ICT and Efficiency of Production: A Comparative Study of OECD Service Industries

Technological progress is considered as the most important factor that fosters long run economic growth. Information and Communication Technology (ICT) is considered as the latest major technological breakthrough which has broad applicability across many sectors of the economy, has many and varied uses and allows for a wide range of technological complementarities. Although it seems that ICT requires costly adjustment at initial stages of development, it is expected that the long run growth impact of ICT will be highly important. The most recent literature has verified that ICT had a significant impact on growth in the USA and the EU during the late 90s. There is not consensus, however, among the economists on its impact on total factor productivity growth.

This study wishes to contribute to this debate by examining the role of ICT in reducing technical inefficiencies across OECD service industries. The existing literature has concentrated more on the ICT effects on growth or productivity and, although an essential relationship exists between efficiency and productivity, the question on whether ICT affects the level of technical efficiency has been examined in few firm level samples and few cross country studies.

This study contributes to the relevant literature by applying stochastic frontier analysis and estimating the relationship between ICT and technical inefficiency at the industry level of OECD countries. In this way, this study will evaluate the impact of ICT not only through the channel of capital deepening but, further, through its impact on the efficiency of production.

It should be noted that, instead of using cross country data, this study chooses to use industry level data, since there might be large heterogeneity in the production structure at the aggregate level and pooling countries together might lead to misleading results. Furthermore, this study estimates the impact of ICT in service industries, because growth differences in market services reflect growth changes across countries and, also, because service industries are the most intensive users of ICT.

To quantify the impact of ICT in technical efficiency, this study simultaneously estimates a stochastic production frontier and a technical inefficiency model. This approach is applied on panel data from service industries across a sample of 16 OECD countries during 1995-2004.

The obtained evidence indicates a negative relationship between ICT and industry level inefficiencies in the industries of hotels & restaurants and real estate, renting & business activities and a significantly negative relationship in transports & storage and wholesale & retail trade. The most efficient countries are Netherlands in the industry of wholesale & retail trade, Ireland in hotels & restaurants, as well as in post & telecommunications, UK in transports & storage and USA in financial intermediation and real estate, renting & business activities.