science technology and industry outlook 2001 potx

ORGANISATION FOR ECONOMIC CO-OPERATION ‘AND DEVELOPMENT Pursuant to Anicle 1 of the Convention signed in Pars on 14th December 1969, and which eame ino force on 30th September 1961, the

Science, Technology and Industry Outlook

DRIVERS OF GROWTH: INFORMATION

TECHNOLOGY, INNOVATION AND ENTREPRENEURSHIP

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of 4

Sp = Science, Technology

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DRIVERS OF GROWTH: INFORMATION TECHNOLOGY, INNOVATION AND

ENTREPRENEURSHIP

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Science, Technology and Industry Outlook

DRIVERS OF GROWTH:

INFORMATION TECHNOLOGY,

INNOVATION AND ENTREPRENEURSHIP

ORGANISATION FOR ECONOMIC CO-OPERATION

‘AND DEVELOPMENT

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FOREWORD

‘This special edition ofthe Scieme, Technology and Indusiry Outlook has further advanced on the extensive analysis undertaken by the Committees and Working Parties of the DSTI in connection with their Work over the last years on the horizontal OECD project “New Determinants of Economic Growth”

It synthesises, and examines in greater depth, key findings in the areas of ICT innovation and entrepreneurship, both as regards new analytical findings on their relationship to economic performance and on the policy implications A major feature of the latter isthe discussion on which policy messages should be taken at national level and which require international co-operation

‘The effort to undertake this work was initiated by Risaburo Nezu,foumer Director of Science,

‘Technology and industy atthe OECD Thomas Andersson, Deputy Director co-ordinated the work and served as general editor The Individual parts were developed by Graham Vickery and Sam Patsdge IICT), Jean Guinet and Jerry Sheehan (innovation) and Frank Lee (entrepreneurship) Peter Aver enedicte Callan, Mario Cervantes, Alessandra Colecchia, John Dryden, Michael Freudenberg, Dominique Guellec, Vladimir Lopes, Daniel Malkin, Dik Plat, Candice Stevens and Andy Wyckoff also

‘marle valuable contaibutions to the report, and useful input was provided by many other colleagues in SSI Constuctive comments which improved the docament were made by the Directorate for Financial Fiscal and Enterprise fairs Finally the oustanding suppor, ative contibutions and comments made

by the delegates ofthe STI committees, CIBE, CSTP and ICCP and their working partes, have been invaluable tothe work

‘New Growth Patterns,

‘renewed interest

Decomposing the diferences ingrowth

‘Addressing the new factors in growth

ICT use among diferent socal groups: hamessing digital opportunities

ICT use by income

ICT se by educational attainment

ICT use by ifferent social groups

Ct use by fms

Approaches taken to harness digital

Building confidence in using ICTS

Concluding policy implications

ypportunities

Sclence, Technology and Innovation: Implications for Growth

Introduction

Innovation and economic growth: establishing the inks

Increasing economic returns from science an technology

Tessons fom leading counties,

Raising the returns fom RED

Strengthening inter organisational linkages and knowledge exchange

Boosting innovative efficiency across the OECD

Increasing he returns rom government investments in RED

‘Suppor for basic and long-term research

Stimulating business RED and innovation

Exploiting mission related RED

Re-evaluating small business R6D programmes

Increasing the flexibility of government financing

30

“0

10

a 6%

‘Annes

Chuoter5, Entrepreneurship a

Enhancing the contibutions of public research institutions

Structural and organisational reforms Strengthening technology transfer mechanisms

Enhancing the mobility of scientific and techalcal workers Conclusions and policy implications

Growth Introduction

Measuring entvepreneuiship

Role af entrepreneurship

Cross-country comparisons

Factor facilitating entry

Removing regulatory baviers Increasing access to venture capital

Removing biases in tax regimes Facltaing the use of stock options Factors facilitating exit

‘Amending bankeuptcy rules

Strengthening secondary stock markets Evaluating goveinment Suppo,

Conclusions and policy implications

ICT capital has boosted GDP growth

Citations fom national sources in USIssued patents, 1990-97,

Sectoral technological trajectories

Sources of science and technology cited by enterprises

Human resources

CCommercalisation of publilytunded research

"National or institutional guidelines for sharing royalties fom PR

Fotmalites for establishing a corporation, 1998

‘OECD manufacturing trade by technology intensity,

Uneven tiend growth in GOP per capita,

Differences in GDP per capita

Trends in international transactions, by component

Shate of foreign afillates in manufacturing RED and tuinover

(Ouward investment

‘The United States isnot alone in experiencing the growth etfects of ICT

‘The rising contribution af softwate tothe US economy

ICT accounts fora large share ofall iavestment

The price of ICT investment

Figute Telecommunications investment by tegion, 1990-99

Breakdown of labour productivity grat, 1989-95 and 1995-09

ICT industries account fora significant share af economic activity

The IT hardware sector and MFP growth

‘The software sector's small ut rowing rapidly

The software sector employs highly educated workers

Computer workers

Growth of internet hosts per 1000 Inhabitants inthe G7 counties

Competition in OECD telecommunications markets i increasing,

and X Bandwidth iee Index 2 Mbiel

The cost of leased lines inthe OECD, August 2000

Leased line casts and internet development in Western Europe

‘Access costs forthe intenet in OECD counties differ considerably

Counties with low access costs have a greater difusion ofthe Internet

Electronic commerce has developed rapidly in countries with unmetered access

Hours spent online (average per month per subscriber

Broadband peaetation rates in OECD countries

Income isan impostant determinant of access

Educational attainment helps to explain diflerences in acces to ICTs,

Figure Urban homes are more connected thaa rural ones

Internet acess in the business sector by frm size

Growth in patenting, 199299

(Change in MFP and in average intensity of business RED

Average numberof scientific atcles cited in US issued patents, 1998

Publications of US public research as ofall citations in Usinvented patents

Sclence linkage in Selected counes, fr ll patents

Science linkage excluding patents in pharmaceuticals and biotechnology

Spin-ff formation in the 190s

The growing patenting activites of publicy-furded research organisations inthe United States

The growing publicprivate co-operation inthe United States

Governments role in RED differs considerably across the OECD

RED intensity and scientific output

Profile of relative scientific specialisation ofthe three largest OECD economies

Direct government funding of business RED asa percentage of GDP, 1999

Distibution ofthe growth in business RED by indus, 1990-98

Intermediary agencies forthe transfer of itelletual property sights

Patents in ICT and biotechnology relative to GDP, 1999

US company funding for RED by frm siz

Business expenditures on RED in services

Destination of government RED funds by sector of performance, 1999

Trends in global RED expenditures (GERD funding inthe OECD area

5

16

2

4 2%

” 2%

5 Business owners as a percentage of labour force

52 Level of entrepreneusal activity

5.3 Eurostat comparison of enterprise volaliy

54 Share of women entrepreneurs

55 Startup, closure and GOP growth rates forthe United States and Japan

56 GDP growth and star-ups

57 GbPpercapita and entreprencuiship

5.8 Regulatory bares to entrepreneurship 1988

59 enture capital investment in early-stage/eypansion and high-technolony sectors, 1995-99,

5.0 Venture capital investment 1999

5.1 Bariersto entrepreneurship and venture capital activity, 1995.99

5.12 Stock options asa percentage of CEO base pay, 2000

5.13 Length of time that creditors have claims on a bankrupts assets, 2000

5.14 Matket capitalisation of shares of domestic companies

515 Market capitalisation of new markets

LUst of Boxes

3.1 Software capital accumulation andthe Imernet

5.2 Investment in highway inrasteuctare and telecommunications infastructure

35 The development of e-ommerce

3.4 New policy challenges

41 RED and productivity growth: an econometric analysis

42 International mobility of SET personnel an emerging Issue

413 Reforming publiclaboratores in Nomay and Germany

4.4 Managing Intellectual property rights (PRS)

45 Public research spin-offs

cchaner INTRODUCTION The final decade of the last Millennium was characterised by a renewed interest in the

longstanding issue of what determines economic grouth, and how policy makers could, and should, aid

the process in desirable directions The interest vas not least fuelled by new and party surprising

‘atlations in growth pattems acoss, aswell as ultin, counties Also, the apparent importance of new

factors ingrowth, notably new techaologies and how they interact with changes in innovation, in human

capital, and in industrial restructuring and organisation triggered novel ways of thinking,

Against this background, in 1999 Ministers requested the OECD to study the causes of growth

dlisparities and identify new factors and policies that could strengthen long-term growth performance

‘The interim report (OECD, 2000s) presented new evidence on significant changes n growth dynamics

and underlying factors, not ony inthe United States, but also in a numberof other OECD counties

Following a renewed request by Ministers, the final teport, prepared forthe Ministeval in May 2001

provided the overriding poliey conclusions ofthis work (OECD, 20080), Meanwhile, a parallel report on

Sustainable development has taken steps towards integrating the various aspects of growth within a

framework that can ensure that policies and economic developments are viable forthe long term,

including in terms of sacial and envizonmental values (OECD, 2001

‘The OECD Directorate for Science, Technology and Industry (DST) has been intensively involved

In the OECD Growth Project In close co-operation with the Economics Depastment (ECO) and the

Directorate for Education, Employment, Labour and Social Afais (DEELSA}, All the main DSTI

committees, ¢ the Committee on Industry and Business Environment (formerly the Industry

Committee), the Committee for Science and Technology Policy (CSTPI and the Committee for

Information, Computer and Communications Policy ICCP) as well as many of the Working Parties of

these commitiges, have contributed actively tothe project The work of DSTI has focused on the areas

OF ICT, technology and related Innovation issues, and entrepreneutShip This special edition of the

Sclence, Technology and Industy Outlook brings together some ofthe pertinent findings to provide an

‘nedepth, Its more detailed in its treatment ofthese issues than the final report, although it remains

more of a survey and synthesis than the underlying expert reports and working papers, which are

referenced in the ensuing chapters

leshould be ma clear that the report draws on a work agenda which stretches back several years in

time, although a more consolidated effort was made in recent years in order to fully respond to the

Ministetial mandates of 1999 and 2000, The area Is an evolving one, in which tis more dificult to find

standard Solutions and provide policy conclusions “cast In stone” than isthe ease in some domains, This

Is because the factors addressed here ae ke the growth processitsell genuinely dynamic in nature 1

role of technology and organisational structures and changes cannet be understood ina static fammework,

And cannot be examined asthe outcomes of more or less well-functioning markets alone outcomes are

inherently shaped by an interplay between markets and institutions individuals and organisations, fms

and governments, The set-up is becoming altogether more complex as globalisation In the fou of

Intensified trade, investment and technology flows, brings a host of new opportunities but also

pressures ~ and contributes to speeding up the processes of ceation and difsion of knowledge At the

same time, 2 range of regulatory as well as institutional conditions, and therefore the nature ofthe

interactions, continue to ifr widely across societies and national economies đi

haner2 NEW GROWTH PATTERNS

renewed interest

‘The mechanisms determining economic growth have long defied full understanding by economists

and poliey makers alike Several decades ago, it was recognised that taditional investment and

‘employment growth could explain only a minor past ofthe observed vatation in giơath pedormances

across counties The remaining factors were lumped together in a residual retested to as “technical

progress” (Solow, 1957, viewed by many a a “black box” of undetined, exogenous Forces While some

Studies showed the importance of better measurement ofthe various inputs of growth Worgenson and

Griliches, 1967), and ether work, such as the “new growth theory” (Romer, 1990) explicitly sought to

Unravel endogenously determined processes, the challenge of revealing the factors that fundamentally

Shape the observed outcomes, and how policy makers should behave in respect to siowth, has

remained,

Towards the end ofthe last Millennium, there was an intensified interest In these issues, This was

basicaly triggered by evo broad sets of developments One has todo with the many signs at micro and

industria level of the increasing importance of new technologies, and associated structural and

‘organisational change This has shown up, for nstanc, ina rapid advance inthe share of technology and

sklLintensive activities in the economy in vrwally all OECD counties (OECD 20010) A second example

15 the phenomenal rate of giowth of high-technology products in international wade, as shown ia

Figure 21, Meanwhile, advances in ICT have made it possible to iffase and access information ata speed

and on a sale never een belore There are rapidly evolving needs for new skill while old ones are

becoming obsolete Science-industry linkages are vital forthe dynamism of local, regional and national

reduction structures Many services ate taking on entirely new configurations, enabling them to be

Stored and waded like goods, Markets are being subjected to new foims of competition: industries are

restructured internationally on anew scale through various foams of globalisation including mergers and

Acquisitions and stategic alliances, The organisation of enterprises and of the workplace is Being

revamped with the aval of new tools and novel ways of doing things (OECD, 20004, OECD, 2001

‘The second set of developments has to do with observed macroeconomic changes inthe pattems

and nature of growth amang the OECD cauntres in the 1990s, and especially towards the end ofthe

decade." Contrary to popular belie, these changes have nat amounted t0 any’ general increase ia

‘youth compated to previous decades, A comparison of trend giowth rates adjusted for diferences Ia

the business cyele, shows that only three OECD counttles, Australia, ieland and the Netherlands,

registered markedly stionger growth of GDP per capita over the past decade compared with the 19805

{Figure 2.2) Several other countries, including the United States, also experienced a certain

Improvement inthe rend growth of GDP per capita in the 1990s with a further acceleration occurring in

the second half ofthe decade (and which occured at avery late stage ofthe business cycle) In contrast,

many other OECD countries including Japan and much of Western Europe displayed slower siowth, in

Some cases quite notably so Consequently, for 34 OECD countses the coeilent of Varaton in tend

‘routh of COP per capita nearly doubled between the 1980s andthe 1990s [Scarpetta eta, 2000)

While the absolute change in trend growth per capita in the United States during the 1990s as

‘opposed tothe 1980s was small, it has attracted a great deal of attention, partly because the United

States already had the world highest level of GOP per capita in 1990, Sustaining rapid growth ithe

ay

Le

Figue 2.1 OECD manutacturing rade by technology intensity

“ends 0 mane ade Succ 0 mans ae

sea ee ‘shat hin mace eae

Furthermore, looking across countries, there has been a reversal in the long-standing trend towards the international convergence of per capita income in the OECD area (Figure 23) This change is in

‘contrast fo the tend established after World Wari whereby per capita incomes across the OECD area were predominantly converging This convergence was evident regardless af whether it was meacured

In relation to the average per capita income orto that of the mast advanced county, the United States

“There were many contributing factors, including increased international rade, expanded foreign direct investment and the diffusion of technologies Nevertheless from the mid-1970s through the late 19805 the rate of convergence slowed relative tothe average, rellecting both a slowdown in trend growth throughout the OECD and uneven adjustment tothe two oll shocks Convergence picked up again in the mid-1980s, but as of the eatly 1990s catch-up towards the most advanced country reversed dramaticalls, even as convergence towards the mean continued

These changed patterns cannot be understood in terms of 2 turnaround as regards globalisation tends As can be seen trom Figure 2.1, globalisation has continued to accelerate as measured by portolio and direct investment flows In addition, there is ample evidence at both industy and frm level to highlight increasingly intensive restructuting of economic activities across national borders Foreign afliates now account fora significant share of production and research activities in most OECD economies, ranging from around 70% in Ireland ane Hungary down toa few percentage points in Japan

in manufacturing [Figure 2), es more dificult o obtain corresponding information for services but, as

‘an be seen from Figure 2 there tends to be a much higher reliance on presence abroad compared to

Figur 2.2, Uneven rend growth in GOP per capita

Figure 22 Ditferences in GDP por capita

expos in services than in manufacturing Meanwhile the bulk of direct investment nov consists of

‘mergers and acquisitions (MEA), accompanied by a proliferation of strategic alliances Both these forms

of intermationalistion ae closely linked withthe need to better manage rapidly evolving information, research and innovation processes (OECD, 20010)

There is thus no doubt that glabalisation remains a formidable force and that ecanomies are becoming increasingly interdependent Yer there ae signs of grotng income diferences, nat only du to {greater divergence in growth rates between counties, but also among sacial groups within counties, raising concerns about long-term social stability Although globalisation has the potential to being tremendous henefIs there isa fear that many counties and groups of citizens would not only lag behind, but would essentially be lett out of any such benelits, While globalisation over the years has been primarily associated with convergence and catching/up its naw being blamed as the culprit behind

‘rowing disparities In this situation, i is becoming imperative to grasp not only the potential for higher

‘704th, bu also forthe widespread benefits om ths process, and how they can best be gained,

‘Tete ae other 1easons for this renewed Interest In growth With the arival of new technologies, rapid quality changes and an increasingly service-oriented economs, productivity growth is becoming, mare difficult to measure These difficulties are amplified by a lack of comparable measurement methodologies in different countries Recent revisions of productivity grouth in selected services in the United states, for instance, indicate tha afcal figures fail to capture some of the upturn in growth

‘meaning thatthe performance ofthe 1990s and especialy the later part of the decade, was most likely leven more impressive than that recorded $0 far (Fislee and Zieschang, 19%), Furthermore, the OECD

‘countries are confronted with major economic and Social tanslarmations associated with the rapid ageing oftheir populations, In addition, there are concems over environmental degradation, and 9 demand far economic growth that is sustainable in the long term from both 2 social and an

Lu environmental perspective

Figure 24 Trends in international transactions, by component

Decomposing the differences in growth

Before examining specific aspects of growth performance across countries, itis essential to

decompose the nature of the observed diferences Ina growth-accounting framework economic growth

depends on a number of factors, namely increased use and/or improved quality (skill) of labour more

Andior better capital in the production process and greater overall efficiency inthe combination ofthese

factors of production, (multifactor productivity [MFP).” MFP reflects maay types of elficlency

Improvements, such as better managerial practices, organisational changes aad, more generally,

innovative ways of producing goods and services Empirical analysis shows that these factors go some way

toexplaining cross-country diferencesin growth performance Those countries that registered an increase

in GDP per capita in the 1990s have generally drawn more people into employment, accumulated more

capital equipment particularly In information and communication technologies ~ ICT), improved the

‘average quality of helr workforce and, la many cases, improved MFP (OECD 20006,

‘The quantity and quality oflagour In genera, the quality of labour, as measured by the educational

attainment of workers, has risen steadily, albeit slowly, across the OECD by between half a year and a

whole year each decade since 1970 Regression estimates suggest that the long-run effect af each

{additional year of education could raise per capita incomes on average between 4% to 7% (OECD,

20001), While many European countries have displayed quallty improvements these have general

been accompanied by sluggish employment growth In 199, the unemployment rate forthe European

Union was more than double that ofthe United States France, Italy, Belgium and the Netherlands have

high labour productivity, but their lower employment rates and shorter working hours nevertheless

account for an income gap with the United States (OECD, 20006; 2000) Put another way, US workersare _5/

Figuie 25 Share of forsign afiiaos in manufacturing RAD and tumover

Is more income on average for the population 3s a whole

The productivity of labour Whether or not countries grow rapidly a large part of erowth in per capita income is due to changes in labour productivity (Figure 2) Some of these gains may fit the "catch-up" hypothesis which postulates that counties with initially low-income levels should grow faster because they ae able to catch up though vansers of technology and know-how This hypothesis seems to old teue for teland, Korea, Portugal and Turkey (Scarpetta eal, 2000), Along the same lines, Switerand slow output growth per capita would be predicted by its above-average inital income levels, However this isnot universally a factor for explaining growth Most prominently, the US expansion accelerated overan extended period, despite the United States being the country with the highest income per

‘capita and one of the highest levels of output per hour worked Simla, for Denmark Finland, Non\ay

‘and Sweden, the catch-up hypothesis provides few insights ~ the drivers of stiong giowrth have to be Sought elsewhere, Moreover some countses, such as Mexico, had comparatively low per capita income and labour productivity, but did not catch up,

The role of physical capital, To alge degre Improving labour productivity depends on the rate of capital deepening ic the services provided by capital equipment to each worker and on multifactor productivity The faster the capital deepening, the more rapid the growth of labour productivity,

le output per worker The rate of capital investment tends to vary over time and across countries, with long-run averages of Business sector investment accounting for between 10%, and 20% of GDP: Since 1991 the United States has been the only major OECD economy to increase its rate of business Investment every year While the US take-of occured from a relatively low level, the rate of increase has been exceptional as shown in Figure 25, with double-digit increases recorded from 1995 1 1999 A

Fr increase in business investment boosts annual growth rates by as much a5 0.2% 10 03%, generating 2 long-term increase in income per capita of about 13% to 15% 1OECD, 2000),

Asin the case of labour, what matters isnot only the quantity of physical capital, but also the quality

1 Technologieal improvements are important for raising the quality of business investment In contrast to

Figue 26, Outward investment

a ee aa

the 1980s, investment in ICT during the 19905 has been the most dynamic component of business

investment, representing upto half fall new investment in some countries The sharp fll in ICT prices

has encouraged investment, and investors have substituted ICT for investment in other asset, Chapter 3 analysesin greater deta the impact of ICT an the quality of investment and on output growth

Multifactor produciiy The final factor that accounts for changes in GDP gronth is accelerating MFP

routh MFP rose considerably in several OECD countries over the 1990s, notably in Australia, Canada,

Finland, teland and Sweden, but aso in Norway, the United States and New Zealand (Figure 2) the

second haf af the 1990s vend MFP improved further ia several counties, including Canada, Finland and

the United States, MFP grouth is measured as a residual facts ater the contributions of increased labour

and capital have been accounted for which makes it dificl to examine all of the factors that influence ít

Nevertheless, this report takes an in-depth look at several areas that are widely thought to have

influenced MFP during the last decade The technologies that many suspect may have spillover effets

that boost MFP are information and communication technologies, which are the focus of Chapter 3 The

development and diffusion of knowledge such as that emanating from RED and the use of new

technology which generates benefits that exceed the cost of purchasing the equipment (so-called

technology “spillovers are addressed in Chapter 4, Finally conditions for organisational change, one

aspect of whichis entrepreneurship, addressed in Chapter 5, Is an important enabling factor

‘Addressing the new factors in growth

It is against this background that Ministers requested the OECD to study the causes of growth

disparities, and identity new factors and policies which could strengthen longterm growth performance 17)

Since then in ate 2000 and early 2001, there has been a dramatic reversal of fortunes US GDP growth has slowed, and highly valued US equity prices have declined steeply, especialy in the technology sector This has been accompanied by plunging equity prices worldwide, and less sanguine growth prospects in other countries as wel Although the duration and severity ofthis downturn, and possible recession, remains uncertain at present this cyclical swing does not diminish the importance of Understanding the nature and sources ofthe evalving growth dynamics observed in the 1990s Infact, there is likely to be a certain celtionship in thatthe swiftness ofthe recent decline may have been Influenced by overinvestment or exuberance in financal markets dung the heyday ofthe technology boom of the late 190s, This might be considered as a "negative pay-back” from or darker side of the growth record studied inthe ensuing chapters ofthis report On the other hand, itis very dificult to say

‘whether orto what extent there would be a “bubble” at any given point in time, and its just a likely that future opportunities are being underestimated during the present gloom as that they were

‘overestimated during the earlier euphoria, At any rte, the present report Is not about the uptums and the downtuins of the cycle It aims fo examine and umvavel the extent to which sigalicant long-term

‘change altering the fundamental underpinnings of growth indeed, it appears clear that technological and organisational processes are underway, the limits and ultimate consequences of which are unlikely tobe reached for some time ta come, These basic results remain unaffected by the present downturn, Itshould be emphasised that we are only ble to judge the impacts of technologies such as ICT and, even mare so, Biotechnology, over a very short period Nevertheless, its important ta strive to Improve our understanding ofthe possible fundamental changes they bung and the associated policy Implications, at this ealy stage so that we do not unduly diminish or distr thele future potent, This special eltion of the Science, Technology and industry Outlook complements other work undertaken in the OECD Growth Project and related activities by providing an integrated, in-depth review ofthe role OfICT, technology and entteprencurship in grosth, ow developments in these areas have contributed

to shaping recent changes and disparities heween counties in growth, an the associated implications for poliey in different counties

ae

NOTES

| These developments wore explore ia det athe Fist year ol the Grosth Project ac reported in the interim

report (OECD 20000 The underlying work wat undertaken in lose co-operation withthe OECD Economics

Department a supporing tables snd further deta san be found elsewhere (Serpeta! af 200) hat

follows growths measured os COP and as GOP per capt, the most widely accepted indicators I clea that

these measures are aatajronyinaus wth welfare andare ao auted ta catching al the deenaton feconorsic

‘gomt, suche environmental o socal concert, However, consumption posses ae an iporant exper

Stirellare and income growth usualy five senittytoervionmentl and social sues and the meas

Sioested to dea wih hem

21 Multiictr productivity Is aso referred to as total factor productivity Reflecting the overall efetoney with “which labour and capital are used MFP effected bya hot of actor, eluding Innovation, technological

hange and ts uiluson, managerial protic, ergansatianal change and, mote generally, improved ways of

producing goods and semes

yy

haners ICT AND GROWTH

Introduction

ICT is the latest example of a major technology that is transforming activity across the whole

feconoms, just as the steam engine, railways and electricity did in the past ICT has already had

Important economic impacts It has contributed significantly to aggregate growth in several OECD

countses in the past few years, More importants it has brought new competition and has been the

catalyst of change in business, partly responsible for a major restructuring of firms, a change in work

‘organisation, and enabling firms to reorganise transactions, reduce routine transaction costs and

rationalise and restructure supply chains: Manufacturing has become more efficient, inventories and

‘overheads have been reduced as co-ordination costs along supply chains have dropped, design and

production have become integrated and ICT applications have been part of Innovation in services,

Moreover, ICT has spawned value-generating networks between producers and consumers Oa the

‘other hand, there are also transition costs and losers Captoring the benelits cannot be tested as a

aiven but will depend on complementary investments and actions by private and public actors

Ie is too eal to say how important ICT will prove to be compared with previous new technologies The

benefits ae oten long-term, and vill continue to develop, even investment in ICT curently tapers ff with

‘the economic downturn, What is important is that ICT appears tobe a major transformational technology

‘and goveraments have to ensure that appropriate polices are la place to seize the benefits of CT as well as

limit any negative effects, Technologies based on networks such a telecommunications and the Intemet,

bring the benefits of networked economies ~the more people that use them the greater the benefits they

generate fo al users The development of ICT panly resulted rom poliyefforsin some OECD counties to

create a more innovative economy Governments should build an environment that is conducive to

Innovation, removes bariers to diflsion and is adaptable to futute technological breakthvoughs, such

polices are discussed move generally later in ths repor

Contribution of ICT investment to growth

Investment in physical capital plays an important role in growth texpands and renews the existing

capital stack and enables new technologies to enter the production process, While some countries have

‘experienced an overall increase in the contibution of capital to growth over the past decade, ICT has

"yplcally been the most dynamic area of investment This section focuses on this component, with ts

potentially very large Implications for growth, rather than on non-IT investment, The dynamism of ICT

investment reflects rapid technological progress and strong competitive pressure in the production of

ICT goods and services leading to steep declines in prices The US (hedonic) producer price index for

computers, for instance el by over 4% annually between December 1990 and December 2000 (United

States Bureau of Labor Statistic, 2001), This decline, together with the sowing applications af ICT, has

encouraged lavestment ia ICT away from other assets (Figure 3.1, The available data for OECD

Counties show that ICT investment rose Irom less than 15% of total non-residential investment ie the

business sector in the early 1980s, to between 15% and 35% in 1999, Investment in hardware has

typically increased at the mest rapid rate, while software investment has also experienced fast grosth

although from a small base (Colecchia, 200) 2

ia

gu 8.1 Tho United States isnot alone in exporioncng the grow aoc of ICT

Coniston CT capt cutpl rom)

Ân the 1995-99 petiod, soltkare capital accumulation accounted for a third of the overall

<ontibution of capital to output growth (Bex 3.1, This holds across all OECD counties for which

software data are available, with the exception of Japan The United States provides the most stiking

‘example since the average percentage contribution of software i 1995-99 is up by a factor of four from

its 1980.85 value Neversheless, these observations demonstrate that the United States is not alone in

‘experiencing the “growth” effects of CT

Box3.1 Software capital accumulation and the Internet

‘one explanation forthe surg n thecontibuie of sofware investment isthe emergence and rapid

lifsion of new general-purpose technologies such a the Internet What nev! compared to other

technologies I thatthe Internet provides an inastictre for new forms of electronic business The

evelopment of the Internet hence entails various waves of complementary and sell-einfrcing

‘ovesment Following the fist wave of investing in communication Iniestucure, there fsa second wave

Ininvestmeat in applications (software) and then a third wave characterised by the development of or- in aves i tu, the growth of elie aves generstes demand for ne techlogylafaeTce

and applications, or instance, new mulimedia applications requte continuous improvements n cet

{echneog) sn innovative software, enabling the urea video, speceh, animation and music Figure 3.2

‘hows the contribution of softvarecaptal fo output growth inthe United States and the timing of malar

Imeret developments

‘The shift investment towards ICT has also leđ to a change in the composition ofthe capital stock

In OECD countries towards assets with higher ‘marginal’ productivity ie an improvement in the overall

quality of the capital stock Schreyer, 20000 The improvement in quality implies that investment in ICT has had larger elects on GOP growth than would have been achieved by similar levels of investment in

‘other assets In the United States, ver the 1995-09 period, increased quality is estimated to account for

‘ver 05 percentage poiats of the total contibution of capital to GDP growth (I.7 percentage points) In

‘Austral, about one-quarter of the 1.6 petceatage point contebution of capital fo GOP growth

‘over 1990-99 i estimated to be due to improved quality

Despite the emerging benefits of ICT, some OFCD counties have seen only a slow increase in ts

use Barriers te competition may be an important factor Globalisation is an important component of

this process since it opens new avenues for market entry and knowledge transfers and forces firms to

ook more and more to innovation and technology to help them restructure and thrive (see Chapter 2)

ay

Figur 3.2 The ising contribution of sotware to tho US economy [DICT equipment Fir Snes Fanon |

= 2.0% | etNon- oT capita | —- www Taare

Bion

8 ose

1971 74 «77 «80 8S BD

Fims in the United States and Canada have enjoyed considerably lower costs of ICT investment

‘goods in the 1990s than firms in most European counties and japan (Figure 3.4) Low costs have Undoubtedly helped to stimulate Investment Bares to trade, in particular non-tanif ares related

Fique 33 ICT accounts for a targe share of allinvestment

| Franco TT

Figue 3.4 The price of ICT investment Pie tris wth he Une Stats, average of estates 955 and 198

aii

2⁄2⁄⁄ “ỷ h2

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to standards, impor licensing and government procurement, aswell asthe level of competition within

counties” explain an important part ofthe cost differentials ver time, however Internationa tade

‘and competition erodes cross county price differences The evidence suggests that in 199 the prices

OfICT investment goods in other countries were already much closer to those inthe United States than

they were in 1993; since then they have come dawn further across the OECD Policies play an important

role in influencing the process, both domestically and internationally, through measures such as the

\W10 Information Technology Agreement and liberalisation of trade in elated services

‘The investment and ditlusion of ICT depends not just on the cost of the investment goods

‘themselves, but also on the associated costs of communication and use once the hardware is linked to 2

network, Regulatory reform of the telecommunicaions industry has been of particular Importance in

driving down these costs It has led to more entrants, greater technology difasion, Improved quality and a higher rte of innovation This has benefited the industry, as well as the economy’ as a whole Counties

that moved early ta iberalise their telecommunications Industry naw have much lower communications

costs and, consequently a wider usage and dilusion of IT technologies than those that ollowed late

Investment in communication networks Increased considerably dung the second half ofthe 1990s

Ifigure 351 In 199 telecommunication caniers had capital expenditures of USD 200 billion, The maior

contributing factors were new market entry, rising evels of investment in Internet backbones, expansion

and digitalsaton of wireless networks and large inereases in investment in local access infrastructures

‘The United States was responsible for much of the increase in communication investment during this 2)

Figue 3.5 Telecommunications investment by reglon, 1900-98

Seuee C001)

period partly as a result of the 1996 Telecommunications Act which opened local markets to Competition Euopean investment started to increase towards the end of the decade, partly as a result ofthe 1998 opening of European Union markets to competition, By way of contrast, after a sharp inctease in investment during the middle ofthe decade, this gure has since declined in lapan

Investment and use of CT Is likely to be greatly encouraged by the growth in the market for mobile communications That growth is based on competition and its impact on commercial and technological innovation in areas ranging from pre-paid cards to lightweight terminals Some othe fist data services are also emerging, including content provision, but at relatively low acess speeds In Japan, NTT Docomos

“Mode” service Isa prominent example of pioneering st steps in wireless Internet access In March 201, two years after its launch, the service had over 35 millon subscribes, A wide range of sewices povided by numerous entepises ate emerging and this is helping to create a market for mobile electronic commerce,

lust asthe Minitel pioneered electranic commerce aver fixed networks in France, new platforms continue to emerge In the case of mobile communications the next generation of wireless services wll deliver levels of performance more in ine with current access using aC and a fixed network connection, Fixed communication networks will of course, catique to evolve, and will provide much higher access speeds than are commonly used today lthoush expenditure on communication networks ma’ curently have steadied, telecommunication caries have announced major new investment in access networks Using optical re, fixed wireless" and DSL (Digital Subscriber Line! technologies

‘growth, particularly when combined with organisational change and effective human resource strategies

26 involving education and training Substantial evidence exists at fim level to show that ICTs can have

Box 3.2 Investment in highway infrastructure and telecommunications infrastructure

i

In the united state, since 1997 investment i information infastuctue has surpassed that in

highvays, Wile caston speeded in interpretation ofthis ađiste tis suggestive ol the areal oan

Be arity nt a lc Eerie ncn ato el

positive effects on firm performance, productivity, competitiveness, employment, ete (see, for

‘example, Gera cl, 1999)" There is also increasing evidence thatthe effective use of ICT facilitates

roth at sector level For some counties inatably Finland and the United States, the role of ICT-using

Industies in labour productivity growth increased in the secand half ofthe 1990s (Figuce 3

Meanuhile, ICT industries themselves contribute an important share of business sector value

added and business sector emplayment, Their shares in value added and employment vary

Considerably across countries but thelr relatively high growth rates in most countries have contributed

Positively to aggregate growth peslormance (Figure 3.7) Being able to tages or respond to high grout

In demand lor thelr goods and services outputs, they have made important contributions to overall

‘economic growth in those counties where they are significant

tn tems ofthe broader srouth picture across the whole economy, few OECD economies the United

Canada, Australia, reland and Norway —have increased wend growth bth in GOP per capita in

‘the 1990S compared with the 1980s, and in adjusted multifactor productivity Four of these countries have

2 relatively large share of ICT {manufacturing and services} in value added and employment: only

Australia does not have a larg ICT sector In countries that have seen a slowdown in trend GDP and 2

deceleration in adjusted MFP growth, the picture is more mised, with Some counties having lage ICT

Sectors, others not For those counties that have both dota sets, MFP growth inthe most recent petiod

11995-99)s positively and weakly coreelated with the share ofthe ICT sector in business value added, but

the corelaton isnot significant Similar patterns apply or ICT manufacturing, where Australia and Norway

Land Denmark) have relatively small ICT sectors and relatively good adjusted MFP growth, the corelation

iSagain postive but not significant (soe Figure 381."

Figue37 IGT Idusples account or

Porariage of buses seco, 1998 net valle yar

ta 1444/0044 4ý/7 GLE

vce! pEoo gu)

Having an IT hardware sector is thus not a prerequisite for growth based on new technology

Geographical proximity to hardware producers may not be as important for ICT users as proximity to

other specialised ICT sector services such as software and IT service providers, which are necessary

\when firms need local skills and advice to implement IcT-elated changes which have laige patential 10

raise MFP grovth Overall the presence ofa strong ICT sectors likely to help improve the ICT sil base

and enhance diffsion through user producer interactions, On the other hand, much of the production

‘FICT hardware is highly concentrated, because of its lage economies of scale and high entry casts:

establishing a new semiconductor plant cost some USD 100 millon in the early 1980s, but as much as

USD 1.2 billon in 1999 (United States Council of Economic Advisors, 2001), suggesting that for reasons

‘of global efciency such plants wll be concentrated in afew countses” All counties cannot compete In

laige-scale semiconductor production even If they can all participate in specialised niche products in

fact, by removing trade barriers and by giving up ineffective hardware production, some countries,

notably in the Nordic region, obtained an edge in software as hardware prices came down quickly

because of elatively inexpensive imports compared with the costs of domestic hardware praduction,

Software industry

Because the ICT sector is a somewhat heterogencous collection of hardware manufacturing,

telecommunications services and software and (1 services, itis useful to explore some of the

Components that make up the sector (OECD, 2001) Software has been seen as one of the more

‘dynamic pats of the ICT sectox and as a strong conteibutor to growth performance {Figute 3.9)

Nevertheless as for the ICT sector as a whole, there is no simple relation between the relative sie of,

the software sector and improvements in adjusted MFP growth between the 1980s and the 1990s Of

counties witha relatively large software industry in business sector GDP or employment, only four out

fof seven had above the median adjusted MFP growth in the 1995.99 period (Sweden, Netherlands, 2)

Figue 38 The ICT hardware sector and MFP growth

‘Sha of 1 manacrg tute va ced, E63)

‘An important contibution to growth from the software sector comes via Inputs from highly skilled workers and the use of thelr software products and services to improve eficencies throughout the economy, for example through Internet and e-commerce applications (Box 3.3) The software sector is Uniformly high skill cross all countries for which data are available, and the sector employs 3 Sgnifcanty greater share of highly educated workers compared with the share of tertiary educated

‘employed across the whale economy (Figure 3.10,

Furthermore software and related sills are not confined tothe software of ICT sectors They are

‘spread widely across the whole economy, ensuring that ICT applications are developed and operate effectively and make up a significant and growing share of total employment outside the ICT sectors [Figure 311) Data forthe United states and France show that there are consicerably more sofare and

“computer spedaiss working outside the "sofware sector than within it These employees are part af the

‘wider phenomenon ofthe widespread fusion and wse and ubiquity of CT throughout the economy

“Telecommunication networks,

Access to telecommunication network increased enormously during the second half of the 1990s,

‘The total number of fixed network access channels and cellular mabile subscribers inereased from

22 563 milion in 1995 to more than | billion in 2000 ver the same peri the numberof internet hosts grew

Figuwe 3 The software sectors small but growing rapidly ator business sco employment et bsass sar GOP

‘saves OFC 0

‘rom 5 milion at the beginning of 1995 ta more than 110 milion by February 2001 Nevertheless growth

‘ates difer considerably among counies

By the beginning of 200, only four OECD countries Turkey, Hungay, Poland and the Slovak Republic)

still had monopolies in the provision ofall or some fixed network services In the wireless sector, the last

‘monopoly as eliminated in 1998 Figure 3.13) This does not imply that effective competition will

Immediately take old, The ability of telecommunication operator to compete in long-distance matkets has

heen more successful than in the loca lop market There ae a numberof reasons for ths ineldiag that i

requires elatvely less investment often deals wth customers who tend tobe more price sensitive, and that

the technology is available to allow customers to change sevice providers rapidly with litle cost and even

fon a call-by-call basis is important for regulators including competition authorities, to monitor the

petfoemance of markets and the development of competition by examining market shares, pricing and other

competitive practices Some regulators do not wadertake this and In a numberof eases, regulators are

tunable o obtain the data necessary fr evaluating how competition is developing

In some countries, suchas Finland, Germany; Japan the United Kingdom and the United tates, new

‘entants had aleady taken more than 30% ofthe long-distance market in 1999 n other countries, like

.Austalls aly, Korea and Spain the incumbent fm still held on to move than 8% ofthe market in 1999,

which could point toa lack of effective competition or mare recent liberalisation, There is more to be

done belore competition in telecammunication markets takes hold in many OECD counties although

‘recent market opening measures ae increasing competition

An example conceins the costs of leased lines, These lines are wsed to transport large volumes of

information between firms and provide the building blocks for 82B electronic commerce Liberalisation

has significantly lowered the prices of leased lines in recent years, particulary following maior

‘communications reforms in Europe since 1998, For example, the price of a2 Mbivs ine between London _ !/

Le

Bor 33, The development of e-commerce While electronic commetce has ern pid n recent year, it til represents a relatively sal valve compared to total business activities ts foo small to explain provements In aggregate productivity growth, eg Inthe United states nthe United States, for example, business to business Commetce (828) accounted for around USD 6 billion in 199, mote than 9% of total e-commerce Manutactsng led with 1999 e-commere shipments value el goods tnd senvees sald on ine ove open networks such 9 the Internet and over proprietary networks unning systems such av Electronic Ota Intorehongel accountng for 20 (USD 49 bili) ofthe total value of manufacturing shipments

merce sles representing 533 (USD,

ed service Industries ecommerce revenues accounted fo 8% 1USD 25 for those induses Real ade, the focus of much e-commerce attention, had e-commerce sales in 199 F055 (USD Is billion f toa fetal sles Retall ecommerce sales inthe United States in 200 [data irom a dllerent survey) accounted for about USD 28 Sbilion, of about 0.8% of oll retail le In Denar, sleconiccommors accounted fr about 1 cf busioss ales n 2000 wth the jor part (878) being business to business It appears smaller In other OECD counties for which data are Becoming {valsble In Austral around 0 ofall orders were received si the Interne in 19912000 In Canada

“round 0.4 ofall cuntomer orders were recived over the intern in 20,

E-commerce has major potential to mosly business strategies and suuctues inthe longo er, panicatarly in 828, Preliminary results af avallable fom the OECD electric commerce business Irpacts projec (ESIP whic does a common anaiticalramewerk and methodology ta undertake fim level ace studies in diterensactors in ton countes Thi work shows thatthe Internet anu and eal = ised very extenivey wth castomers for advertising and information services and with supplier or Information services However core business transactions n ordering bling payment and delves with

<istomers and suppliers ae still more frequently cated ou ove secure propritaty elecuonic data interchange (2D) sytem Ordering billing and payment are migrating rom EDI ystems towards the we,

‘ad also towards closed sjstems Such os EDI over the Internet and extanets Fitms expected and (epeteneed lapekral etomacees lege li bislscrsleaicne ME = cap Information capture Inpovation impacts were In enhanced product diversifiction in process ae Gore ned

“heordination and loistis and increased inerorgenisationaltuse Overall the study nupgest that

‘ecommerce srateuies enable firms to present «broader ange of prods, reduce costs of production

‘and dsibution of goods and services manage thetr supply chains more eflecively and Improxe

‘communications and felations Wi custome ad suppliers But litle quantatveiforaion on pacts ISyetavaiable (OECD, 2019)

‘Ecommerce may provide considerable matkot advantages to those fms and network a ons which -accensflly adopt ex organisational methods An example tthe optical networking industry n Canad

‘there inventories declined frm 3040 days 3 feu years ago to 12 days today naa eanom seas

‘commerce and elated ict applications have improved product development procurement and supply Earproducers ae able to reduce sme of the costs of itermedaton, foveansing production and the Interface with customers and improving the through low of production and estomer information The

‘tvngs could be substantial 9 many seas Korean ear producers expect that he coat f procurement ol eee career eo 0n Barserst futher ace of e-commerce were perceived to be elated to lack sta aning and sls Tel can côn in on SH ca Intellectual propery protection) Government polities generally were not secn asa major baer to

‘deption, bat neve sometimes seen as not sufictentlyfaatating exommerce, parteualy sm education Sndltainng but also ater seas |OECD, 2019,

The price of leased lines, alongwith factors such as quality and availability, is among the key factors influencing the rate of internet development for users Inthe absence of competitive alternatives, experience has shown that telecommunication caries wth significant market power will exercise that

Tfgu/e 3.10 Thêsefiuare seeleremploys hghly educated workers

Figue3.12, Growth of Internet hosts per 000 inhabitants in the G7 counties

Another example cancerns the costs of internet access for consumers The prices charged to consumers by Internet Service Providers SPs) are direclyafected by the cost of capacity rom backbone networks The level of prices difes considerably ro county to country due to the fixed and variable telephone charges set by telecommunicalons fms (Figure 3.17), Such cst diferences aso seem to alec the uptake ofthe Internet, countries with lower access costs typically have a greater number of Internet hosts Figure 5 18) The rate of intemet demand and the development of infrastructure supporting,

‘electronic commerce in differen countries are undoubtedly influenced by many factors This includes not only the level of pricing but also the structure, as regards metered is unmetered, as well asthe quality land speed of the network Not least for electronic commerce, factors such as security, ust, user Confidence and sls ate also fundamental determinants

The development of fully-fledged competition atthe local level is a major challenge In 1999,

re enteants had only a very small shave of local markets ln vitally all OECD countees, only In the United Kingdom did new entrants have an important share of local markets (OFCD, 20018), More competition inthe local loop would drive prices down further and wauld help to change the pricing structure of the Internet Consider, for example, uametered access tothe Internet (i rather than [2 paying by the minute, users pay either a flat fee or na fee for unlimited Internet access) Australia,

Figure 2.14, Band-X Bandwidth Price Index (2 Mbit)

_`

`

Figue 215, The costof leased lines in the OECD, August 2000

‘Charges fora bschet atonal lisse ng ol? Mepabs pr cons, OECD average = 100

aml

279 tee 10/4/47

‘Saas! 0600 1014

Figue 2.16 Leased line cost and Internet development In Western Europe

Figute 3.17 Access costs forthe internat in OECD counties ifr considerably

Co 40 hot aa ub peak ies, September 250, USD PPP

Sac OEED 01M

~‘which are needed for secure transactions on line ~ and move rapid growth in secure servers (igure 319),

Unmetered access was available from the leading telecommunication carrier in twelve OECD countries by the beginning of 2001, up from five at the beginning of 2000 (OECD, 20018 Count

‘where unmetered offers have been introduced include Finland, Hungary Iapan, Portugal, Spain and the United Kingdom This umber Is expected to increase in 2001 as new interconnection frameworks become avalable, designed to enable unmetered olfers for users For those counties which have not yet done so, an important step is to implementa specific interconnection framework which enables a Hat rate Internet access option to be available to Internet Service Providers (ISPs) to allow for lunmetered charges to consumers

The tend towards flat rate options being available to users is already having an impact on the amount of time users are spending online, Freeserve, one ofthe leading ISPs in the United Kingdam, Feported that average usage per subscriber had increased to 22 hours per month by the end of 2000 {igure 3.20) The sharp increase corresponds to the availability of flat rate tals in the United kingdom during the second half of 2000, Only AOL in the United States [36 hours} and Telecom New Zealand's XTRA (23 hours) report more online time per subscriber - with flat rates having been available in bath countries fr a longer perio,

Figue 5.19, Eleeronlecomimaree hào develped rapÏd ln eounuies vì unmelered secsse