ICT and Total Factor Productivity Growth: Intangible Capital or Productive Externalities?

The views and opinions expressed in the report are those of the author alone and do not represent, in any way, the views or opinions of the Department of Industry or of the Government of Canada.


Industry Canada

Abstract

What accounts for the exceptional total factor productivity (TFP) growth performance of the United States and to some extent some of the other OECD countries after the mid-1990s? Most commentators have pointed to enormous productivity gains in the production of Information and Communications Technology (ICT) as the answer. But according to standard neoclassical theory, technical progress in one industry should not raise TFP growth in other industries. Yet the TFP acceleration is due mostly to industries that use, but do not produce, ICT capital. This paper investigates two explanations for this apparent puzzle, one based on the existence of intangible capital that is not measured in the National Income Accounts, and the other based on productive externalities.  While both explanations can match the observed behavior of TFP growth, the two have very different implications for economic policy and welfare. We show that the two explanations can be distinguished using a cross-country, cross-industry data set. Using newly constructed very comprehensive data covering 16 OECD countries for 24 industries for a period of 32 years, we find evidence of intangible capital accumulation, but no evidence of positive spillovers to ICT investment. These results are robust across different estimation techniques and under different assumptions regarding market structure.

Table of contents

  1. Introduction
  2. The Basic Model
  3. A Basic Identification Problem and its Solution
  4. Data
  5. Results
  6. Conclusions
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