The contribution of information and communication technologies investment on economic growth

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE CONTRIBUTION OF INFORMATION AND COMMUNICATION TECHNOLOGIES INVESTMENT ON ECONOMIC GROWTH BY THAN PHUONG LAN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2013 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE CONTRIBUTION OF INFORMATION AND COMMUNICATION TECHNOLOGIES INVESTMENT ON ECONOMIC GROWTH A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By THAN PHUONG LAN Academic Supervisor: Assc Prof Dr PHAM HOANG VAN Assc Prof Dr NGUYEN TRONG HOAI HO CHI MINH CITY, DECEMBER 2013 ACKNOWLEDGEMENTS Writing process of a thesis is a collaborative experience involving the helps and supports from many people I want to express my gratitude to those who give me the great support to complete this study I am deeply indebted to Associate Professor Doctor Pham Hoang Van, Lecturer at Department of Economics, Baylor University (USA), Fulbright Scholar, is a super supervisor Thanks for his encouragements and useful comments to pursue this topic from the initial ideas to the final completion as well as enable me to develop a deeply understanding on my thesis Equally, I also wish to express my grateful thanks to Associate Professor Doctor Nguyen Trong Hoai, Lecturer at Department of Economics Development, University of Economic (HCMC), my second supervisor, for his valuable suggestions during the time I write this thesis His wide knowledge, excellent advice and logical way of thinking have provided me a good basis in present this thesis Doctor Truong Dang Thuy, Lecturer at Department of Economics Development, University of Economic (HCMC), has provided me many useful comments that help me to improve my academic writing skill as well as critical thinking Thanks for his nice supports and helpful advices Doctor Pham Khanh Nam, Lecturer at Department of Economics Development, University of Economic (HCMC), has supports me in initial ideas for this thesis and provides me useful data source that help me a lot to continue this thesis By the way, I also would like to express sincere thanks to Anders Halvorsen, Vice President, Administration of World Information Technology and Services Alliance (WITSA) organization He has provided me the Digital Planet Reports versions 2002, 2004, 2006, 2008 and 2010 that covers all my needed data for ICT spending Without his data, I would not be able to complete my thesis Equally, I also wish to express my grateful thanks to Dr Vu Minh Khuong, Assistant Professor Lee Kuan Yew School of Public Policy, National University of Singapore (Singapore) Although very busy with his job, he did give me a lot of knowledge, data and useful advices for me to solve my problem when I got stuck and complete my thesis During years at VNP course, lectures and many friends have encouraged, reposed trust in me and motivated me to overcome all difficulties in learning and my life Thanks for all Than Phuong Lan Dec 2013 ABSTRACT Growth accounting method to measure the contribution of Information and Communication Technologies (ICT) investment on economic growth has widespread in 1990s in the United States and then in many other developed countries including Europe, G7 This study extends growth accounting exercise in a large sample of 32 countries in recent period from 2005 to 2010 Results from this study prove that ICT capital investment is a very important factor Although its contribution is not largely as non-ICT capital, its share in economic growth is not small and positive in all countries including developed and developing groups Even in the period after financial crisis in year 2008, ICT investment is recognized a positive contribution to economic growth in all economies in sample Such country-by-country results, however, “are not sufficient to judge how significant ICT has impacted output growth across economies” as Vu (2005) mentioned Therefore, in my research, I continue to analyze the main channels through which ICT investment influences the economic growth and evaluate its impacts on each channels By applying regression analysis, this study finds a robust and positive statistically significant between ICT capital on output growth and on TFP growth through spillovers effects in the full sample of 32 countries, especially in developing economies group For developed economies, the empirical evidence of ICT impact on output growth is smaller and even not statistically significant impact on TFP growth through spillovers Finally, an empirical regression model is build in order to find out determinants of variation on the contribution of ICT investment on economic growth in this research Regression results show that education, openness, inward FDI, health and English fluency are the most significant and positively impact although institutional quality is not statistically significant in period before 2008 However, those impacts from these variables are smaller in later period of post-2008 ABBREVIATIONS ICT Information and Communication Technologies OLS Ordinary Least Square IV Instrument Variables TFP Total Factor Productivity TFPG Total Factor Productivity Growth FDI Foreign Direct Investment EU Europe US United States UK United Kingdom G7 Group of Developed Countries: U.S, U.K, France, Germany, Italy, Canada and Japan OECD Organization for Economic Co-operation and Development WITSA World Information Technology and Services Alliance BEA U.S Bureau of Economic Analysis UNDP United Nations Development Programme CONTENTS ACKNOWLEDGEMENTS ABSTRACT ABBREVIATIONS Chapter I INTRODUCTION 1.1 Problem Statement 1.2 Research Objectives 1.3 Research Questions 1.4 Organization of the Study Chapter II THEORETICAL BACKGROUND 2.1 Sources of Economic Growth 2.1.1 Two Views of Capital 2.1.2 Explaining Sources of Economic Growth 2.2 ICT and Its Impacts on Economic Growth 11 2.2.1 Information and Communication Technologies (ICT) 11 2.2.2 Accessing the Channels of Contribution to Growth by ICT 11 2.3 Measuring the Contribution of ICT Investment to Economic Growth 15 2.3.1 Approaches for Evaluating the Impacts of ICT on Growth 15 2.3.2 Measuring the Contribution of ICT Investment as a Source of Economic Growth 16 2.3.3 Empirical Literature 19 2.4 Determinants of the Variations in ICT Magnitude Contribute to Economic Growth 33 Chapter III 38 RESEARCH METHODOLOGY 38 3.1 Estimating ICT and non-ICT Capital services 38 3.1.1 ICT Investment Flows Calculation 40 3.1.2 Real ICT Investment Flows 42 3.1.3 The measurement of ICT Capital Stock using PIM 43 3.1.4 Quantities and User cost of ICT Capital Services 44 3.2 Methodology 47 3.2.1 Growth Accounting For Contribution to Economic Growth of ICT Investment 47 3.2.2 Impacts of ICT on Economic Growth 49 3.2.3 Determinants of ICT Contribution to Growth 54 CHAPTER IV 60 EMPIRICAL RESULTS AND DISCUSSIONS 60 4.1 The Contribution of ICT to Economic Growth 60 4.1.1 Magnitude of ICT Contribution to Growth 60 4.1.2 The Share of ICT Contribution to Output Growth Rate 64 4.1.3 ICT vs Non-ICT Capital 65 4.2 The Impacts of ICT Investment to Economic Growth 66 4.2.1 ICT is Capital Input Contribute to Economy Output 66 4.2.2 Spillover effects of ICT Investment on TFP Growth 71 4.3 Determinants of Variations of ICT Contribution to Economic Growth 74 CHAPTER V 81 IMPLICATIONS AND CONCLUSIONS 81 5.1 Conclusion 81 5.2 Implications 83 5.3 Limitations 86 REFERENCES 88 APPENDIX A 96 INFORMATION AND COMMUNICATION TECHNOLOGIES (ICT) 96 APPENDIX B 99 ICT CONTRIBUTION TO ECONOMIC GROWTH (RESULTS OF GROWTH ACCOUNTING METHOD) 99 LISTS OF FIGURES Figure 2.2.1: Contribution of ICT to Economic Growth 14 Figure 2.3.1: Share of ICT-Producing Industries in Total Business Sector 20 Figure 2.3.2: Output contribution of ICT Production in the Market Sector in Finland 21 Figure 2.3.3: Share of TFP Growth of ICT Producing Sector in Total TPF and Labor Productivity 1995-2000 23 Figure 2.3.4: Contribution of ICT to Labor Productivity Growth 30 Figure 3.1.1: Summary for capital services calculation 40 Figure 4.1.1: Average GDP Growth of 32 Countries in Sample (in %) 61 Figure 4.1.2: ICT Contribution to GDP Growth (All Samples) 62 Figure 4.1.3: Average GDP Growth- Developed vs Developing 63 Figure 4.1.4: ICT Contribtion To GDP Growth Developed vs Developinng 64 Figure 4.1.5: ICT Contribute to 100% of Overall Output Growth 2005-2010 65 Figure 4.1.6: Shares in Contribution of ICT vs non-ICT Capital Input to Growth 66 LISTS OF TABLES Table 2.3-1: Contribution of ICT Capital on Economic Growth 26 Table 2.3-2: Contributions from non-ICT sector to Aggregate MFP growth 32 Table 3.1-1: ICT’s Investment to spending ratio 41 Table 3.1-2: Data sources for Capital Services Calculation 46 Table 3.2-1: Proxy and expectation sign for each determinants of ICT contribute to Growth 58 Table 3.2-2: Data sources of determinants of ICT contribute to Economic Growth 58 Table 4.2-1: ICT is Capital Input Contribute to Economy Output 67 Table 4.2-2: Specific Tests for ICT is Capital Input Contribute to Economy Output 68 Table 4.2-3: Spillovers Effects of ICT Investment on TFP Growth 72 Table 4.3-1: Determinants of Variations of ICT Contribution to Economic Growth 75 Table B-1: ICT contribution to economic growth – results of growth accounting method 99 CHAPTER I INTRODUCTION 1.1 Problem Statement The concept of Information and Communication Technology (ICT) had been used since 1980s by many academic researchers Since then, ICT has become an interest topic and attracts researchers in many different fields The reason is because ICT has many characteristics that make it particularly attractive in the whole development strategy At first, it is a useful channel of communication that would overcome the geographical distance In any place, you can access information from anywhere else Through ICT, almost every kind of knowledge can be transmitted between countries and regions all around the world So with ICT, different countries have greater opportunity to interact with each other to improve themselves in cultures, politics and other features of society Especially, developing countries have the ability to increase their knowledge, productivity and new introductions of modern technologies Moreover, this capability increases continuously due to advance developments in ICT products including radio, satellite, networking and data processing Second, ICT has applications in many different areas that significant impact on the ways of education, learning, production, health, economic manipulations… Remote or distance education and health are among such of those benefits from ICT applications Moreover, in discussion about role of ICT in learning and education in her report of “Investing Effectively in Information and Communications Technology in Schools, 2008-2013”, Minister Mary Hanafin emphasized that a pivotal force that brings the changing in learning is the use of ICT “which provides richer, more immediate, world-relevant educational resources and opportunities” ICT operation cost by removing or narrowing trade barriers, lower tax and tariff are necessary Linking networks Linking networks help to increase spillovers or network effects of ICT Building ICT infrastructure framework for internet, mobile phone or any other equipments that would narrow down the physical space are useful Besides those policies, the increasing of government spending for health, R&D should promote the contribution of ICT to growth 5.3 Limitations The current study points to several keys of the shortcoming First is lacking of data for ICT investment for a large numbers of economies Therefore, a private data source from Digital Planet reports that were published by World Information Technology and Service Alliance (WITSA) is used in my thesis However, the data from WITSA has limitations while WITSA only provide the data for ICT spending without splitting into ICT investment and ICT consumption As the result, in order to calculate ICT as well as non-ICT capital services as the requirements of this study, some assumptions need to be made such as ICT spending data as well as ICT constant-quality hedonic price index by BEA are used as benchmark for calculation ICT capital services Second, due to the availability of data and time constraint, this study assumes a constant of labor income share equal to 0.65 Although there are evidences to support for this assumption, there are also evidences prove that the constant income share of labor is not suitable for all countries in the sample Third, for the regression model of ICT spillover effect on TFP growth, there is problem with endogeneity as I mentioned in the methodology and result part The 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Chronicle of Higher Education, 95 APPENDIX A INFORMATION AND COMMUNICATION TECHNOLOGIES (ICT) Definition of ICT producing sector as the agreement by OECD members which is based on ISIC Rev (International Standard Classification) as in OCED (2002) is describe through this box Box OECD definition of ICT-producing industries Manufacturing 3000 Manufacture of office, accounting and computing machinery 3130 Manufacture of insulated wire and cable 3210 Manufacture of electronic valves and tubes and other electronic components 3220 Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy 3230 Manufacture of television and radio receivers, sound or video recording or reproducing apparatus, and associated goods 3312 Manufacture of instruments and appliances for measuring, checking, testing, navigating and other purposes, except industrial process control equipment 3313 Manufacture of industrial process control equipment Services – goods related 5150 Wholesale of machinery, equipment and supplies 7123 Renting of office machinery and equipment (including computers) Services – intangible 6420 Telecommunications 7200 Computer and related activities Source: OECD (2002) 96 Products from ICT producing sectors can be categories into types including computer hardware, computer software, communications and computer services as definition from Digital Planet Report 2010 which published by WITSA (The World Technology and Services Alliance) organization Computer hardware includes:  Computers  Storage devices  Memory upgrades  Printers  Monitors  Scanners  Input-output devices  Terminals  Other peripherals and bundled operating system Computer Software includes package software:  Operating system  Database system  Programming tools  Utilities  Applications Communications include voice and data communications equipments as well as services that are:  Voice and data communications services: - Local and long distance wire-line - Wireless - Paging 97 - Satellite - Internet access - Private line services - Other data communication services  Voice and data communications equipments: - wire-line and wireless telephone handsets - legacy and IP PBXs - key system - wire and wireless LAN equipment - WAN equipment - Central office equipment - Modems - Multiplexers - Telephone answering machines and system Computer services include outsourced services such as:  IT consulting  Computer system integration  Outsourced custom software development  Outsourced www (world wide web) page design and Web hosting  Network system and network system integration  Office automation  Equipment maintenance  Computer disaster recovery  Data processing services 98 APPENDIX B ICT CONTRIBUTION TO ECONOMIC GROWTH (RESULTS OF GROWTH ACCOUNTING METHOD) Table B-1: ICT contribution to economic growth – results of growth accounting method Country Australia Austria Belgium Canada Denmark Finland France Germany Greece Hong Kong Ireland Korea Netherlands New Zealand Norway Portugal Spain Sweden Switzerland United States Brazil Chile Hungary Mexico Venezuela GDP growth 2.92 1.58 1.32 1.53 0.43 1.29 0.85 1.29 0.51 4.56 1.40 3.86 1.52 Average of 2005 -2010 NonICT Labor (hours ICT Capital Capital worked) TFP Growth 0.15 1.94 1.32 -0.49 0.25 0.39 -0.08 1.03 0.24 0.74 0.69 -0.35 0.27 1.27 0.45 -0.46 0.21 0.87 0.09 -0.75 0.29 0.62 0.28 0.10 0.15 0.74 0.08 -0.13 0.13 0.32 0.21 0.63 0.21 1.17 0.13 -1.00 0.10 0.96 0.31 3.18 0.31 1.47 -0.45 0.07 0.21 1.20 -0.34 2.80 0.31 0.61 0.41 0.19 1.30 1.08 0.60 1.33 1.95 2.26 0.07 0.21 0.23 0.28 0.20 0.41 1.30 1.14 0.43 1.23 0.96 0.45 0.39 1.18 -0.36 0.01 0.67 0.74 -0.46 -1.46 0.31 -0.19 0.12 0.65 1.09 4.26 3.86 0.55 2.02 4.92 0.11 0.27 0.21 0.56 0.15 0.17 0.90 0.74 2.43 0.57 1.32 2.21 -0.12 1.52 1.90 -0.56 0.62 0.87 0.20 1.73 -0.68 -0.01 -0.07 1.67 99 China Egypt India Malaysia Philippines South Africa Thailand Average 11.23 5.90 8.54 4.61 4.93 0.50 0.36 0.25 0.38 0.19 3.99 1.57 3.44 1.04 0.91 0.66 0.49 1.40 2.41 2.26 6.09 3.48 3.46 0.78 1.57 3.60 3.78 2.84 0.55 0.40 0.26 1.55 0.70 1.22 0.51 1.09 0.59 1.00 1.59 0.77 100 ... ̂  The contribution of ICT on economic growth is calculated by term SICT K ICT  The contribution of ICT on economic growth is calculated by term ̂ Snon−ICT K non−ICT  The contribution of labor... RESULTS AND DISCUSSIONS 60 4.1 The Contribution of ICT to Economic Growth 60 4.1.1 Magnitude of ICT Contribution to Growth 60 4.1.2 The Share of ICT Contribution to Output Growth. ..UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE CONTRIBUTION OF INFORMATION AND