The impact of information and communication technology in the dynamics of total productivity

What is it about?

There is by now a large debate about the impact of the information and communication technology (ICT) adoption on the productivity dynamics. Our aim in this paper is to endogenize the ICT contribution. Two considerations lead our process of endogenization. First, we model and estimate a two-level constant elasticity of substitution (CES) aggregate production function with four inputs. Hence, we introduce a specific factor setup with two different kinds of capital and two different types of labor used in the production of the two intermediate goods (ICT and traditional). Thus, ICT enters as a factor of production through a nested CES production function allowing us to analyze the mechanisms for ICT to influence productivity growth. Second, for estimation purposes, we consider ICT producing industries only, thus excluding those sectors ICT users. The mechanism linking technological progress in ICT to these industries is direct. Technological progress that enables the ICT producing industries to produce greater aggregate output per unit of input is a direct potential contributor to productivity dynamics. We choose to leave out ICT using industries since in this case ICT mostly affects the way to do and organize businesses. Clearly, the way ICT impacts on productivity growth is an open issue.

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Why is it important?

Most of the literature examines the role of ICT in enhancing general production in the Italian economy, assuming that the ICT contribution is exogenous. In this paper, instead, we take the view that the process of innovation is complex and endogenous. The hypothesis is that the introduction and expansion of ICT increase the productivity of capital and labor so that for the same general factor inputs, output is higher, and disproportionately so, if the benefit of ICT is sufficiently strong.

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