Information and Communication Technology, Production and Economic Growth: A Theoretical Nexus

Abstract

This paper explains the relationship between information and communication technology (ICT), production and economic growth. The main intention is to highlight the theoretical relationship between ICT and economic growth within an economy. Five subsections will be discussed including Zhen-Wei Qiang, Pitt and Ayers framework, total impact of ICT on economic growth, complementary effect of ICT on economic growth, ICT network externalities and last one is the empirical literature recapitulation. The chapter concludes that the gaps identified will open up the need for extensive research in this field, hoping to provide guidelines to developing countries in terms of policy directions and future planning. Introduction Information and communication technology (hereafter, ICT) refers to communication device including computers, mobile phone and fixed telephone. ICT can be defined as technologies which enable the process of communication and distribution as well as easy access to information. ICT basically includes fixed telephone lines, mobile devices, the internet and personal computers. The International Telecommunication Union (ITU, 2012) defines ICT as a tool that increases efficiency in the technological development resulting in revolution in the world of production and logistics as well as in the decision making of firms. The effects of the information development span the whole process of day to day activities, and play an important role in the government, business and individual settings. A notable economic development that happened in global economies; especially in developed economies during 1980s and 1990s, was the rapid increase in the ICT sector’s share of investment International Journal of Academic Research in Business and Social Sciences Vol. 8 , No. 12, Dec, 2018, E-ISSN: 2222-6990 © 2018 HRMARS 644 and economy. According to ITU (2015; 2014; 2012), the adoption ICT became an integral part of strategic planning for many organizations in developing countries, seeking to engage in the emerging digital economy. ICT plays an important role in revolutionizing management structure and nature of competition in emerging economies. In theory, the use of ICT promotes sustainable and independent economic structure in any given country. Poor structures and policies governing the economy, as well as existence of investment and productivity gaps may lead to unsustainable economic development in the African countries. In September 2015, United Nations (UN) has established the new Sustainable Development Goals (SDGs) which identifies 17 goals with specific targets to be achieved in the next 15 years (by 2030). Some of the targets include reducing poverty and hunger, increasing decent employment, ensuring development, innovation and infrastructure in the industry. Globally, mobile connectivity has already connected 4.7 billion people, enabling communications between rural and urban areas, easing transfer of goods and services, thus boost the economy. Moreover, it helps to improve health care, education services, agricultural and financial inclusion, indirectly alleviating poverty and ensuring more sustainable development (GSMA, 2016). The use of mobile communication services helps solve the problem of communication failures in government agencies. Among them is it allows access to health information and speeds up the relay of price information for agricultural products resulting in improved development of other sectors in the economy. Moreover, ICT promotes innovation such as mobile money transfers and money remittances. Empirical literature showed different results that remain debatable regarding the use of ICT. These studies can be grouped into four different findings. The first group proved that the use and investment in ICT facilitate the process of development, in social, political and economic perspectives, in both developed and developing countries (Gordon 1999; Jorgenson, 2001, Jorgenosn et al., 2002; Jorgensen and Stiroch, 2005; Czernich et al. 2009; Seki, 2008; and Koutroumpis 2009; Ward and Zheng, 2016; Kumar et al., 2015a). This is in fact what the majority believe. The second argued that the use and investment of ICT especially in developing countries would not guarantee economic development unless there are complementary factors such as infrastructure, enabling policies, financial development, human capital and production innovation in play (Caroli and Van Reenen, 2001; Brynjolfsson et al., 2002; Conway et al., 2006; Samoilenko and Osei-Bryson, 2008; Van Reenen et al., 2010; Adrianaivo and Kpodar, 2011; Ana F and Carmen, 2012; Sassi and Goaied , 2013; Jin and Cho, 2015). The third found no impact of ICT on growth and productivity (Roach 1987;1991; Loveman 1988; and Baily and Chakrabarti 1988; Lee et al., 2005; Erumban and Das, 2016) while the fourth actually found a negative impact of ICT on economic growth (Freeman and Soete, 1985, 1994, 1997; Aghion and Howitt, 1998). The debate among the economists on the impact of ICT use and investment on economic growth remains but many believe that with the right infrastructure and training, economic growth is imminent, more so in developing countries than the developed ones. International Journal of Academic Research in Business and Social Sciences Vol. 8 , No. 12, Dec, 2018, E-ISSN: 2222-6990 © 2018 HRMARS 645 Zhen-Wei Qiang, Pitt and Ayers Framework Tarutė and Gatautis (2014) and Consoli (2012) summarized theories regarding the role that is played by ICT on firms’ productivity and economic growth. The theoretical literature has spread more widely, analyzing the impact of ICT from the macro to the microeconomic level. This part will explain the connection from the micro level to the macro level. Consoli (2012) categorized main effects of ICT into four main groups namely performance, expansion, new products and growth (Figure 1.1). Each group consists of several dimensions as shown in Figure 1.1. (1) Performance: The use of ICT leads to reduced cost of supply and communications by firms, thus increases efficiency and effectiveness of the firms. The more the firms become efficient and effective, the more competitive they are in the market in terms of pricing, marketing and securing sales. It also enables firms to be innovative through exchange of information with related institutions and organizations. (2) Expansion: ICT eases expansion of an organization by improving domestic and international communications and improving every level of production, even from the level of supply chain. ICT usage, particularly in the form of internet marketing increases exposure of an organization to the world, attracting business cooperation and strategic alliance. The use of ICT is also expected to contribute into these five aspects of good business strategies; increased flexibility via products and services differentiation, better visibility, better information provision, online transaction facility and online marketing strategy. (3) New products: ICT leaves a large impact on new products or services, screaming for its inclusion in the perks offered. The information offered by the internet these days makes it hard to design new products without taking into consideration what is already offered by other similar product. Newer product should be able to offer similar or better features in order to really compete in the market. Customer satisfaction is pertinent as even the slightest dissatisfaction would not escape the scrutiny of web users and good reviews could bring a product a fair distance. (4) Growth: Growth takes place when firms invest in ICT for business purposes and productivity increases. This could happen through reduction in marginal cost of production, but more can be achieved through sales boost, opening in new market opportunities and exposure via advertisement and websites. Maciulyte-Sniukiene and Elina Gaile-Sarkene (2014) summarized theoretical impact of ICT on productivity. By referring to Zhen-Wei Qiang, Pitt and Ayers’ (2003) model, they explained channels available for ICT to drive economic growth and labour productivity. i) TFP growth in sector producing ICT: the ICT revolution is partly characterized by rapid technological progress leading to rapid use of ICTs in ICT producing sectors. The technological progress results in higher productivity which in turn improves the average TFP growth. International Journal of Academic Research in Business and Social Sciences Vol. 8 , No. 12, Dec, 2018, E-ISSN: 2222-6990 © 2018 HRMARS 646 ii) Capital deepening and ICT can influence productivity when there is high level of investment. The use of information and communication technologies lead to reduced cost of operations and reduced relative price of goods. As price of goods declines, the real capital output per worker increases (capital deepening in the macro economy). This would complement other factors, ultimately results in increased per capita productivity of the existing capital stock and labor in the economy. iii) TFP grows through reorganization and ICT usage. The advancement in the use of ICT can enhance new business models making them more productive and more efficient in disseminating information cheaply, with less administrative bureaucracy. In turn, the process of production throughout the economy becomes more effective and efficient. This results in reorganization of markets for goods and services, new product initiation and an improved economy. International Journal of Academic Research in Business and Social Sciences Vol. 8 , No. 12, Dec, 2018, E-ISSN: 2222-6990 © 2018 HRMARS