerce inthe past several years. Even though there has been aslowdown in the global economy and e-commerce hasnot grown as rapidly as first envisioned, e-commerceis still expected to continue growing steadily. A largeportion of e-commerce is in the form of B2B(Business to Business) trades, and the scope of B2Btrading is expected to continue growing rapidly.Regionally, e-commerce is expected to grow furtherin North America and Asia. In Asia e-commerce has

Figure 3 Correlation between GDP Per Capita and PCs Ownership (2000)70

60

50

40

30

20

10

0

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000

(GDP per capita, US$)

IndiaBangladesh

Malaysia

IrelandFinland

Japan

U.S.

China

Sweden

Source: Prepared from Yearbook of Statistics 1991-2000, ITU (2001)Made from International Financial Statistics, IMF (2001)

Figure 4 PC Diffusion Status of US $1,000 GDP per Capita (2000)

Source: Compiled from Yearbook of Statistics 1991-2000, ITU (2001)International Financial Statistics, IMF (2001)

4

3

2

1

0

Mala

ysia

Sweden

China

Finlan

d

Amer

ica

Irelan

dIn

dia

Japa

n

Bangl

ades

h


seen strong growth in Singapore and China. The mainreasons for their success are the fact that English isthe official language, the high levels of infrastructureand Internet diffusion, and support from thegovernment. However, B2B trade in the Chineselanguage has been flourishing in the Chinese region.

3. IT Plans of Various Countries

Governments of the advanced IT nations, such as theU.S. and many European countries, have enacted basicpolicies for the building of their IT infrastructures.However, support is also being provided for preparingthe necessary legal system, research & development,education and training. Asian countries also beganseriously addressing the building of IT infrastructuresand the enactment of IT strategies in the 1990’s. Insome cases, a few countries in the Asian region haveaddressed these issues earlier than Japan. Many ofthe Asian countries that have seen economic growthpromoted mainly by the government have aggressivelyenacted IT policies as part of their broader industrialpolicies. However, even though there are somecountries like Malaysia that have adopted grandschemes, it can still be said that overall these countriesare well behind Europe and the U.S. in terms ofpreparing the necessary legal system and support forresearch and development.

Chapter 3Analysis of Macroeconomic Effects of

IT Adoption and Diffusion

In addition to the improved productivity mentionedearlier, the macroeconomic effects of IT adoption anddiffusion in developed countries also include pricestability brought about by expanded supplycapabilities and the elimination of some businesscycles thanks to reduced economic swings derivedfrom by better inventory management. In Asia theamount of analytical data is rather limited, but the

available evidence points to different research resultsin terms of the degree of economic impact broughtabout by IT adoption and diffusion. This surveyfocuses on how the IT adoption and diffusion throughvarious routes helps to promote growth in thedeveloping nations. Therefore, the main considerationof this study will be productivity.

Another very interesting point will be theapplication of the endogenous growth theory, whichstresses the importance of knowledge, in verifyingIT impacts.

1. Review of Estimation Methods

The basic framework for making empirical analysisof the economic effects brought about by progress inIT adoption and diffusion has mainly been estimationsbased on Solow growth accounting4 and the functionalforms resulting from this growth accounting model.With the Solow model there is the “Solow residual”,which cannot explain technical progress throughcapital and labor, and there is the premise of fixedyields for capital and labor. The basic line of thoughtis that

Y(t) = F ( K(t), A(t) L(t) )

can be derived from the production function

Here, Y is GDP with added value, K is capital stock,AL is efficient labor (A is the efficiency of knowledgeand L is labor). aK (t) is capital elasticity of theproduction amount at time t. aL (t) is labor elasticity.The usual assumption is that ak (t) + aL (t) = 1. Basedon the above equation, the “Solow residual” isinterpreted as a mixture of all growth factors,excluding the contributions from capital and laboraccumulations. As will be seen later, when there areno considerations of “technical advances that embodycapital” and “labor that accounts for qualitativeimprovements”, all of the contributions resulting fromchanges to the quality of capital and labor will be

Y(t) K(t) L(t)Y(t) K(t) L(t) = ak (t) + aL (t) + R(t)

4 Solow, R.M (1957). There are cases in which the term “growth accounting” is used to define factor analysis that is unrelated tocoefficient estimations. However, in this report the term “growth accounting” is not limited in this manner and so also includesfactor analysis based on coefficient estimations.


included in the Total Factor Productivity as the “SolowResidual”, but will not be reflected in the elasticitycoefficient5. The basic framework for this growthaccounting can be expanded and applied in variousways. The most common method to be tried usesseparation based on considerations of the differencesin the types of capital and labor, and also takes intoconsideration qualitative changes and other suchaspects. Specifically, estimations are conducted afterseparating IT capital from other “physical” capital.

In particular, Pohjola created an expanded modelthat include as new production elements the gaps inproduction levels and incomes between countries thatcould not be explained in the conventional Solow-type model, the Mankiw, Romer, Weil-type6 modelthat attempted to make explanations that includeconsiderations of human capital, and indexes relatedto IT investment. In this manner Pohjola madeestimates using pooling data that includes developingnations.7

The Solow model assumed diminishing returnsfor the production elements. However, Minetaki andKumasaki applied the CES (Constant Elasticity ofSubstitution) production function and measured thescale of economies brought about through M&A andother factors to suggest that the IT revolution resultedin increasing returns in the U.S. economy.8 When suchincreasing returns are gained, knowledge creates moreknowledge and the economy conforms to thecharacteristics of the endogenous growth model.Minetaki and Kumasaki suggested the existence ofan endogenous economic growth mechanism in theU.S. economy by making calculations that indirectlyintroduced the impacts of IT into the endogenouseconomic model.9

2. Sequence for Appearance for IT Effects

As mentioned earlier, various methods have been usedto try and verify the effects of IT adoption anddiffusion in the U.S., which is seen as an advanced ITnation. When the IT adoption and diffusion started inthe first half of the 1990’s, there was no noticeableimprovement in productivity and so it was believedthat the IT revolution had brought about only a minorimpact on the economy. However, estimations madeusing later statistics showed that IT made a majorcontribution to the accelerated production in thesecond half of the 1990’s10.

When the U.S. is used as an example for this typeof empirical examination, the sequence for therealization of IT impacts can be arranged in thefollowing manner (Figure 5). First there is a rise inIT-related demand, which is tied to realizing effectsfrom the accumulation of IT-related capital. However,it has been said that hardware alone will make only asmall contribution to the economy, while the spreadof goods using IT like software and communicationswill help to increase this impact. After a certain periodof time the various conditions needed for applying ITwill be in place. At this stage the TFP for the ITmanufacturing sector and the user sector will increase.After this the IT capital will replace labor and theeffect of capital deepening tied to a rise in laborproductivity will be realized. Once the variousconditions are in place, the true impact of increasingreturns through IT adoption and diffusion can berealized. Then the economy of scale brought aboutby IT adoption and diffusion can be achieved, andthere will be conformity with the endogenous growthmodel in which knowledge creates more knowledge.

5 Oliner and Sichel (2000). This paper made the same point that in the analysis made by this type of model, the contribution togrowth brought about by the use of IT capital (portion of economic growth attributed to the collection of IT capital) is included ineach elasticity, but the portion of the collected IT capital that can not be measured (Ex.: improved efficiency achieved bymanufacturing through the use of IT) is included in TFP.

6 Mankiw.N.G., D.Romer. And D.N. Weil. (1992)7 Pohjola, M. (2000)8 Kumasaka, Minetaki (2001)9 Kumasaka, Minetaki (2001)10 One example is shown in Table 1.


This suggests that a fair amount of time is neededbefore macroeconomic effects brought about by ITadoption and diffusion are realized. This also suggeststhat the overall socioeconomic environment will needto be prepared in order to realize these effects.

3. Verification by the Asian IT Adoption andDiffusion Macro Model

(1) Results of Pohjola EstimationsAs mentioned earlier, the Pohjola estimations havebeen applied to the developing nations that have notreached the stage of increasing returns and for whichthere are many restrictions on the available data. Theresult was that while IT capital has made a certaincontribution to economic growth in the industrializednations, the same trend was not seen in the developingnations11. However, it is important to note that thestatistics used by Pohjola, especially for the Asian

Figure 5 Sequence of Appearance of IT-effects on Economy

region, were for only up to 1995, which was still justthe eve of the true spread of IT. However, theestimations now being conducted are Pohjola-typeestimations, but with up-to-date data being applied.In addition, a broad range of data from Asian countrieshas been used to diversify the IT elements (Table 2)12.The following conclusions were derived based on theresults of these estimations.• According to estimations based on the latest data

on the progress of IT adoption and diffusion,progress in IT adoption and diffusion has a positiveimpact on GDP levels and growth rates even in thesample of only Asian countries. Among the variousIT elements, the spread of personal computers isseen as having the biggest impact on the GDP level,followed by the spread of cellular phone use (seenas coefficients of determination). Telephones,personal computers and followed by cellular phonesare also seen as having the biggest impacts in terms

2. Effects of IT related capital accumulation�• IT capital has larger economic effects than other general capital• However, the effect on the whole economy is small in the early stage (general capital > IT capital in quantity).• In the medium term, it is necessary to examine substitution/complementarity between IT capital and

general capital/labor.

3. Rise of TFP in the IT manufacturing sector

4. Rise of TFP in the IT user sector�• In estimation, all factors but capital and labor

are included in TFP.• Sufficient IT diffusion is a necessary

condition.

6. Economy with increasing return can be realized through IT adoption and diffusion: economy of scale can be pursed.

5. Capital deepening• Labor saving effect by increase of IT capital

(Translog function analysis)• Necessary conditions - improvement in

socio-economic frameworks for utilizing IT, e.g., reforming economic structure, streamlining corporate organizations

Sho

rt te

rmM

ediu

m/L

ong

term

1. Increase in IT demand

11 Pohjola (2000)12 Estimations in this report were made by pooling data from Asian, OECD and APEC countries and then comparing the estimates

based on all samples (can be seen as the industrialized nations) with estimates based on samples just for the developing Asiancountries.


of elasticity. Personal computers and telephones arealso seen as having high elasticity from theperspective of GDP growth rates. Here a directrelationship between these types of devices andeconomic impacts can not always be proven, butPCs make a contribution to the growth ofinformation processing and telephones make acontribution to the growth of networks, whichsuggests the importance of their support.

• Basically, it is significant that estimates usingmostly Asian samples have shown a positivecorrelation between human capital factors and ITfactors. It is understood that these factors providepositive impacts for the GDP level and growth rates.

(2) Substitutability and Complementarity ofElements by the Translog Functions

Next, in order to study the mutual relationshipsbetween production elements, production functionswere estimated using the general function formtranslog method that does not use any restrictions(Table 3). The following is an overview of these results(Table 4).• When looking at the cross terms for the results of

the estimates for all samples (Asia + APEC +OECD), IT and general capital coefficients havenegative substitutional relationships and while IT

and human capital coeff icients have positivecomplementary relationships. Furthermore, thereis a signif icant complementary relationshipbetween IT and general capital stocks, and asignificant substitutional relationship between ITand labor. While it has been seen that IT can leadto a reduction in labor (capital deepening), it canalso be said that human capital is needed for ITactivities.

• In terms of the cross terms in the estimations ofthe Asian samples, the IT and general capitalcoeff icients are seen as having a negativesubstitutional relationship, while IT and humancapital coefficients are seen as having a positivecomplementary relationship. On the other hand, ITand general capital stock have a signif icantsubstitutional relationship, while IT and labor havea significant complementary relationship. Thisfinding runs counter to the results for all samples.

• This can be explained by the fact that in Asia IThas not really led to a reduction in labor and sounder such conditions it is hard for the capitaldeepening mechanism to come into play. On theother hand, since there is complementarity betweenIT and human capital, it can be assumed from theseresults that development of human capital isindispensable for the IT activities.

Table 2 Results of Estimation of Pohjola-type Function

Constant 11.40*** 11.49*** 13.49*** 12.29*** 15.30*** 1.51*** 1.85*** 1.18** 3.26** 1.03*

General Capital 0.43 –0.72 0.06 –0.66 1.32 –0.8 –0.11 –0.10 –0.07 0.06

Human Capital 0.56 0.84** 0.87* 0.84** 2.26*** 0.18* 0.27** 0.08 0.25* 0.20

IT Capital (Tel.) 0.83*** 0.11**

IT Capital (Cell. Phone) 0.58*** 0.07*

IT Capital (Internet Host) 0.35*** 0.05**

IT Capital (PC) 0.80*** 0.19***

In (a+n+d) –1.83 –0.71 –1.82 –1.97 –3.59* –0.51 –0.23 –0.03 –0.37 –0.26

Initial Productivity –0.09* –0.12* –0.08** –0.23** 0.04

AdjR2 0.71 0.85 0.58 0.95 0.44 0.23 0.16 0.19 0.18 0.09

Independent variable In: (Y/L) Independent variable: In (Y (99)/L (99) - In (Y (97)/L(97))

Asian Samples

(1) (2) (3) (4) (Reference 1) (5) (6) (7) (8) (Reference 2)

Notes1. * is 10% level significance, ** is 5% level significance, *** is 1% level significance.2. “General Capital” is ratio of fixed capital formation vs. GDP, “Human Capital” is the ratio of official expenditures for education vs. GNP,

and “IT Capital” is the diffusion rate for each object. As for In(a+n+d), a is the exogenous technical progress rate, n is labor force increase rate, d is capital depletion rate, and here a+d = 0.05 is assumed. The numerical value for 1997 has been adopted as “Initial Productivity”.


• In the results for all samples there was a significantcomplimentary relationship between general stockand IT capital. By comparison, there was asignificant substitutional relationship between thesetwo factors in the results for just the Asian samples.The manner in which general capital stocks and ITcapital stocks are combined and used differsbetween Asian and industrialized nations.

• A significant complimentary relationship was seenbetween capital stocks and labor in both all samples

and in just the Asian samples. An increase in thecapital stock is tied to a simultaneous increase inlabor. Therefore, it can be assumed that in manycases the capital factor will not be so significantfrom the perspective of the impact on per capitaGDP in the Pohjola estimations.

(3) Propriety of Applying the Endogenous Modelto Asia

Various considerations must be made when assessingthe propriety of applying the endogenous model toAsia. These include the fact that there were limitationson data and a large volume of IT-related data has notbeen collected. The expected synergy effects are stillsmall and the environment for IT adoption anddiffusion and IT activities is still not completely inplace. Therefore, considerations have been given tonot making direct estimates of the endogenous growth

Table 3 Results of Estimation by Translog Function

Table 4 Summary of Translog FunctionEstimates

IT/Human IT/Labor IT/General

All Samples Complimentary Substitution Complimentary

Asian Samples Complimentary Complimentary Substitution

Note: Compiled based on Table 3.

Constants –2.29 –1.88 7.24 –1.30

General Capital (primary term) –1.47 8.84

Capital Stock (primary term) 1.80*** 1.57*

Human Capital (primary term) –9.24* –8.74*

Labor Force (primary term) –0.06* –1.01*

IT Capital (primary term) 3.08*** –0.87** 2.88** –1.04

General Capital (secondary term) –1.28 0.77

Capital Stock (secondary term) –0.11*** –0.09

Human Capital (secondary term) –2.09 –2.52

Labor Force (secondary term) –0.03 –0.07

IT Capital (secondary term) 0.06 –0.76** 0.11 –0.11**

(General) (Human) Cross term 1.16 2.76

(Stock) (Labor) Cross term 0.17*** 0.21***

(General) (IT) Cross term –0.54 –1.24*

(Stock) (IT) Cross term 0.21*** –0.22***

(Human) (IT) Cross term 0.84*** 1.01**

(Labor) (IT) Cross term –0.10** 0.20**

AdjR2 0.90 0.95 0.96 0.96

All Samples Asian Samples

(1) (2) (3) (4)

In (Y/L) InY In (Y/L) In Y

Notes: 1. * is 10% level significance, ** is 5% level significance, *** is 1% level significance.2. “General Capital” is the ratio of fixed capital formation vs. GDP, “Capital Stock” is the accumulation of the amount of low investment based on

the numerical value from 1992, “Human Capital” is the ratio of official expenditures for education vs. GNP, “IT Capital” is the PC diffusion rate for In(U/L) as an explained variable, and telephone diffusion rate for InY as an explained variable. The choice of kinds of “IT Capital” is determined by the significance of the estimation. And as for diagonal terms, “(General) (Human)” is the diagonal term for General Capital and Human Capital, “(Stock) (Labor)” is the diagonal term for capital stock and labor force population, “(General) (IT)” is the diagonal term for General Capital and IT Capital, “(Stock) (IT)” is the diagonal term for General Capital and IT Capital, “(Human) (IT)” is the diagonal term for Human Capital and IT Capital, “(Labor) (IT)” is the diagonal term for labor force population and IT Capital.


model, but instead apply the Jones technologypropagation model (Figure 6)13.

This model is based on the Solow model andincorporates the key ideas of the endogenous growthmodel and accounts for the importance of technology.However, this model also realizes that while advancedtechnologies can be accessed by all countries aroundthe world, the degrees to which these technologiescan be applied to production activities will varydepending on the education level of the workers andas such the economic growth for each country willdiffer. The figure shows the relationship between(relative value of unit acquisition for equilibriumefficiency) (U.S. = 100) and university entrance rates.While the industrialized nations are able to make useof progressing technologies, the developing nationslack the capacity to quickly learn the newtechnologies. This means that the developing nationshave not been able to accumulate the technicalexpertise needed for applying IT and so there is thepossibility that future income levels will remain low.Jones gave examples of how economies that are adeptat using new technologies can quickly propagate new

technologies. Such examples include the propagationof cellular phones in China, where a solid network oftelephone lines is not in place, and India and thePhilippines where multinationals have helped to buildpower distribution grids and power generators.However, in the economies that have low basiceducation levels, the range of new technologies thatcan be adopted through training is very limited. Thisanalysis also confirmed that raising the ability to takein new technologies through education is veryimportant for expanding human capital.

(4) Asian IT Adoption and Diffusion Derived fromMacro Estimations

When the results for the various estimations of ITadoption and diffusion in Asia are all compiled, it canbe said that progress of IT adoption and diffusion hashad some positive economic impacts for this region.However, it is also clear that the industrialized nationsare at different stages of IT progress.

Results from estimates using the Pohjola modelwere different from the Pohjola results that used data

Figure 6 Correlation between Predicated Value of Relative Income and University Entrance Rate

13 Jones, C.I. (1998)

Relative Y/L constant predicted value

1.60

1.40

1.20

1.00

0.80

0.60

0.40

0.20

0.000 20 40 60 80 100

University entrance ratio (%)

Switzerland SingaporeBelgium

Germany

SwedenSpain

Saudi HungaryMalaysia


only up until 1995. The 2000 estimations using asample that included Asia showed that the IT adoptionand diffusion factors could clearly explain GDP andgrowth rates. Basically, different results were obtainedeven though a model and statistical data similar toPohjola were used. This is thought to be due to thefact that IT began to spread rapidly after 1995 even inAsia.

Results of the estimates of the substitution andcomplimentary relationships between the variouselements using the Translog functions show that thereare some disparities between the elements whencomparing estimates for all samples (for which theindustrialized nations have a strong influence) withthe estimates for just the Asian samples.

A particularly important point is that there is acomplementary relationship between IT variables andhuman capital variables, and a substitutionalrelationship between IT variables and labor in theoverall sample including the industrialized nations.However, in the sample of only Asian countries thereis the same complementary relationship between ITvariables and human capital variables, yet therelationship between IT variable and labor is alsocomplementary, not a substitutional relationship. Thisis opposite to the result seen for all samples. It canthen be interpreted that the accumulation of humancapital is needed for the IT adoption and diffusion inboth the industrialized nations and Asian nations, andso the education of those using the IT is important.The sample including the industrialized nationsshowed that progress in IT adoption and diffusionresulted in reduced labor, but in the Asian sample ITadoption and diffusion was not tied to a reduction inlabor. According to Minetaki capital deepening meansthat labor is substituted by IT capital14. From thisperspective it is believed that the industrialized nationshave been able to harness the capital deepeningbrought about by the progress in IT adoption anddiffusion to raise the level of labor productivity, butin the Asian countries, progress in IT adoption anddiffusion has not been tied to a reduction in labor andso these countries have not yet reached the stage wherethe capital deepening mechanism comes into play to

raise the level of labor productivity. Analysis basedon the technology propagation model show that therelative incomes for the developing nations wouldremain low unless the technology gap between theadvanced and the developing nations can be narrowed.However, there are expectations that over the mid tolong term the same mechanisms at work in theindustrialized nations will also come into play for thedeveloping nations provided that the people using ITare properly educated, human capital is accumulatedand there continues to be progress in the diffusion ofIT.

Chapter 4Results of the Corporate Interviews

In order to gain a better understanding of the microinformation that can not be obtained through thequantitative macro analysis, in other words the impactIT adoption and diffusion has had on corporateactivities, the authors of this report conductedinterviews with IT-related hardware and softwarefirms, IT users, IT-related industrial groups andgovernment agencies in four advanced and fourdeveloping nations.

1. Results of Survey of Industrialized Nations

The following is an overview of the four industrializednations selected for this survey.(1)U.S.: Has played a leading role in the IT adoption

and diffusion around the world.(2) Ireland: Promoted the introduction of foreign

capital into its IT field in the 1990s and hasachieved economic growth and a dramatic drop inunemployment.

(3)Sweden and Finland: Have giant mobilecommunications companies, active IT industriesand IT has taken firm root in everyday life.

The following will provide a simple explanationof the situations in each country.

The U.S. IT industry entered a period ofstagnation from the latter half of 2000. With the

14 Minetaki, K. (2001)


current IT slump, falling stock prices have resultedin poor financial situations and even bankruptcies forsome Internet and communications companies. Thisin turn has hurt the finances of the manufacturers ofsystem equipment that sell their products to thesecompanies. Furthermore, the slowdown in the overallU.S. economy has resulted in weaker computer-relateddemand. On the other hand, corporate IT investmenthas fallen in terms of the amounts spent, but the actualamounts of equipment purchased has not fallen thatmuch, as the prices for such equipment are lower.Many people in the interviews said that despite thecurrent slump, they expect IT demand to remain strongover the long-term as corporations try to maintain theircompetitiveness15.

In the early 1990s Ireland began to pull itself outof a deep economic slump by developing a policy toaggressively attract foreign IT corporations throughvarious tax incentives, the high level of education heldby its working force and the fact that English is theofficial language. As a result, the country saw a highannual rate of economic growth of 9% in the latterhalf of the 1990s. There has been an increase in thenumber of domestic software makers, but Ireland’sIT industry is still primarily led by foreigncorporations.

At the core of the IT industries in Sweden andFinland are two domestic communications giants,namely Ericsson and Nokia, respectively. Thesecountries are both social welfare states, which meansthat the education needed for raising the level of ITliteracy (basic education, technical education,English) is well in place.

Markets for procuring capital (venture capital andcapital markets) are established and these countriestraditionally invest aggressively in R&D. This meansthat various elements are already in place for ITadoption and diffusion. Other shared characteristicsare the fact that both countries have small populations,but large land areas and so a communicationsinfrastructure linking the dispersed houses was already

in place, there are many local companies activeinternationally, and there is high domestic IT demand.The difference between these two countries is thecontributions made by there respective governments.In Finland the telephone industry has been privatizedfor more than 100 years. Furthermore, the localcompanies had been exposed to internationalcompetitiveness due to the government’s marketliberalization policies of the 1980s and thus developedunique market competitiveness. The government hasbeen providing support for improved competition ofprivate companies through R&D investments. Theorigin of Sweden’s IT industry, on the other hand, wasdemand from the Swiss Army and the government’sprodding of Ericsson to enter the cellular phonemarket. The government covers 32% of R&Dinvestments, which is much larger than the 11.2%covered by the Finnish government.

The results of the interview surveys of the fourcountries, as stated earlier, showed that although verydifferent economic promotion policies were selectedby Ireland, Sweden and Finland (led by foreign ITcorporations in Ireland and local IT corporations inSweden and Finland), all of the countries enjoyed highlevels of economic growth in the latter half of the1990s. The following section will summarize someof the reference points for IT adoption and diffusionin developing nations, focusing mainly on these threecountries (Table 5).

(1) Elements for Developing an IT IndustryThe basic elements for developing an IT industry arehigh levels of basic education, high degrees of skillin using the English language, infrastructuredevelopment, access to overseas sales markets andopen markets.

All three of these countries have high levels ofbasic education, are skilled in using English, have theneeded infrastructure in place, have access to salesmarkets and their markets are very open. Here thedomestic markets are rather small and sales of IT

15 The main goals and impacts for corporate IT adoption and diffusion are large improvements in customer service, improved laborproductivity, modernization of business processes and cost reductions. However, these goals and impacts vary greatly between thedifferent industries and types of IT being introduced. The indexes used by corporations to measure the impacts of IT are ROI,improved speed in providing products and services and customer satisfaction.


products are dependent on other countries. That is whythe English language and policies towards openmarkets are seen as being so essential. However, somedisparities can be seen in such areas as abilities todevelop technologies, level of technology educationand the existence of domestic IT demand industries.Sweden and Finland have successfully developeddomestic IT industries and this success has attractedforeign IT industries to make these countries majorglobal players in terms of IT technologies. However,Ireland does not have such major domesticcorporations and selected a development course thatrelies heavily on foreign corporations.

(2) Ties between Hardware and Software forBalanced Development

Looking at the two main sectors for the IT industry,namely hardware and software, balanced developmentis being achieved for both the hardware and softwareindustries. In the case of hardware production, thereis the need for domestic supporting industries andimports for the supply of parts and intermediate goods.However, in the case of Sweden and Finland the mainhardware companies (Ericsson and Nokia) developand use domestic subcontractors. The role of thesesubcontractors is not limited to just supporting thesetwo companies, but rather they appear to bedeveloping into global parts production companies.In the case of Ireland, hardware production is mainly

Table 5 Characteristics of IT adoption and diffusion in Industrialized Nations and Lessons forDeveloping Nations

Characteristics and Lessons

U.S.

Ireland

Sweden

Finland

• Even though there has been a slowdown due to poor economic conditions, the main opinion is that corporations will continue

adopting IT to improve their competitiveness.

Economy led by an IT

industry built by foreign

companies.

Government policies encouraging

foreign investment (tax system,

others).

Issues of developing human

resources and domestic

companies.

Increased dependence on

exports makes countries

more susceptible to changes

in foreign demand.Economy led by major

domestic IT corporations.

Aggressive development policies

from the government (defense,

telecommunications industry).

• Communications

environment already in

place

• High level of IT literacy

among students, citizensThe government itself prepares the

trading environment (deregulation,

opening markets)

Lessons forDevelopingNations

• Bolster education, develop basic infrastructures, prepare trading environments (deregulation, open markets), encourage the set-

ups of new businesses, link hardware and software (balance)

by foreign firms and much of the demand for parts iscovered by imports.

Foreign industries have also been developingback-office and other IT-enabled services that makeuse of Ireland’s skill with the English language andhigh level of education.

(3) Bolstering Technical Capabilities through R&DInvestment

In order to continuously develop an IT industry, thegovernment needs to do more than simply provideshort-term support for corporate R&D investments,but must also provide support for moving toward moreadvanced fields. The flourishing IT industries inSweden and Finland are not simply the results ofgovernment policies, but the product of more than100 years of infrastructure development, solideducations provided by these welfare states and theopen economic policies of these small countries.

(4) Promoting the Application of IT TechnologiesBolstering the basic education for IT is the keyelement behind why these countries have becomeglobal top-class users of IT. In particular, access toPCs and the Internet in the early stages raise the abilityto adapt to new technologies. Furthermore, each ofthese countries offers ample opportunities for lifelongeducation, through which education to raise the levelof IT literacy is also available. This trend is particularly


evident in Sweden and Finland. This has helped toincrease the rates of PC ownership and Internet usagein these countries. These two countries are also leadersin terms of PC and Internet usage spreading beyondthe business level. This is due to not only the above-mentioned lifelong education helping to raise ITliteracy among average citizens, but also due to anabundant amount of entertainment contents andInternet services like online banking. This is seen asone possible reason why the U.S. has lagged behindthese two northern European countries in terms ofInternet access and PC ownership rates.

2. Results of Survey of Developing Nations

The following is an overview of the four developingnations selected for this survey.(1) India: Has become a major software exporter.(2)Bangladesh: Planning economic development

through the application of IT.(3)Malaysia: Conducting industrial structural changes

with the aim of promoting IT industries.(4)China: has become a prominent hardware

production base and is also becoming more activein the software fields.

Table 6 provides a quick overview of thesituations and issues facing theses countries derivedfrom the interview surveys.

Comparisons made through various pairings ofthese countries helped to clarify some of their uniquecharacteristics.

(1) India and ChinaComparisons were made of the IT-related industriesin China and India, two very large countries. Chinahas overall predominance in hardware fields such aspersonal computers and semiconductors, but itsdomestic software market lacks internationalcompetitiveness. The following are some of thedifferences in the software industries of China andIndia.• Software industry customers: The Chinese software

industry is mainly for the domestic market, while

the Indian software industry is mainly gearedtowards exports.

• Language: in India English is taught from theprimary school level and the nation has muchstronger English skills than China.

• International quality recognition: Chinese softwaremakers have not really established a softwaredevelopment process, but India has numerouscorporations that have achieved SEI-CMM Level 5certification16, which demonstrates how they havesuccessfully established a software developmentprocess.

• Positioning of IT education: In India IT educationis thriving as a business (establishment of trainingorganizations) and has made big contributions topersonnel development. In China software-relatededucation is not seen as a business.

(2) China and U.S.The authors of this report interviewed a Chinesemanager working for an IT software maker in China,but who was previously a technician in Silicon Valley.He pointed out the following three differences betweenthe software fields in the U.S. and China.• Legal protection: The IT market in the U.S. is not

only large, but it is all legally protected.• Venture capital: There is plenty of venture capital

in the U.S. In China, however, venture capital is hardto find. Furthermore, inflows of foreign capitalremain small due to credibility concerns and manyIT firms have insufficient capital.

Domestic IT demand: America’s high level ofeconomic development has resulted in large domesticdemand for IT products and services.

This disparity exists not only between the U.S.and China, but is believed to be a general disparitybetween most advanced and developing nations.

(3) India and BangladeshThe following are some of the disparities betweenIndia and Bangladesh, two countries located inSouthern Asia.

16 Software Engineering Institute - Capability Maturing Model. International quality recognition for computer software.Refer to <http://www.sei.cmu.edu/cmm/cmm.html> more in detail.


Current situation and characteristics of IT industry

• Export-oriented software industry (mainly toward the U.S.)

• High dependency on exports by top software manufacturers.• Shift from overbalanced onsite contracts to contracts with appropriately

integrated onsite and offshore development.

• Shift of industrial structure from hardware-led economy to software-ledeconomy.

• Domestic demand for IT industry driven by the government.

• Building of communication infrastructure through the creation of STPI(Software Technology Park of India)

• Low presence of hardware industry.

• Existence of many IT human resources with high English andmathematical ability.

• Existence of many IT human resources development institutions.

• Linkage with NRI (Non-Resident Indian).

• Delay of the building of communication infrastructure.

• Increase in users of cellular phone faster than that of fixed phone users.• Lack of global optical fiber connection

• Expensive communication costs and slow communication speed.

• Oligopoly of communication sector by BTTB (Bangladesh Telegraphand Telephone Board).

• Operation of cellular phone business by Grameen Telecom targeting

women in farm villages.• Promotion by Grameen Phone of the use of cellular phones in farm

village.

• Creation of MSC (Multimedia Super Corridor).

• Building of information and communication infrastructure and the grant

of favorable treatment through MSC. Promotion of IT related industriesthrough legislation.

• Promotion of MSC plan by MDC (Multimedia Development

Corporation)• Development of IT human resources by newly established Multimedia

University.

• Provision of IT development environment through the promotion of 7flagships of MSC.

• Provision of venture capital through the establishment of a venture

capital management corporation.• IT industry structure with an inclination for hardware exports.

• Relatively developed information and communication infrastructure.

• One of the largest IT related hardware production centers.

• Insufficient domestic productivity in the area of semiconductors.

• IT industry structure with too great an emphasis on hardware.• Strong implementation of a policy to promote the software and

semiconductor industries.

• Development of a semiconductor industry with the highestconcentration of top-level management resources in the world.

• Concentration of the software industry at Zhongguancun in Beijing.

• Demand for a domestic software industry• The world’s largest cellular phone market.

Table 6 Current Status and Issues for the IT Industries in the Surveyed Countries(items indicated from the surveys)

India

The challenges of the IT Industry

• To enter into high-value-added software

business.• To diversify clients and countries for software

export.

• To expand domestic market.• To reinforce the linkage between hardware and

software.

• To develop information and communicationinfrastructure.

• To compete with China’s emerging software

industry.

• To develop information and communication

infrastructure.• To develop IT human resources.

• To establish IT human resources development

institutions.• To create venture capital.

• To exert political initiative by the government.

• To expand domestic market.

• To develop and reinforce IT human resources.

• To expand domestic market and to exploit

foreign markets.• To stimulate domestic software related needs.

• To improve customer recognition of the

products of domestic companies.• To improve the recognition of the effect of IT

adoption.

• To transfer high-end technologies from foreign

companies.

• To develop human resources and to train in thearea of semiconductors.

• To speed up the governmental procedures.

• To standardize software development process.• To create venture capital.

• To prevent the outflow of excellent human

resource for high salaries.• To prevent the piracy of software

• To improve the legal aspects.

• To improve the recognition of the effect of ITadoption and awareness education on IT

adoption and diffusion.

Bangladesh

Malaysia

China


• Development status of infrastructure: Bangladeshhas plans to build a high-tech park and it has startedto build an information communicationsinfrastructure. However, the country lags wellbehind India in terms of the number of f ixedtelephone lines and data transmission speeds.

• IT-related personnel: In 2001-02 India produced66,494 graduates who had studied computer scienceand information technology. By comparison,Bangladesh had produced only 1,257 suchgraduates, which is less than 2% of the levelachieved by India.

• International quality recognition: There are only 58companies in the world that have been awarded theLevel 5 SEI-CMM quality recognition and 36 areIndian companies (as of December 2001). Thisshows how the quality of the products produced byIndian software companies is recognized around theworld. However, none of the Bangladesh companieshave received such recognition.

• Marketing activities towards the internationalsociety: In India the public and private sectors haveconducted aggressive market activities to promotethe country within the international society.However, Bangladesh has not conducted suchactivities and international awareness remains low.

3. Implications for other Developing Nations

The following offers an overview of some of thegeneral implications for developing nations based onthe results of the interviews with companies in thedeveloping nations mentioned earlier.

(1) Ripple effect from establishment of high-techparks: The establishment of high-tech parks is aneffective short-term method for establishing aninformation communications infrastructure thatrequires an enormous initial investment. A high-techpark, which is essentially a localized informationcommunications infrastructure, helps to lower initialinvestment costs. In addition, the parks also attractparticipation by foreign firms, which in turn isexpected to raise the level of technical skilldomestically and create a knowledge cluster.According to the interviews, this effect is already

being widely recognized. A government-led creationof high-tech parks is an important initial step inpromoting IT adoption and diffusion. However, thegovernment policies need to consider having IT parkseventually established and operated by the privatesector, once a certain level of IT adoption and diffusionhas been achieved. After seeing the successfulestablishment of IT parks by the government, theprivate sector will start to construct IT parks on theirown. The important point will be to create thisfavorable cycle where the IT parks promote the ITadoption and diffusion, which promotes the creationof more IT parks, and so on.

(2) Development of IT-related personnel: Themain key that will determine the success or failure ofan IT business will be whether or not the businesshas skilled IT technicians. The development andstrengthening of IT-related technicians is especiallyvital for the software industry. According to theinterviews, the reasons behind the strong internationalcompetitiveness of the Indian software companies arethe facts that the Indian people are skilled in Englishand mathematics, and the fact that the countryproduces large numbers of IT professionals each year.Specific policies for developing personnel is to in theshort-term provide practical IT training for universitygraduates that majored in science, but over the middleand long-term IT training at all education levels isdesirable. However, the proper development of IT-related personnel requires time and a large initialinvestment. Some of the participants in the interviewssaid that a temporary measure has been to allow forthe hiring of foreign engineers and then start upbusinesses after attracting some of the top talent inthe world.

(3) Bolster venture capital: In order to launch IT-related businesses there must be an environment wherethose with new technologies can start businesses andeasily enter markets. In order to create just such anenvironment, a large amount of venture capital isessential. Software companies do not require as muchinitial capital as hardware companies, however, theycannot grow unless the have the necessary capitalduring the software development stage. It is very


diff icult to raise venture capital in developingcountries . However, recently some publicorganizations in the industrialized nations have startedraising venture capital for developing nations. Forexample, in Malaysia a venture capital managementpublic corporation has been established with supportfrom the Japan Bank for International Cooperation.

This is helping to provide the funds needed byIT-related businesses, mainly software companies, forprojects to develop and introduce systems using IT.

(4) Creating domestic demand through promotionof e-government: Many developing nations still havevery weak domestic IT demand due to the delays inbuilding information communication infrastructure,the high cost of hardware and poor awareness of thebenefits associated with introducing IT. During theinterviews it was frequently indicated that instead ofpolicies promoting the introduction of IT by theprivate sector and society, the more effective approachwould be to have the government take the initiativeby promoting e-government. The promotion of e-government in developing nations helps to bring aboutgreater fairness, transparency and efficiency forgovernment procedures and transactions. It alsocontributes to the establishment of market conditionsthat are required.

(5) Lower communication costs throughderegulation: It has been frequently stated that themain reasons for the low diffusion rates forinformation communications in developing nationsare delays in building communications infrastructureand high communication costs. The communicationssector in many developing nations is monopolized bypublic corporations under the jurisdiction of thegovernment. As a result, the principles of competition

do not come into play, which results in a high coststructure. Privatizing state-owned communicationspublic corporations and enacting deregulation toencourage inflows of foreign capital into the domesticcommunications market would likely promote greatercompetition in the market and provide users with highquality, low-cost services. This would likely improvethe accessibility to the communications infrastructureand promote greater application of IT.

(6) Acquire foreign capital and technologiesthrough policies to attract foreign funds: In order tocompensate for the lack of technologies and capitaldomestically, many developing countries have beenadopting policies aimed at attracting companies fromthe industrialized nations. Such policies are essentialfor the IT sector in order to attract foreign ITcompanies with the aim of raising the level ofdomestic technologies and acquiring capital.

(7) Necessity of preparing basic infrastructure:The effects brought about by IT adoption and diffusionmust be realized to the greatest extent possible, notonly for the development of IT industries, but so thatIT can be widely used both socially and economically,and so that the activities of existing industries can beexpanded. To make this possible, it is essential thatbasic infrastructure such as roads, electricity,hydropower and ports are all in place beforeestablishing IT high-tech parks. In many cases thedeveloping countries have had delays in building thisneeded infrastructure due to insufficient finances andthus support from industrialized nations is veryimportant. Ireland is one example of how support fromforeign countries was used to build up the basicinfrastructure and then tie this into the developmentof IT17.

17 The EU Structural Fund is a system for providing subsidies to countries within the EU region that have had comparatively slowerdevelopment. Ireland was the largest recipient of subsidies provided by this fund. Funds provided to Ireland in the 1994-1999program were allotted in the following manner: 35% infrastructure, 30% development of human resources, 25% private sector,10% revenue support. Based on Ireland’s Financial Reconstruction Plan launched in 1987 public spending was drastically cut.Public investments between 1987 and 1989 were also cut by more than 10%. During this time funds provided from the EU wereincreased. Not only did this help Ireland to prepare infrastructure while improving its finances, it also greatly contributed toattracting foreign direct investment.


Chapter 5GTAP Model-based Analysis of

Economic Effects of IT Adoptionand Diffusion

The economic effects of IT adoption and diffusionwas analyzed in Chapter 3 using the macroeconomicindex of per capita GDP and it was analyzed inChapter 4 through a micro approach that studied theactivities of individual corporations. This chapter willlook at results from simulations using the GTAP(Global Trade Analysis Project), a CGE (computablegeneral equilibrium) model used to understandstructural changes on the industry level positionedbetween the micro and macro levels.

1. GTAP Model Characteristics andConsiderations

The GTAP model used in this report is widely usedby research institutions and public organizationsaround the world18. Before studying the results of thesimulation, it is important to first understand thecharacteristic of the GTAP and clarify merits andpoints to consider.

The CGE model is an economic model based onthe microeconomic general equilibrium theory. Themodel is a system of simultaneous equations withnumerous variables and is written as a model equationtargeting the behavior of all economic units. The aimof the model is to understand behavior when thesystem has equilibrium, no equilibrium, stability andshocks19. Three characteristics can be cited as follows.Firstly, the considerations are given to the economicrationality of family budgets, corporations and othersto ensure that the economic theories are in place forthe model and the results of the analysis. Then this is

applied to the analysis of changes to family budgets,corporate behavior and others when there are changesto economic policies or the external environment.Secondly, the relationship between prices and goods(consumption and production amounts) are clearlydefined, thus the effects of policy changes throughprice changes can easily be analyzed. Thirdly, themutually dependent relationships in the economy hasbeen considered and, as a result, markets andindustries can be subdivided in the analysis, andanalysis of the effects on the macroeconomy and onspecified industries can be simultaneously performed.

The GTAP model used in this report is amultinational CGE model that consists of variouscountries and regions. The biggest merit of this modelis that it offers comprehensive coverage of data forthe entire world, which allows for analysis of globaltrade and capital flows. Furthermore, the collecteddata is based on industrial classifications common foreach country. This means that analysis for eachindustry can be conducted along with the overallmacro-analysis.

However, one point to consider when using theGTAP model analysis is that the time concepts arenot clear. The simulation is based on “when there is achange to the initial equilibrium state, what types ofchanges occurred as compared to the initialequilibrium up until the point where this equilibriumcould again be restored”. The “change” here isexpressed as a percentage. There is no concreteindication of just how much time processes took inreaching the resulting new state of equilibrium. Thispoint needs to be fully incorporated when interpretingthe results of an analysis using the CGE model20.Another point to consider is that the GTAP model, ageneral equilibrium model, was developed originallyfor use in static analysis. It cannot be used to analyze

18 The GTAP model, developed in 1992 by Purdue University professor Thomas W. Hertel, is a general equilibrium model thattargets all regions of the world. The model was developed to measure the impacts on international trade resulting from the loweringand abolition of tariffs. The model has also been used to analyze the effects of the Uruguay Round and APEC. Data for the GTAPmodel has been continuously updated since 1992 and Purdue University is working to prepare a database for the GTAP model.

19 The CGE model and macroeconomic model are similar in the way they both handle the trading cycle within the economy.However, the CGE model is different in that it has a premise for economic behavior based on the economic rationality (maximizingeffectiveness and profits) of economic units such as consumers and producers.

20 For example, it is assumed that there will be some actual problems in the world such as frictional unemployment up until the timethat a new equilibrium resulting from the structural change is established. However, the CGE model does not account for suchpoints.


the dynamic process in which increased income bringsabout increased savings, from which new capital isinvested, resulting in increased income (used in theanalysis of the effects on the reallocation of resources).Methods by which dynamic changes in capital stockcan be incorporated into the GTAP model are nowbeing developed. This report conducted a simulationusing methods that incorporated the capitalaccumulation effect in order to analyze the impactson investment resulting from improved economicefficiency due to IT adoption and diffusion, and theeffect this increased investment has on capitalaccumulation21.

However, the GTAP model currently has notinternalized savings rates. Therefore, there will verylikely be an overestimate for “savings amount = capitalincrease amount” and that the results of the simulationwill be higher than the actual situation.

Generally speaking, simulations by the GTAPmodel are not intended for projecting future valuesfor economic variables when external shocks bringabout structural changes. Instead, the aim of thesesimulations is to compare the relative sizes of changesto economic variables between sectors22. The strengthsand weaknesses of this model will need to be kept inmind when evaluating results obtained fromsimulations based on this model23.

21 The active private sector capital investment in the U.S. in the 1990s was financed by capital inflows from foreign countries. Evenfor developing nations, analysis that takes into consideration capital inflows to countries with active IT adoption and diffusion andcapital accumulation in addition to the capital inflows can be very effective.

22 All of the estimates are made through simulations covering multiple nations. An external impact on one region can impact thevariables for all regions through changes to trade and investment. However, please note that due to space considerations this reportcovers only variables for regions that gave impacts.

23 These simulations used the GTAP Version 5.0 released in July 2001. The original data set for the GTAP Version 5.0 consists of 65regional classifications and 57 industrial classifications. However, this report uses 10 regional and 12 industrial classifications tobetter clarify the target countries and IT-related industries.

Table 7 Classification of Industries in the GTAP Simulation

Classification Industries Included

1 Agriculture Rice, wheat, other grains, non-grains, wool, other livestock products industries, forestry, fishing andthe like

2 Mining Coal, crude oil, natural gas, other minerals

3 Construction Construction

4 Manufacturing, Durable goods Steel, nonferrous metals, metal products, transport equipment and parts, other manufactured industrialgoods

5 Electronic Equipment and Machinery Machinery and equipment, electrical equipment and products

6 Manufacturing, Nondurable goods Textiles, apparel, petroleum/coal products, chemical/synthetic rubber, plastic products, ceramics/cement & glass, leather products, wood products, pulp/paper products, printing

7 Transport and Public Utilities Electricity, gas, water supply, air transport, marine transport, other transport businesses

8 Communication Communication

9 Wholesale and Retail trade Wholesale trade, retail trade

10 Finance and Insurance Financial services, insurance

11 Services Recreation service, public services, housing and lease

12 Business Services Software industry, back office, customer instruction, and the like


2. Analysis of IT Adoption and Diffusion inthe U.S.

First we studied the impacts of IT adoption anddiffusion on the economy in America, which is seenas an advanced IT nation and for which a great dealof detailed information is available. This was done toverify to what degree the GTAP model can reproducethe actual structural changes in the world, whilekeeping in mind the fact the GTAP model does nothave a time series concept, as well as the possibilitythat the calculated results will be bigger than the actualsituation due to the introduction of the capitalaccumulation effect mentioned earlier.

This study conducted a simulation in which theimpact of IT adoption and diffusion was limited tothe improvement in labor productivity brought aboutby the rise in TFP. As mentioned earlier there arevarious routes for the actual impacts from the growthin IT adoption and diffusion such as growth in IT-related capital, rise in human capital and the laborsubstitution effect caused by IT capital. However, theGTAP model is comparatively static and there arevarious limitations such as the fact that the increasein production elements for each industry cannot beexternally assigned. Thus contributions from increasesin production elements must be abstracted whenconducting the analysis. Of course elements other thanIT adoption and diffusion contribute to the actual risein TFP. However, in this case the entire rise is attributedto IT adoption and diffusion.

Specifically, the CEA (Council of Economic

Advisory: a panel of economic advisors for the U.S.president) analysis shown previously in Table 1 wasadopted to determine how much IT adoption anddiffusion contributed to the rise in TFP. Here, capitaldeepening and computer production included in therise in macro labor productivity and not contributingto the rise in TFP are assumed to be contributions bythe successfully improved efficiency due to progressin IT adoption and diffusion. It is also assumed thatthe degree of contribution made by IT adoption anddiffusion for improved labor productivity is the samefor each industry. The degree of contribution madeby IT adoption and diffusion in improving TFP, asdetermined by the above macro analysis, is thenmultiplied by the actual rise in labor productivity foreach industry (nonagricultural sectors) to determinethe impact of IT adoption and diffusion for eachindustry. However, for the electronic equipmentproduction sector, the contribution from the rise inTFP for the computer production sector is added(Table 9).

The results of the simulation show big positiveresults in each area such as price, production andimports (Table 10, line 1). This is especially true forthe machinery and electronic equipment sectors,which saw large growth in their production rates.Other IT-related industries saw lower prices andincreased production due to IT adoption and diffusion.However, these effects were not limited to just therelevant industries, but spread to impact otherindustries as well. In this manner, positive impactswere passed on to the entire economy.

Table 8 Classification of Regions in the GTAP Simulation

Classification Included Regions

1 Oceania Australia, New Zealand

2 Japan Japan

3 India India

4 South Asia Bangladesh, Sri Lanka, Other Southern Asia countries (Pakistan, Nepal, Maldives, Bhutan)

5 ASEAN Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam

6 Other Asia Hong Kong, Korea, Taiwan

7 China China

8 U.S.A. U.S.A.

9 Europe Countries in the EU, Switzerland, other old EFTA nations

10 Other Regions Canada, Latin American countries, Central European nations, former Soviet Union, Nations in MiddleEast and North Africa, Nations in Sahara Africa, others


1 Agriculture – –

2 Mining 1.85 0.66

3 Construction -0.32 -0.11

4 Manufacturing, Durable Goods 1.07 0.38

5 Electronic Equipment and Machinery 12.43 8.70

6 Manufacturing, Nondurable Goods 1.57 0.56

7 Transport and Public Utilities 1.31 0.47

8 Communication 3.79 1.35

9 Wholesale and Retail Trade 3.15 1.12

10 Finance and Insurance 3.73 1.32

11 Services -0.51 -0.18

12 Business Services 0.43 0.15

Table 9 External Conditions for the U.S. Simulation (average values for 1989~2000)

Portion of Labor ProductivityGrowth Rate Attributed to TFP

Classification Rate of Growth in LaborProductivity

Agriculture 0.01 0.16 0.13 0.05 0.21 0.00

Mining 0.21 0.30 0.29 0.06 0.37 0.66

Construction 1.24 0.64 0.28 0.40 0.56 –0.11

Manufacturing, Durable Goods 0.51 0.89 0.61 0.29 0.77 0.38

Electronic Equipment and Machinery 5.58 2.21 2.43 3.23 3.15 8.70

Manufacturing, Nondurable Goods 0.52 0.42 0.24 0.16 0.27 0.56

Transport and Public Utilities 0.62 0.64 0.42 0.40 0.61 0.47

Communication 1.22 0.90 0.83 0.60 0.82 1.35

Wholesale and Retail Trade 1.27 0.71 0.42 0.66 0.73 1.12

Finance and Insurance 1.21 0.83 0.61 0.71 0.81 1.32

Services 0.61 0.56 0.31 0.35 0.58 –0.18

Business Services 0.99 0.72 0.43 0.14 0.55 0.15

Price 0.24 0.00 –0.00 –0.05 0.09

Actual GDP 1.13 0.55 0.32 0.56 0.70

Imports 1.07 0.22 0.16 1.11 0.53

Exports 1.30 0.54 0.28 1.34 1.01

Table 10 Summary Table of Scenario 1

Disparate range from initial equilibrium variable (%)

Productionamounts by

industry

Macroindicators

Rate of Increase inLabor Productivity for

each Industry alongwith IT adoption anddiffusion in the U.S.

(external impact valuefor scenario 1)

Resultsfrom U.S

Simulation

Results of Scenario 1

India South Asia ASEAN China


Agriculture 0.00 – – – –

Mining 0.66 – – – –

Construction -0.11 – – – –

Manufacturing, Durable Goods 0.38 – – – –

Electronic Equipment and Machinery 8.70 – – 8.70 8.70

Manufacturing, Nondurable Goods 0.56 – – – –

Transport and Public Utilities 0.47 – – – –

Communication 1.35 – – – –

Wholesale and Retail Trade 1.12 – – – –

Finance and Insurance 1.32 – – – –

Services -0.18 – – – –

Business Services 0.15 0.31 0.15 – 0.15

Price 0.00 0.00 -0.02 0.09

GDP 0.00 0.00 0.43 0.54

Imports 0.01 0.00 1.03 0.46

Exports 0.01 0.00 1.20 0.76

Table 11 Summary Table of Scenario 2

Methods fordelivering the

impact for eachindustry inscenario 2(impact ofincrease in

laborproductivity foreach industryalong with ITadoption and

diffusion)

Results ofsimulation forthe scenario 2

(macroindicators)

Rate of Increase in LaborProductivity for each Industry alongwith IT adoption and diffusion in theU.S. (same with external impact value

for scenario 1)

India South Asia ASEAN China

When the results of this simulation are comparedto the actual results, the sections that do not accountfor the actual rise in capital and labor for GDP andother macro values tend to be lower than the actualresults. However, it can be said that the direction interms of the lively activities in IT-related industriescan be ascertained when looking at the trends for eachindustry.

3. Analysis of IT Adoption and Diffusion inDeveloping Countries

This section will look at what form of economicimpacts are generated when there is external technicalprogress in developing nations by IT adoption anddiffusion. Here a simulation was conducted to measurethe differences before and after the impact of higherlabor productivity generated externally for eachindustry in just the relevant regions. The four regionscovered by the simulation were India, the South Asianregion including Bangladesh, ASEAN, includingMalaysia and China. (For example, in the analysis forIndia there is the impact of the rise in laborproductivity just for India, and it is assumed that thischange does not occur in regions other than India.)

Furthermore, the following two methods are setas the ways in which the impacts of labor productivityfor each industry are presented.

Scenario 1: The case in which the impact fromthe rise in labor productivity for all industries in therelevant regions is considered to be the same as withthe above-mentioned U.S. simulation. For example,when analyzing India it is assumed that IT adoptionand diffusion for each Indian industry is the same asin the U.S.

Scenario 2: The case in which the impact for therise in labor productivity is applied only to aparticularly strong industry in the relevant region(selected based on field surveys and data analysis).

For example, for India the considerations are thatIT adoption and diffusion is seen only in the software-related industries (the “business service” classificationin this survey). Here, the following is applied basedon the assumption that the rate of production growthis the same as in the U.S. Characteristic of IT is thefact that profits for latecomers are big, and thatcountries late in introducing IT can still make activeuse of IT with the most up-to-date technologies, whichcan result in a high rate of technological progress(leapfrogging effect).


There is still a big gap between the level ofproductivity in the U.S. and in the developing nations.However, the developing countries targeted by thissurvey are for the most part experiencing continuedeconomic growth due to the progress in IT adoptionand diffusion, and it is not out of the question toestablish a scenario in which the rate of growth inproductivity is the same as with the U.S.

Therefore, scenario 1 uses the U.S. example andthe same external conditions are applied to allindustries (except agriculture) and not limited to justIT-related manufacturing sectors. In other words, thedifferences in the responses for each country whenthe same external impacts are applied to just onecountry were checked. Scenario 2 takes a morerealistic viewpoint in which the same production riseimpact for the corresponding industry in the U.S. isin principle applied only to the particularly strongfields in each country.

When evaluating the results of the simulation,special consideration will need to be given to the factthat actual impacts from labor and capital increasesare not accounted for, the model does not sufficientlyreflect actual institutional and operational problems,and that there is the possibility of no movement ofgoods and production elements between industries andcountries (Table 10 and 11).

In the case of India, when progress in IT adoptionand diffusion results in the same rate of productivitygrowth as the U.S. (scenario 1), India can be expectedto have roughly half the GDP growth rate of the U.S.,while controlling price rises. However, almost nomacroeconomic effects can be expected when the rateof growth for just the “service business” sector(including the software industry) is twice the level asfor the U.S. (scenario 2). The conclusion then is thatthe rise in the capability to develop softwaretechnologies has stalled and there are limits to whateffects it can have for the Indian economy.

Even though the degrees of change in the SouthAsian region are small, the same trends as with Indiawere seen for both scenarios24. The conclusion thenis that the IT adoption and diffusion will not be able

to contribute to sustainable economic growth withsoftware alone, but rather the accumulation of ITcapital will also be necessary.

For the ASEAN countries the differences in theresults for scenarios 1 and 2 (rate of productionincrease just for machinery and electrical equipmenton par with the U.S.) are comparatively small.Therefore, the conclusion here is that there is alreadyan industrial structure making full use of thecomparative advantageous and hopefully developmentwill continue in this direction. However, there is thetrend that as the machinery and electrical equipmentindustries in the ASEAN nations continue to grow,they tend to import more. Therefore, in order for thisregion to continue growing it will be important todevelop the domestic production of capital goods andparts.

According to the results of the calculations forChina, there is the strong possibility of growth(without higher prices) and larger trade surpluses dueto the promotion of IT adoption and diffusion.However, there is also the possibility of the promotionof IT adoption and diffusion resulting in a bottleneckwhereby prices in the agriculture sector rise andexports decrease, while imports increase. From theperspective of the macro level it will be important topromote the diffusion of IT while arranging measuresto protect the agriculture sector, which is easilyinfluenced by the impacts from the spread of IT.

When the results for the developing countrieswere compared against those for the U.S. it was seenthat the amount of increase in production for thedeveloping countries was smaller than the amount forthe U.S. and almost no price increase trends were seen.It is assumed that this is because the developingcountries have much more labor than the U.S. andlower wage increase rates. On the other hand, thedeveloping countries tend to have low landproductivity and the rate of increase in land prices ishigh. To summarize, even when the developing nationsachieve higher production due to the promotion of ITadoption and diffusion, they will not be able to enjoythe same degree of IT-led economic growth as the

24 Scenario 2 for the South Asian region was for when the rate of production growth for just the business service sector is the sameas the U.S.


U.S. and economic growth will be limited unless acertain degree of sophistication is first brought to theoverall economy. In order for the developing nationsto enjoy the IT-led economic growth seen in theindustrialized nations, it will be important to arrangeIT capital and plan for capital deepening. This is thesame as the result obtained from the macro analysis.

Chapter 6 Summary

The IT adoption and diffusion discussed in this reportis not just limited to the rapid growth in IT-relatedsoftware and hardware industries, resulting inincreases in production. In other words, attention hasbeen focused on improving efficiency and creatingnetworks in various economic aspects through the useof IT to provide new services and through the broaduse of IT by companies. This IT adoption and diffusionhas been taking place around the world since the1990s. Overall this IT adoption and diffusion hasbrought about positive economic effects on both themicro and macro levels.

Recently more and more attention has been givento “knowledge”, which has the characteristic ofincreasing returns, from the perspective of economicdevelopment for the developing nations. IT adoptionand diffusion is an important constituent element ofthis “knowledge”. At the same time IT adoption anddiffusion is a key element in the spread of a morebroadly defined “knowledge”.25

However, it has become clear that IT is not thepanacea that can paint a rosy future for the overalleconomy as was first believed. For example, in theU.S. IT was expected to eliminate economic cycles,but it has actually invited an economic downturn. Evenin other industrialized nations, as well as in developingnations, changes in IT-related demand have made theoverall economy even more vulnerable. Increasedglobal competition is always threatening the positionsof those countries and corporations that have alreadysucceeded through IT adoption and diffusion.

IT adoption and diffusion has also drawn on

information and income gaps on various levels fromindividuals to countries. This has resulted in a viciouscycle in which information gaps lead to large incomegaps.

Under these conditions, the most important pointwhen considering the economic impacts of ITadoption and diffusion is to confirm that IT adoptionand diffusion itself is not seen as the goal, but ratheras the means for achieving other goals. In other words,first the goals that must be met should be set and thenconsiderations should be given to what form IT shouldtake in order to reach these goals.

For the developing nations the promotion of ITis tied to raising the economic level of the countryand region over the long term. However, a broadenvironment for achieving this goal needs to be inplace, and the building of this environment issomething that the developing countries cannot doalone. Therefore, industrialized nations andinternational organizations need to provide supporton various fronts so that the developing countries canrealize the spread of IT and the resulting economicbenefits.

1. Preparing Information Infrastructures andIndustrial Bases

In order for everyone to enjoy the benefits of IT,it will be important to first prepare a communicationsinfrastructure and create an environment whereinformation can be accessed. From the results of themacro estimates it is clear that personal computerscontribute to the growth of information processingand telephones contribute to the growth of informationnetworks. This results also point to the importance ofsupporting these areas. The results of the analysis byGTAP also show that an environment without theproper communications infrastructure will result inrestrictions being placed on the economic impactsderived from IT adoption and diffusion. Themacroeconomic estimation has also shown that thepersuasiveness of the net host argument for economicgrowth is rather weak. Conversely speaking, this

25 Refer to Easterly, W. (2001). “The Elusive Quest for Growth: Economists / Adventures and Misadventures in the Tropics” in termsof the importance of “Knowledge” in the economic development of developing countries.


suggests that the network effects can be fully realizedonly after priority is placed on preparing telephonenetworks and personal computers.

The spread of personal computers is a basiccondition for improving access. In the developingcountries this cannot be achieved on a commercialbasis as easily as in the industrialized countries.Therefore, an effective solution would be to providefree personal computers on a large scale throughsupport from industrialized nations.

In order for the communications network to trulyfunction, it will be essential to lay the communicationlines, which will serve as the backbone, throughcooperation with support agencies from theindustrialized nations. Advances in informationtechnologies means that the laying of wired channelsmight not always be the best option. Easy access canquickly be established through wireless channels thatcan be more affordably installed. Furthermore,liberalization of the communications sector throughderegulation and the introduction of competitionprinciples is expected to help lower communicationrates and promote the spread of Internet usage.Therefore, it is very important for the industrializednations to provide support and advice in these areas.

It will also be necessary to continue to developthe industrial base. The promotion of IT adoption anddiffusion should not stop at simply bolstering the ITproduction sectors, but should be intended for raisingproductivity for the overall society through the use ofIT. Therefore, it is extremely important to expand allindustrial bases that serve as the infrastructure. Thisincludes the electric power sector, which is essentialfor IT, and transport networks that are essential fordomestic and international distribution. The fact isthat even the countries that are receiving capital fromEurope to promote IT adoption and diffusion havefirst focused their efforts on building the neededinfrastructure. So it is desirable for the industrializednations and support organizations to provide thedeveloping nations with various types of support inaddition to financial support, such as support for theimprovement of systems and operations forintroducing private participation activities and foreigncapital.

2. Human Investment in the InformationTechnology Fields

The effects of IT usage depend greatly on the level ofskill of the IT users. This means that it is veryimportant to raise the level of IT literacy on variouslevels. The macro estimations showed that there is acomplimentary relationship between human capitalfactors and IT factors. It has been said that thedevelopment of IT adoption and diffusion and humancapital produces synergy effects that can bring abouteconomic growth. In other words, an economy thatoffers the proper training using new IT-relatedtechnologies will very likely be able to quicklypromulgate these technologies. On the other hand, therange of new technologies that can be learned ineconomies with low educational levels is very limited.Currently Asian human capital has not reached thesame level as the industrialized nations in terms of ITutilization and so these countries have not been ableto bring forth the capital deepening mechanism (laborsaving effect) seen in the industrialized nations.

Many regions in the developing world are not onlywithout the introductory level knowledge of IT, butthey still have low basic literacy rates. For such regionsit will be important to first expand basic education(reading, writing and mathematics) and then providemany chances for contact with IT, and allow for themto learn the basic understanding and applications ofinformation technologies. Also, lifelong educationshould also be promoted to raise the level of IT literacyfor all age brackets, and not just for the young. It isexpected that raising the level of IT adaptability atvarious educational levels in this manner will raisethe level of interest in IT among the citizens, whichin turn would generate greater demand for IT products.

Providing better technical training at the highereducation and vocational education levels can be aneffective means for fostering new technicians andraising the IT-related technical skill levels of existingemployees. An analysis of education and income levelsshows that even among the industrialized nations,those countries that realized strong IT effects werethose that bolstered their IT educations at theuniversity level. Therefore, mechanisms need to be


in place to provide a wide range of opportunities toget a college level education. The U.S. example showsthe importance of having universities that can produceexcellent technicians and new technologies and theSweden, Finland and India examples show theimportance of being skilled in English in terms ofdeveloping IT-related businesses. This suggests thatdeveloping personnel in the IT field is extremelyimportant for raising the potential of the developingnations. It is expected that the fostering of suchpersonnel would further raise productivity, which inturn would further raise the economic effects broughtabout by IT profusion.

It is still important to note that even if humancapital that can effectively use IT is developed, theimpacts will be decreased unless there are alsomechanisms in place to make effective use of thishuman capital. This means that there must be liquidityon the labor market, support for matching labor supplywith demand, the establishment of a reliable labormarket and the creation of a market that places theright person in the right job.

Taking this into consideration, the industrializednations and support agencies need to provide supportto the developing nations in bolstering IT-relatededucation at various educational levels.

3. Support for Entrepreneurs

This report has attempted to measure and analyzeresults on both the macro and corporate levels.However, recently OECD also released a reportmeasuring and analyzing the impacts of IT adoptionand diffusion on the corporate level26. This reportestimates the impacts on the macro-level productivityof corporate productivity. The items having an impacton the rise in macro productivity are rises inproductivity within existing corporations and the entryof new corporations. The former impacts macroproductivity through capital intensif ication andcutting labor on its own, while the latter achieves thisthrough technical progress (TFP increase).

The results of the corporate interviews conducted

by this report show that IT adoption and diffusion inthe U.S. was accelerated by the establishment of manynew corporations and IT adoption and diffusion inEuropean countries was helped along by putting towork large domestic capital and direct investment byforeign f irms. As IT adoption and diffusionprogressed, technicians from some of the IT firms setup their own companies, which helped to broaden thescope of the domestic IT industry. Even in thedeveloping nations there has been an increase in thenumber of such entrepreneurs, mainly in the softwarefield.

When this point is considered along with thepreviously mentioned macro analysis, it is believedthat support for IT-related entrepreneurs, even in thedeveloping world, would be desirable. In other words,since the developing countries have not been able toachieve the same level of industry-led labor costreduction effects as seen in the industrialized nations,technical progress (increased TFP) can play a muchbigger role in terms of increasing the effects of ITadoption and diffusion and thus this needs to bepromoted. This is especially true in the software fields,where talented people are needed, but large amountsof capital for equipment is not needed and businessescan be easily started even in developing countries.

During our interviews with corporations in thedeveloping countries many people said that theproblem in starting a new business is that it is difficultto raise capital. Therefore, an effective measure wouldlikely be to have industrialized nations and supportagencies support a fund for raising venture capital. Infact, the Japan Bank for International Cooperation hasalready started providing support for venture capitalin Malaysia. The experiences gained here will likelybe useful for expanding such efforts to other countries.

4. Improving the Economic Environment

In order for the developing nations to link IT tosustainable economic development, it will be veryimportant to make general improvements to theireconomic environments. In particular, the following

26 OECD Working Paper No.329 (2002)


four points will need to be addressed.First, progress in globalization and IT adoption

and diffusion will need to go forward hand in hand.In order for IT adoption and diffusion to makeprogress, there needs to be capital and there must beregular buyers for the products and services. However,in the case of the developing countries, domesticcapital reserves are insufficient and the domesticmarkets are too small. In addition to these obstacles,most developing nations are also confronted with theproblems of insufficient personnel and technologies.It is hoped that globalization will help to ease someof these limitations by bringing about deregulation,the trade barrier reductions and smoother flows ofcapital, goods, personnel and technologies.

With this type of internationalization of trade,industrialized nations will be able to makecontributions in numerous ways outside of justeconomic support. One example is that with theadoption and diffusion of IT, more corporations inthe industrialized nations will turn to the developingnations for the procurement of hardware and software.There have been cases in which Japan’s differentlanguage and business customs have obstructedsmooth trade with other nations. Hopefully theseproblems can be overcome through the provision ofinformation, Japanese language instruction overseasand English language instruction in Japan.

The second point is to prepare a market-tradingenvironment. There is the fear that trouble arisingwhile conducting business over the Internet will resultin large costs if the proper procedures are not in place.Software development is a classic example of a“knowledge” application whereby the developmentcosts are high, but the production costs are very low.In this case development can be seriously underminedif intellectual property rights are not respected andillegal copies are allowed to spread.

In order for the developing nations to expand IT-related production, start new services using IT andparticipate in international trade (corporate supplychain, others), they will need to protect intellectualproperty rights, have secure trading, prepare andoperate a reliable trading environment, and makebusiness practices fair and transparent.

The IT adoption and diffusion results in trade that

reaches beyond national borders and thus developingcountries need to consider just what social regulationsand taxes should be imposed on this trade.Comprehensive advice from the industrialized nationswill surely be needed. In addition, internationaldebates on these matters must provide opportunitiesfor participation by the developing nations, and effortsshould be made to create systems that take intoconsideration the interests of the developing nations.

The third point is to promote e-government.Developing nations generally have abundant suppliesof cheap labor and it is hard for very small businessesto recognize the benefits offered by IT in terms ofreducing labor. This is one of the main reasons whyIT-related demand has not grown very much in thedeveloping nations.

However, the governments in countries such asIndia and Malaysia have taken the lead in developingdomestic IT demand by enacting policies for theinvestment in e-government on the national andregional levels.

The promotion of e-government goes well beyondthe simple procurement of hardware. There shouldbe plenty of room for participation by local companiesthat are well aware of the national and local laws andregulations. This is expected to help develop softwareand foster software companies.

During the interviews with corporations in thedeveloping countries, it was often indicated thatgenerally the government procedures are not verytransparent and result in a great deal of lost time, bothof which have proven to be big obstacles to business.However, it is believed that e-government will makeprocedures more fair, transparent and efficient, whichin turn would make a big contribution to establishingthe necessary trading environment. The industrializednations and support organizations need to provide bothfinancial and technical support for the developingnations and regions trying to implement e-government.

The fourth point is to stabilize the macroeconomy.Even in the U.S. it took a great deal of time before ITadoption and diffusion could be linked to economicgrowth. Therefore, it will be important for thegovernments of the developing countries to buildconsensus among its citizens regarding the long-term


27 Refer to <http://www.mlit.go.jp/crd/daiseitelework/h13sakuhin.htm>

promotion of IT through the government’s IT plans.The IT plans should not be over ambitions and shouldnot try to placate everyone. Instead the plans shouldtake into consideration the socioeconomic situationsof the country, as well as the country’s relative strongpoints, and then clarify priorities and adopt goals thatare attainable. In this case the IT adoption anddiffusion should be promoted along with the long-term growth for the overall economy. In terms ofmacroeconomic management, f inancial policymanagement with certain regulations should be usedto stabilize prices, long-term interest rates andcurrencies.

The various industrialized nations need to adoptsuitable policies in order to stabilize the internationalmacroeconomic environment. Efforts should also betaken to avoid major shocks like the Asian currencycrisis, and consideration should be given to a crisismanagement system for international currencies inthe event that just such a crisis occurs.

Chapter 7 Conclusion

In concluding this report, we would like to brieflytouch on the impact IT adoption and diffusion hashad on Japan.

The analysis provided in this report focused onthe advanced IT nations, mainly the U.S., and someof the developing countries in Asia. Japan also saw asteady expansion of IT from the 1990’s. However, ithas been said that the speed of this growth laggedbehind the growth seen in the other industrializednations, and even some of the developing nations.During this period Japan’s economy stagnated due tothe aftershocks of its bubble economy bursting, andclear relationships between IT adoption and diffusionand economic growth could not always be seen.

Still, the progress in IT adoption and diffusionhas had a major impact on the Japanese society andeconomy. For example, in the past few years e-mail

has played a major role in the business field byfostering connections both inside and outsideorganizations. This has revolutionized the mechanismsfor decision-making and for reaching sharedunderstandings. This has also led to increases in theprovision of information and the conducting oftransactions over the Internet. IT adoption anddiffusion has helped the manufacturing sector todiversify production bases and led to the creation ofproduction clusters that have revolutionizedrelationships between companies. It can be inferredthat these changes would not have been possiblewithout the spread of IT.

IT adoption and diffusion has also had a profoundimpact on daily life in Japan. The use of cellularphones for sending e-mail and accessing the Internethas become commonplace. Fierce competition amongtelecommunications companies has resulted in lowerprices and the rapid spread of broadband services.The increased convenience of networks has also beenchanging the forms of individual employment. Forexample, “Essay Contest for Working Women”27

sponsored by the Ministry of Land, Infrastructure andTransport in 2001 showed that it has become verycommon to use IT to work at home, which has cometo be known as SOHO (small office / home office).

However, the important point to remember is thatthese changes in employment options were notbrought about simply by the fact that PCs and theInternet can now be freely used. There is still the needto bolster the expertise required for each type ofemployment. One woman in the above example ofSOHO workers said that she is employed as atranscriber of audiotapes. This woman said that sheneeds to have strong skills in the mother tongue and atechnical understanding of the contents on the tapesto raise the accuracy of her work and win theconfidence of her customers. This example reconfirmsthat even in Japan the IT adoption and diffusion initself is not the goal, but rather it should be seen as aneffective tool for achieving some other goals.


References

(Japanese)

Kazunori Minetaki (2001) “IT Innovation and LaborMarket in Japan”, “Economic Review” Vol.5,No.3, July pp.39-60.

Yuzo Kumasaka, Kazunori Minetaki (2001) “ITEconomy”, Nihon Hyoron Sha.

(English)

Jones, C. I. (1998), “Introduction to EconomicGrowth,” W. W. Norton & Co. (Japanesetranslation edition: Jones/Kozai (1999)“Introduction of Economic Growth Theory”)

Mankiw, N. G., D. Romer. and D. N. Weil. (1992) “AContribution to the Empirics of EconomicGrowth,” Quarterly Journal of economics, 107(2).

OECD Working Paper No. 329 (2002) “The Role ofPolicy and Institutions for Productivity and FirmDynamics: Evidence from Micro and IndustryData”.

Oliner and Sichel (2000) “The Resurgence of Growthin the Late 1990s: Is Information Technology theStory?,” Journal of Economic Perspectives, 4.

Pohjola, M. (2000) “Information Technology andEconomic Growth: A Cross-Country Analysis,”The United Nations University Working Paper,173.

Solow, R. M. (1957) “Technical Change and theAggregate Production Function,” Review ofEconomics and Statistics, 39 (3).

macroeconomic impact of it adoption and diffusion1

Documents