Technical Efficiency and the Role of ICT: An Empirical Study Across OECD Countries

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. Now, it is almost certain that ICT had a significant impact on labor productivity growth in the USA and EU and accounts for a part of the faster productivity growth witnessed in USA during the late 90s. There is less consensus, however, among the economists on its impact on technical progress and total factor productivity growth.
We wish to contribute towards this direction by examining the impact of ICT capital on the technical efficiency (which constitutes a part of total factor productivity) of OECD countries.  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.
Furthermore, this study does not treat ICT as a conventional type of input affecting output through traditional channels of capital deepening. Instead, we evaluate the ICT impact by explicitly assuming that ICT is a special type of technology and knowledge capital, the impact of which should be evaluated on total factor productivity through the channel of technical efficiency. Importantly, we evaluate the percentage contribution of ICT in reducing cross country inefficiencies.
 At the aggregate cross country level, the measurement of technical efficiency might be particularly useful in identifying ways to promote economic growth. A low level of technical efficiency, for an individual country, would imply that higher economic development could be achieved by efficiently producing more output with the same level of inputs. On the other hand, a highly efficient country should lie more on technical progress and innovative activity in order to achieve higher economic growth.
We use stochastic frontier analysis to quantify the impact of ICT in cross country technical efficiency. A relatively recent production frontier approach is used which simultaneously estimates a stochastic production frontier with a technical inefficiency function. We apply this approach by looking into the effects of ICT on technical inefficiency across a panel of 17 OECD countries (Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, Portugal, Spain, Sweden, United Kingdom, United States) in the period 1990-2005.
Clear evidence is found for a significant ICT impact in the reduction of cross country inefficiencies. In particular, the results show that, on average, ICT contributed by more than 5% in the increase of technical efficiency. The efficiency estimates indicate that the most efficient countries are Belgium and Netherlands, followed by the USA.