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Essay for Productivity Class (TEMEP in SNU)

Essay for Productivity Class (TEMEP in SNU)

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Published by: akoo on Feb 14, 2009
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Summary and Policy Implications for the Paper “ICT Productivityand Firm Propensity to Innovative Investment: Evidence from ItalianMicrodata”
 Rovshan M. Mukhrumbaev
and Aung Kyaw Oo
Technology Management Economics and Policy Program, College of Engineering,Seoul National University, San 56-1, Shilim-dong, Kwanak-Gu,Seoul, 151-742, South Korea
The purpose of the essay is to summarize briefly the article of Atzeni and Carboni(2006), which was published in Information Economics and Policy journal, and givepolicy implications as homework for “463.508 - The Theory of Productivity andApplication” class.
Keywords: ICT; Rate of Return; Productivity; Innovative Investment, Economic Growth.
During preparation of this material, several references have been read by authorsregarding rate of return from ICT and ICT investment. All of the papers have manyinteresting findings and results with respect to output from ICT and ICT investment. Forinstance, Spencer (2002) proposed new methods and tests to analyze the impact of ICTinvestment on United Kingdom’s GDP potential. He found that without quality-adjustedmeasures of labor supply, it is possible to assess the contribution of the investment toGDP potential. The calculations by new methods shows that ICT investment highlycontributes to potential output growth which reflects the rapid growth in ICT investmentand its high marginal product. Oulton (2002) developing new estimates to measurecontribution of ICT in GDP growth, found that ICT output contributed a fifth of overallGDP growth during 1989 to 1998 and this contribution has been rising over time. Also,several papers analyze and discuss productivity effects from ICT investment,contribution of ICT and ICT investment to output, Economic Growth and LaborProductivity. They are: Meijers and Hollanders (2001), Piatkowski (2003), Sharpe
PhD Candidate, phone: +82-10-5817-9999, E-mail:ravshanshah@yahoo.com 
PhD Candidate, phone: +82-10-2893-1424, E-mail:akoo@snu.ac.kr
(2006), Colecchia and Schreyer (2001), Ark B. et al (2002), Jalava and Pohjola (2005),Becchetti et al (2003). However Chowdhury and Wolf (2003) shows that ICTinvestment has a negative impact on labor productivity and does not have anysignificant impact on enterprise’s return. Among these all interesting readings Atzeniand Carboni (2006) have been chosen by authors to summarize and give policyimplications. This paper provides some insight into the link between ICT, productivityand the innovative level of investment and this was one of the reasons to choose thispaper among the others.The next parts of the essay provide brief summary to Atzeni and Carboni (2006) andgive policy implications.
In this section, the summary upon the research paper that was mentioned above will bepresented in accordance with the sub-sections appeared in the original research paper.Since this is only the summary of the original, it will not cover the complete work theydid and the methodology and equations applied in their paper. The authors didn’tinclude
services industry
in their survey but with the dataset from manufacturingindustry firms, and so they pointed out that generalizations based on their informationshould be cautious. ICT
data they used are only for the period 1995–97 
whichprevented them from using more recent data in their study.
Model used
Starting from the dataset, the researchers look for a methodology to estimate ICTproductivity
without information on ICT capital stock 
They measure firm productivitychanges through the variations in output and input prices. They use ‘Partial PriceChange’ (PP), used to parallel TFP growth in the estimation equation, to compute ICTadditional contribution to productivity. But,
constant returns to scale are assumed 
throughout the calculation process
By their research, the rate of return on ICT capital is found to be 0.814, and whichimplies that putting one additional dollar of ICT capital into service yields roughly
$ 0.40 of output per annum. Regarding the quality adjustment problem,
they found weak correlation between ICT and quality changes in labor. ICT productivity is about eight times greater than that of non-ICT investment.
Interpretation of the magnitude of theirresearch results refers to gross and not net investment. Depreciation without beingconsidered could lead to a downward bias in the results.High-innovative firms have, in fact, an ICT coefficient of 2.0. Although the differencein group coefficients is wide, it seems that it is the low-REP and high-INNO group thatstrongly determines overall low-replacing group ICT productivity.
The low-REP and low-INNO group ICT investment share in total output is less than half that of itscorresponding low-REP and high-INNO counterpart 
 It was found out in the paper that
improvements in the workforce through a higher demand for more educated labour have a positive impact on productivity. This mayexplain the low coefficient in the highly innovative firms
While for ‘standard’investment skills do not play a paramount role and firms have high productivity, forinnovative investment, where complementing workers’ ability is crucial, the problememerges consistently.
Capital renewal is not the best strategy if skills are not complemented properly
In spite of its lower importance, ICT investment accounts for arelevant share of output growth when compared to non-ICT investment.
This paper is a small contribution towards understanding the link between ICTproductivity and firms’ investment behaviour. The findings they reached by this papercan pave the way ahead for the other researchers to go deeply into finding therelationship between the ICT productivity and firm investment. In their conclusion, theytold that when investment is mainly guided by replacement, the average firm behavesnotably worse than the others.
Nowadays ICT is becoming as one of the main part in our life and in manyindustrialized countries. By spending millions of dollars in IT, many countries try toachieve significant economic growth and better living environment. We can see recentempirical studies which show a positive and significant relationship between growth inICT (IT) investment and growth in national economic performance. As a last part of this

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