Working Paper: CEPR ID: DP6732
Authors: Saul Lach; Gil Shiff; Manuel Trajtenberg
Abstract: There is widespread agreement about the important role played by Information and Communication Technologies (ICTs) in the US productivity revival and in the evolving US-EU productivity gap. In Israel, the ICT sector grew very rapidly during the 1990s and became a hotbed of innovation and technological advance by worldwide standards. Yet, Israel's overall productivity growth remained sluggish, with traditional sectors both in manufacturing and services seemingly unable to benefit from the success of the ICT sector. The main goal of this paper is to shed light on these twin developments. We use newly constructed data on industry-level ICT investments between 1990 and 2003 and estimate production functions for manufacturing industries augmented to include ICT capital. We find a significant elasticity of value-added with respect to ICT capital, which increases considerably with the technological sophistication of the industry. We also find that ICT capital deepening is the most important factor contributing to value added growth in manufacturing during 1995-2000, before the burst of the dot.com bubble. Because most ICT capital is concentrated in high tech industries, growth in manufacturing has been mostly confined to the high-tech sector. Facilitating the adoption of ICT in traditional industries is therefore crucial to achieving economy-wide growth. The Israeli experience described here - although restricted to the manufacturing sector - provides a useful example of the benefits and limitations associated with a growth strategy centred on a local ICT producing sector, however successful it might be.
Keywords: ICT; productivity growth
JEL Codes: O3; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ICT capital deepening (O30) | value-added growth (O49) |
| value-added growth (O49) | high-tech sectors (L63) |
| technological sophistication (O33) | elasticity of value-added with respect to ICT capital (O49) |
| ICT capital deepening (O30) | productivity growth in high-tech sector (O49) |
| high-tech sector (L63) | stagnation in traditional sectors (O14) |
| ICT capital (O30) | value-added growth in manufacturing (O49) |