ICT Intermediates, Growth and Productivity Spillovers Evidence from Comparison of Growth Effects in German and US Manufacturing Sectors

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1 Ifo Insttute Lebnz Insttute for Economc Research at the Unversty of Munch ICT Intermedates, Growth and Productvty Spllovers Evdence from Comparson of Growth Effects n German and US Manufacturng Sectors Thomas Strobel Ifo Workng Paper No. 123 February 2012 An electronc verson of the paper may be downloaded from the Ifo webste

2 Ifo Workng Paper No. 123 ICT Intermedates, Growth and Productvty Spllovers Evdence from Comparson of Growth Effects n German and US Manufacturng Sectors* Abstract Recent pre-crss growth accountng exercses attrbute strong productvty growth to ncreased nvestments n nformaton and communcaton technologes (ICT), especally durng the md-1990s. EU-wde stylzed facts about a growng US EU productvty gap are confrmed for Germany, partcularly showng no substantally economy-wde effects from ICT for German sectors. Tracng the effect from ICT durng the perod , ths study takes a dfferent vew by expandng the concept of value added to gross output, addtonally ncludng dfferent types of ntermedate nputs. The fndngs suggest that mported ntermedate nputs played a more domnatng role n Germany than n the US, partcularly mported non-ict and ICT materals, although domestcally-produced ICT materals were mportant as well. In the US, man drvng forces were domestcallyproduced non-ict servces and ICT materals, even though mported ICT materals were on the uprase post Moreover, there were decsve dfferences s countres TFP growth rates wth about twce the sze n the US. Accordng to robust econometrc analyss there have been strong spllover effects from ncreasng domestcally-produced ICT materals n German TFP growth, whle for the US TFP growth orgnated from ncreasng mported ICT materals. It wll be argued that these dfferent productvty effects stem from dfferent functons of ICT n the producton process. However, TFP growth dfferentals between Germany and the US durng 1991 to 2000 are explaned to a great extent by strong US TFP growth n the Electrcal & Electronc Machnery sector. JEL Classfcaton: C23, C43, L16, L23, L60, O33, O47. Keywords: Industry productvty growth, nformaton and communcaton technology, ntermedate nputs, growth accountng, technology spllovers. Thomas Strobel Ifo Insttute Lebnz Insttute for Economc Research at the Unversty of Munch Poschngerstr Munch, Germany Phone: +49(0)89/ strobel@fo.de * I thank Theo Echer from the Unversty of Washngton for extensve dscusson. I am also grateful to the German Research Foundaton grant # for fnancal support and Elke Kronjäger for sharng fo ndustry-level asset-specfc nvestment data for Germany.

3 1. Introducton The analyss of ndustry-level productvty and output has a long tradton of mplementng two dfferent approaches of output measures. One of the approaches employs ndustry gross output, whch s defned as the value of ndustry producton (e.g. fabrcaton of machnes, cars or semconductors). Therefore prmary nputs, lke captal and labor, plus ntermedate nputs purchased from other ndustres are used. An alternatve approach employs ndustry value added,.e. focusng on the contrbuton of prmary nputs solely, whch s obtaned by calculatng the dfference between gross-output and the used up ntermedate nputs n the producton process. Regardng ntermedate nputs, those are usually separated nto energy, materals, and servces. The emergence of the New Economy made clear the mportance of nformaton and communcaton technology (ICT) equpment n generatng output and ncreasng productvty growth (Bosworth and Trplett, 2004; Jorgenson, 2001; Jorgenson et al., 2005; Olner and Schel, 2002; Stroh, 2002). However, most of the recent studes of the aggregate economy or studes that merely focus on value added as an output measure, do not explctly account for the flow of ntermedate nputs n ICT. Nether do they explctly determne spllover effect from ICT ntermedate nputs on sectoral productvty growth. Hence, by usng a gross-output measure nstead of value added, all growth effects from ICT and Non-ICT captal, labor, as well from ICT and Non-ICT ntermedates nputs can be examned. Ths separaton enables the researcher to trace the effects from nformaton technology, lke computers, telecommuncaton, and software, n sectors that ether use ICT as captal nput (.e. frms that nvest n new computer equpment) or as an ntermedate nput (.e. frms that buy and ncorporate semconductors nto ther products). One of the man contrbutons of ths study s n applyng the descrbed gross-output concept to extend our knowledge about productvty effects from ICT, whch so far receved a lot of attenton beng classfed as nvestments, whle ICT as ntermedate nput has receved relatvely lttle attenton. Ths may be of nterest snce ICT goods are prmarly produced n the Electronc Components and Communcatons ndustry, but are purchased by many other ndustres for the use as ntermedate nputs, e.g. n automobles and machne tools. To dstngushng between ICT as a captal nput and as an ntermedate nput necesstates the use of a complete model of ndustry gross output and nter-ndustry flows that provde an explct role for ntermedate nputs. The model mplemented therefore wll follow Jorgenson et al. (2005). Stroh (2002) outlnes that by concept frms and ndustres actually 2

4 produce gross output from some combnaton of prmary and ntermedate nputs. Ths should be reflected n the producton model. Value added, on the other hand, s an artfcal construct that reflects only prmary nputs and therefore does not correspond to a welldefned output concept at the ndustry level. Moreover, only under specfc assumptons about the separablty of prmary nputs from ntermedate nputs does a value-added producton functon exst and provde a vald descrpton of the underlyng producton technology. Other former studes that accounted for ntermedate nput data to estmate ndustry productvty are Hulten (1978), Jorgenson, Gollop, and Fraumen (1987), Gullckson and Harper (1987), Bosworth and Trplett (2004), and Bartelsman and Beauleu (2004). Besdes studes on aggregate ndustry data, recent papers on development economcs nvestgate the mpact of mported ntermedate nputs on frm-level productvty. Van Besebroeck (2003), for example, does not fnd any supportng evdence that Brazlan frm productvty ncreased by mportng more advanced ntermedate nputs. On contrary, other studes lke Amt and Konngs (2007) and Kasahara and Rodrgue (2008) suggest that better access to foregn nputs has ncreased frm productvty n countres lke Indonesa and Chle, respectvely. In general, n the growth lterature productvty-enhancng effects from mported ntermedate nputs are dentfed va two channels: ncreased varety and/or qualty n nputs. Emprcal evdence for the former channel has been provded by Goldberg at al. (2009), where combnng foregn and domestc nput varetes ncreased product scope of Indan frms. The second channel has been extensvely dscussed n terms of qualty-ladder models postulated by Grossman and Helpman (1991) and Aghon and Howtt (1992). However, ths study wll be more n lght of the latter as t focuses on dfferent types of mported and domestcally-produced ntermedates embeddng dfferent levels of technologes (.e. ICT and non-ict), and the functonalty of these nputs n the producton process. In partcular, embedded technology has been determned an mportant drvng force of TFP dfferences across countres (Casell and Wlson, 2004). To analyzes the effects from ntermedate nputs on gross-output growth dfferentated by dfferent ntermedate types, we focus on the manufacturng sector of two ndustralzed countres, Germany and Unted States. Therefore we use 2-dgt NACE ndustry-level data as provded by the Ifo Industry Growth Accountng Database (IIGAD) for Germany and the EU KLEMS Growth and Productvty Accounts (EU KLEMS) for the US. 1 The data employed covers the perod from 1991 to 2005, ncludng the emergence phase of the New Economy and ts apex n See Table A1 n the Appendx for a detaled lst of ndustres. 3

5 The emprcal nvestgaton reveals that accordng to Jorgenson (1991) comparng the contrbuton of ntermedate nput wth other sources of output growth, the former s by far the most sgnfcant source of gross-output growth. However, growth accountng analyss shows that the growth contrbuton from ntermedates compared to value-added s much more mportant n case of Germany than n the US. US output growth us much more determned by ncreases n value added. Detaled analyss of ntermedate nput contrbutons shows that mported ntermedates play a more domnatng role n Germany than n the US. Thereby t s partcularly the mported non-ict and ICT materals that consttute the hghest shares, although domestcally-produced ICT materals n Germany are smlarly hgh as mported ICT materals wth both showng a persstent share. In the US t s the domestcallyproduced non-ict servces and domestcally-produced ICT materals, whch exhbt the hghest growth contrbutons, even though mported ICT materals are on the uprase post Turnng to value-added growth as the second source of gross-output growth besdes growth n ntermedates, the growth accountng exercses show a strong drag on German value-added growth from declnng growth n labor servces. In the US, there are sgnfcant growth contrbutons from captal servces, whch are neglgble n case of Germany. But the most decsve dfference s countres TFP growth, whch s about twce the sze n the US compared to Germany, especally post The econometrc analyss of spllover effects on sectoral TFP growth suggests that there have been strong productvty effects from ncreasng domestcally-produced ICT materals n Germany as well as from decreasng labor servces. The latter s not found for the US as soon as fxed effects are ntroduced. For the US, the regresson results suggest a strong productvty effect from ncreasng mported ICT-materals, but whch s only half the sze of Germany s postve productvty effect from domestcallyproduced ICT materals. As wll be argued, the productvty effects from dfferent ICT ntermedate nputs are assumed to stem from dfferent functonal of ICT n the producton process. Moreover, the TFP regresson for the US show strong average productvty growth for the Electrcal & Electronc Machnery sector, whch to a great extent explans TFP growth dfferentals between Germany and the US durng 1991 to The paper s organzed as follows: Secton 2 explans the methodology of growth accountng for the case of utlzng the gross-output concept and ncorporatng ntermedate nputs nto producton functon. Secton 3 descrbes the employed sectoral growth-accountng data for German and US manufacturng sectors. Secton 4 provdes the results for the grossoutput growth accountng exercses separated by dfferent types of ntermedate nputs and 4

6 sources of value-added growth. Secton 5 tests whether there are sgnfcant spllover effects from prmary or ntermedate nputs on sectoral TFP growth, especally from ICT, for German and US manufacturng sectors, respectvely. Secton 6 concludes. 2. Growth Accountng Methodology The methodology to measure sectoral output, ntermedates, and value added was ntated by Jorgenson et al. (1987) and extended by Jorgenson (1991). Our specfc approach to dsentangle the varous contrbutons to countres gross output (GO) growth as decomposed nto growth contrbutons from prmary nputs and ntermedate nputs follows Jorgenson et al. (2005). Hence, ndustry-level gross output growth can be decomposed nto contrbutons from prmary factor nputs (captal and labor), ntermedate nputs and total factor productvty (TFP) growth accordng to Δ ln Y ν Δ ln K ν Δ ln K ν Δ ln L ν Δ ln X Δ ln TFP, (1) ICT K, ICT NICT K, NICT L, X, where Y s gross output of ndustry, K are captal servces (separated by ICT and Non-ICT captal), L represents labor servces, and X ndcate as set of ntermedate nputs used up durng the producton process. Because of mplementaton of a Tornqvst ndex the ν s are two-perod average nomnal nput and ntermedate shares n total gross output. Captal and labor servces are defned as Δln K ICT ω Δln K, (2) j ICT j, ICT j, Δln K NICT ω Δln K, (3) j NICT j, NICT j, Δ ln L Δ ln X ω Δ ln H, (4) l k H l, X k, l, ω Δ ln X, (5) k, where ICT K and j, K are ICT and Non-ICT captal servces, and H l, and X k, hours worked NICT j, of captal type j, labor (skll) type l, and ntermedate nput type k n ndustry, respectvely. The weghts NICT H ω, ω, ω, and ICT j, j, l, X ω correspond to the two-perod average compensaton k, shares of ICT captal servces of type j, non-ict captal servces of type j, labor servces of type l, and ntermedate nput type k n total ICT captal servces, non-ict captal servces, labor servces, and ntermedate nput compensaton of ndustry, respectvely. TFP s calculated as a resdual capturng all those factors not explctly accounted for n equaton (1). In case of the neoclasscal assumptons beng fulflled, t may be nterpreted as dsemboded (.e. not n nput factors embedded) technologcal progress. 5

7 Defnng aggregate gross output growth as the weghted average of ndustry gross output growth, Δ ln Y (where w s the average share of ndustry gross output n w Δ ln Y aggregate economy-wde gross output) and combnng ths expresson wth equaton (1), we obtan Δ ln Y w ν ICT K, Δ ln K ICT ν NICT K, Δ ln K NICT ν L, Δ ln L ν X, Δ ln X Δ ln TFP. (6) Because of our nterest n the ndustry contrbutons to GO growth from dfferent ntermedate nput types we further dsaggregate the contrbutons from total ntermedates nto growth of ICT and Non-ICT materals, energy, and ICT and Non-ICT servces separated by ICTM NICTM ENE ICTS NICTS mported and domestcally-produced: Δ ln X I, Δ ln X I, Δ ln X I, Δ ln x I, Δ ln x I ICTM NICTM ENE ICTS NICTS (for mported ntermedate nputs), Δ ln X D, Δ ln X D, Δ ln X D, Δ ln X D, Δ ln X D (for domestcally-produced ntermedate nputs). Ths renders equaton (6) nto Δ ln Y ICT ICT NICT NICT ν K, Δ ln K ν K, Δ ln K ν ICTM ICTM NICTM ν X, Δ ln X I ν X, Δ ln X I I I w ICTM ICTM NICTM ν X, Δ ln X D ν X, Δ ln X I I D Δ ln TFP L, NICTM NICTM Δ ln L ν ν ENE XI, ENE XI, Δ ln X Δ ln X ENE I ENE D ν ν ICTS X I, ICTS X I, Δ ln x Δ ln X ICTS I ICTS D ν ν NICTS X I, NICTS XI, Δ ln x Δ ln X NICTS I NICTS D (7) wth ν X, resemblng the two-perod average nomnal ntermedate shares for mported and domestcally-produced ICT and non-ict materals, energy, and ICT and non-ict servces n total gross output. The gross-output growth decomposton n (7) has the advantage that sectoral contrbutons from nputs, ntermedates, and TFP to gross-output growth from any ndustry subset smply equal the (weghted) sum of sectoral contrbutons from all ndustres n the subset. 3. Data In ths paper we focus on the effect of German and US ntermedates, partcularly n nformaton and communcaton technology (ICT), separated by mported and domestc producton. To extend sectoral Ifo ndustry accounts to the gross-output concept, we ntroduce sectoral ntermedates for Germany and the US as provded by the EU KLEMS Growth and Productvty Accounts (Tmmer et al., 2007a, b), henceforth EU KLEMS. Because of lackng detaled nformaton on mported and domestcally-produced ICT ntermedates on German and US ndustry level, we nfer ICT ntermedates as beng equal to the ntermedates produced and suppled to the economy by ICT-producng sectors. Therefore we adopt the German Federal Statstcal Offce defnton of ICT producton ncludng the fve sectors provd- 6

8 ed (DeStats, 2006): Offce Machnery and Computers (NACE 30); Rado, TV and Communcaton Equpment (NACE 32); Instruments (NACE 33); Communcaton Servces (NACE 64); and Computer and Related Servces (NACE 72). To determne ntermedate nput flows by sectors we apply symmetrc ndustry-by-ndustry nput-output tables provded by the OECD (Yamano and Ahmad, 2006), whch separate ntermedates by mported and domestcally-produced. In partcular, we employ ndustry shares of ntermedates n total ntermedates suppled by the ICT-producng sectors. Ths s mplemented for all types of ntermedates,.e. ICT materals and ICT servces, energy, and non-ict materals and non-ict servces. Snce the OECD ndustry-by-ndustry nput-output tables are only publshed for 1995, 2000 and 2005, we need to lnearly nterpolate the nput-output coeffcents for the tme perods n-between,.e. for and Although the coeffcents do not change dramatcally over tme for most of the sectors (see the aggregate sectoral shares n the Appendx), employng nterpolatons ensure a smoother transton n ntermedate supples over tme nstead of holdng shares constant. For the pre 1995 perod for whch we do not have any nformaton on shares whch could be exploted for nterpolaton, we smply extrapolate the gven trends backwards untl To be consstent wth the total ntermedate numbers provded by EU KLEMS the nterpolated share of non-ict servces s ultmately determned as resdual share n total ntermedates. For German ntermedates nputs n real terms we apply an average of the ICT deflators provded by the Ifo Industry Growth Accountng Database (Roehn et al., 2007), henceforth IIGAD, whch account for rapd changes n new technologes and whch ensure consstency wth the deflaton of ICT nvestments as used n the Ifo database. Those deflators are based on ndustry-specfc Ifo nvestment data for offce equpment, communcaton, and software adjusted to match BEA IT deflators. In case of the US, average BEA ICT deflators as provded by EU KLEMS are employed. Those are average deflators for the computer, communcaton, and software. Imported and domestcally-produced non-ict materal and servces, as well as energy nputs are deflated by the ntermedate deflators as provded by EU KLEMS. Imported and domestcally-produced ntermedates are assumed to have the same deflators. The standard prmary nput as captal and labor servces, as well as hours worked, value added and gross output are provded by the IIGAD and EU KLEMS for Germany and the US, respectvely. Snce the IIGAD comprses a more dsaggregate level of manufacturng sectors regardng ts nvestment seres and captal servces compared to EU KLEMS, we aggregate sectors to harmonze databases to the same ndustry aggregaton level. 7

9 4. Growth Accountng Results: Output, Value Added and Intermedate Inputs 4.1 Decomposton of Gross-Output Growth Begnnng wth a juxtaposton of ndexed gross output, value added and mported and domestcally produced ntermedates for German and US manufacturng sectors shows smlar developments regardng the growng mportance of mported ntermedates, but dfferences n the relaton between gross output and value added (Fgure 1a, b). Apparently real mported ntermedate nput ncreased by 70 for Germany from 1995 to 2005, and even 235 percent for the US durng the same perod. These fndngs correspond to Snn (2005) for Germany and underlne the growng mportance of mported ntermedates for US as mentoned by Yuskavage at al. (2008). A man dfference apparently s n the dfferent developments of gross output and value added of both countres. Whle n case of Germany, gross output ncreased stronger than value added snce 1997, whereas the gap between gross output to value added remaned stable throughout recent perods, n the US value added ncreased stronger than gross output most of the tme. The partcular development n Germany of dvergng gross-output and valueadded trends has been analyzed by Snn (2005), who coned the phrase of Germany representng a bazaar economy n whch ntermedate nputs are offshored to low wage countres, but patched together n Germany, and ultmately sold under the brand of beng Made n Germany. Ths offshorng development s expected to eventually erode Germany s manufacturng prowess. For the US, the pcture seems to be somewhat dfferent, especally as the development of value added and gross output s not characterzed by such a strong dvergence, and value added growth stll performs better than growth n gross output. Regardng average aggregate sectoral gross-output growth for Germany and the US, Fgure 2 shows substantal dfferences between both countres trend growth n gross output. Germany experenced a strong declne durng the perod , n whch gross output growth declned on average by percent. However, durng the economc recovery n , German gross-output growth ncreased by 3.52 percent and even managed an ncrease of 1.33 percent post In the US, gross output exhbts strong growth durng and wth an average growth rate rangng between 4.79 and 5.23 percent. The economc contracton n the wake of the burst of the Dotcom bubble n 2001, gross output saw a massve slump durng by percent. 8

10 Aggregate-Level Growth Accountng Dssectng gross-output growth nto ts growth contrbutons from value added (as t s calculated from growth contrbutons of captal, labor, and TFP) and ntermedates, Fgure 3 provdes an overvew of the mportance of each of the two components n generatng grossoutput growth. Apparently, German gross-output growth s much more determned by growth n ntermedates than n the US. The fracton of German value-added to ntermedate nput growth s comparably small n Germany. In the US, ths rato s much more balanced, although ntermedates make up a larger fracton of US gross-output growth than value-added, too. Durng the perod of the US recesson n growth contrbutons from ntermedate nputs slumped and even generated a drag by percent, whle value-added growth stll contrbuted by 0.53 percent. Sectoral-Level Growth Accountng Analyzng the sectoral sources of gross-output growth, n ths secton we wll provde a more detaled analyss of growth contrbutons from value-added and ntermedate nputs by sngle manufacturng sectors. Fgure 4a provdes growth accountng exercses for perod averages of 13 German manufacturng sectors that aggregate up to the growth accountng numbers of the prevous chapter. Apparently, there are some specfc manufacturng sectors that experenced strong growth n gross output, whch are manly the three sectors Machnery (Id10), Electrcal & Electronc Machnery (Id11), and Motor Vehcles & Transport (Id12). These sectors demonstrate the tremendous growth contrbutons from ntermedate nputs compared to growth contrbutons from value added. Interestngly all three sectors started wth a negatve growth n value added but steadly ncreased over tme. However, growth contrbutons from ntermedate nputs peaked for all three sectors durng , exhbtng the strongest ncrease n Motor Vehcles & Transport. Compared to Germany, US sectors wth strong gross-output growth are Electrcal & Electronc Machnery (Id11) and Motor Vehcles & Transport (Id12), but also Basc & Fabrcated Metals (Id9) and Machnery (Id10) show relatvely strong gross-output growth (Fgure 4b). Interestngly, regardng the composton of gross-output growth, the stronger growth contrbuton of value added throughout US manufacturng sectors becomes apparent. The aggregate pcture s largely confrmed on the sectoral level, where ntermedate nputs consttute a much smaller fracton of ndustry gross-output growth across sectors, contrary to German manufacturng sectors. 9

11 4.2 Dfferent Types of Intermedates and Sources of Value-Added Growth In ths secton we wll further nvestgate dfferent types of ntermedates that generate aggregate ntermedates growth contrbutons to gross-output growth as well as dfferent sources of value-added growth. We start by examnng the contrbutons on an aggregate level before we delve nto sectoral analyss. Aggregate-Level Growth Accountng In Fgure 5 we start wth a dsaggregaton of ntermedates nputs by mported and domestcally-produced ntermedates. German ntermedates reveal a strong dependence of mported ntermedates durng , where mported ntermedates exhbt a contrbuton to gross-output growth of 0.81 percent. Ths dependence changes durng Domestcally-produced ntermedates reganed strength and even outpaced growth contrbutons of mported ntermedates. Nevertheless, mported ntermedates stll play a sgnfcant role n generatng German gross-output growth. Post 2000 both types of ntermedate contrbutons slumped to around 0.50 percent. In the US, there s a sgnfcant dfference n the orgn of ntermedate nputs wth mported ntermedates playng a much less mportant role. Whle domestcally-produced ntermedates generated growth contrbutons of about 2.3 and 1.9 percent durng and , the contrbuton from mported ntermedates was around 0.6 and 0.9 durng the same perods, respectvely. Durng the recesson n 2001 both ntermedate types experenced massve growth reductons. Besdes ntermedate nputs as source of gross-output growth and juxtaposng the sources of value-added growth llustrates once gan major dfferences for both countres. Fgure 6 depcts labor servces as a major source of German value-added growth, whch steadly declned throughout the perods and thus exerted a drag on the growth contrbutons from value-added. The growth contrbuton from captal, be t ICT or non-ict, s neglgble small n Germany, whle TFP growth makes up the strongest postve contrbuton. Comparng these fndngs to the US, labor servces show very low contrbutons durng but slumped durng the perod after the 2001 recesson. In contrast, nvestments n ICT and non-ict make up for a much more substantal part of US manufacturng value-added growth. But most mportantly, TFP growth generated enormous growth contrbutons that lay above those of German manufacturng sectors thought the entre perods. Partcularly, whle contrbutons of TFP growth steadly declned n Germany from 0.99 to 0.65 percent, US TFP growth ncreased sgnfcantly durng from 1.22 to 1.60 percent, stayng hgh even post 2000 wth 1.45 percent. 10

12 Sectoral-Level Growth Accountng Decomposng German ntermedate growth contrbutons by mported and domestcallyproduced on the sectoral level, suggests that mported ntermedates played an mportant role partcularly durng (Fgure 7a). As shown n the fgure, growth contrbutons from mported ntermedates ncreased from to , but dd not stablze at such hgh growth rates. In contrast, ther contrbutons declned. In some crucal German manufacturng sectors, as Motor Vehcles & Transport, the contrbutons from domestcallyproduced ntermedate outpaced those of mported ntermedates. Regardng growth contrbutons by ntermedate type for US manufacturng sectors s smlar to Germany to some extent as mported ntermedates contrbuted stronger durng (Fgure 7b), whle domestcally-produced ntermedates also played an mportant role throughout ths perod. The aggregate pcture of a slump n both ntermedate types durng s agan confrmed on across sectors. Concernng dssected value-added growth by captal, labor, and TFP for German manufacturng sectors suggests that a lot of the declne n value-added growth was due to decreases n hours worked (Fgure 7a). Whle nvestment contrbutons are relatvely small, ncreasng TFP growth counters the declnng n sectoral labor servces. However, the steady declned n labor servces s suggested to be heavest durng wth decreasng rates afterwards. TFP growth generated strong contrbutons n Electrcal & Electronc Machnery, Basc & Fabrcated Metals, and Chemcals & Chemcal Products. For US manufacturng sectors the pcture s dfferent (Fgure 7b). Whle declnng labor servces were less mportant across sectors, ncreases n TFP growth are found the fundamental drver of US manufacturng sectors value-added growth. Some sector also managed to ncrease ther value-added growth by sgnfcant growth n ICT and non-ict nvestments. The latter was not observed n the German case. 4.3 Changes n the Structure of Intermedate Inputs As we are nterested n the change of the relatve mportance of dfferent types of ntermedate nputs n the producton process and potental spllover effects on TFP growth resultng from these changes, we start wth an nvestgaton of shfts n the relatve mportance of mported versus domestcally-produced ntermedates. Therefore we calculate aggregate growth contrbutons of ntermedates nputs to sum up to 100 percent. Fgure 8 shows that durng mported ntermedates nputs had a enormous nfluence on German gross-output growth, thereby entrely substtutng mported for domestcally-produced ntermedates. But 11

13 ths pcture changes post 1995, as domestcally-produced ntermedate reganed strength and even outpaced the contrbutons of mported ntermedates. Nevertheless, the mportance of mported ntermedates revved post 2000, but both nput types stablzed at about smlar fractons by post In the US, domestcally-produced ntermedate nputs generated strong nfluences throughout the perod , wth a magntude of about two thrds of mported ntermedates. However, domestcally-produced ntermedates sgnfcantly slumped post In the next step we would lke to know, whch types of mported or domestcallyproduced ntermedates contrbuted most to gross-output growth and how ther mportance changes over tme. Therefore we splt ntermedates further nto non-ict materals and non- ICT-servces (Fgure 9) as well as ICT materals and ICT servces (Fgure 10). Fgure 9 shows that the US generated most of ntermedate-drven gross-output growth from domestcally-produced non-ict servces and to some extent from mported non-ict materals, whle Germany on contrary experenced strong contrbutons from mported non-ict materals but show a steadly growng mportance of domestcally-produced non-ict materals. In case of ICT ntermedates Fgure 10 llustrates that German manufacturng sectors exhbt smlar shares n mported and domestcally-produced ICT materal. These shares are qute stable over tme and hence do not ndcate severe adjustments n purchasng ICT ntermedate nput durng the New Economy. In the US the pcture s dfferent. Apparently the mportance of domestcally-produced ICT materals decreased n favor of ncreasngly mported ICT materals durng Post 2000 domestcally-produced ICT materals smlar to domestcally-produced non-ict materals n Fgure 9 experenced a sgnfcant slump due to the 2001 recesson. 5. Econometrc Estmatons of Spllover Effects on TFP Growth 5.1 Random- and Fxed-Effects Estmatons In the prevous analyss we traced the effects of a) ntermedate nputs by dfferent types and b) prmary nputs and TFP growth on aggregate gross-output growth. It was shown that mported ntermedates played a much stronger role n Germany than n the US. Partcularly, mported non-ict and ICT materals generated strong contrbutons, although even domestcally produced ICT materals contrbuted smlar n sze as ther mported counterpart. In the US t was domestcally-produced non-ict servces and ICT materals that generated the hghest contrbutons, although durng mported ICT materals ganed strength. 12

14 Regardng value-added growth, the US experenced substantally larger contrbutons to gross output than dd Germany, whle most of t was drven by stronger growth n TFP. Germany n addton experenced strong but dmnshng declnes n labor servces, whch dragged on German value-added and gross-output growth. In the subsequent analyss we trace the sources of dfferences n German and US manufacturng TFP growth. Therefore we dentfy spllover effects from prmary and ntermedates nputs on ndustry productvty growth by estmatng TFP growth regressons. The regresson specfcatons have the followng general form: Δ ln TFP,t α β Δ ln K β Δ ln K β Δ ln L β Δ ln X ε (8) 1 ICT,t 2 NICT,t 3,t 4,t,t where ε,t u υ, t wth the correspondng varables notaton as gven n equaton (1) and an error-term structure υ,t assumed to be..d. and unobserved tme-nvarant ndustry heterogenety u. Intermedate nputs (ndcated by X,t ) are further separated by type accordng to equaton (7). To determne the spllover effects on sectoral productvty growth we employ two panel estmaton technques, random and fxed effects as well as several robustness checks. For the latter we addtonally nclude sectors dummes for trade-ntensve and hgh-tech sectors n the randomeffects specfcatons and provde a comparson of fxed-effects and restrcted fxed-effect regresson,.e. excludng captal and labor nputs from the specfcaton. Moreover, econometrc estmaton technques to account for cross-sectoral dependence n the dsturbances are employed (see secton 5.3) As long as u s uncorrelated wth the explanatory varables the random-effects estmator provdes unbased results. Hence, estmatng equaton (8) by random effects assumes that the covarance between u and the explanatory varables s zero. Snce the latter assumpton s seldom acheved n TFP growth regresson, the fxed-effects estmator allows for a correlaton unequal to zero. The reason for non-zero correlaton may stem from ndustry-specfc factors that enable sectors to be more productve than others throughout, and thus feed back nto ther decson on how to employ prmary and ntermedate nputs. Hence, spllover effects are no longer derved from the sngle employed nput but due to ndustres hgher overall productvty. To control for possble cluster effects among specfc sectors TFP growth, an ndustry taxonomy for trade-ntensve and hgh-tech sectors s ncluded n the regressons. Therefore trade ntensty of sectors s determned by the nomnal value of sectoral exports of goods and the quartles of the sectoral export dstrbuton. Sectors wth the hghest trade ntensty are 13

15 those whose value of exports s n the fourth quartle of the export dstrbuton (TI-1) throughout the perod from Stll trade ntensve, but less than TI-2 are those sectors wth a value of exports n the thrd quartle (TI-2). Sectors wth medum trade ntensty are those whose value of exports s below the medan, but stll above the 25 th percentle (TI-3). Fnally, low trade-ntensve sectors have a value of exports lower than the 25 th percentle (TI-4). 2 The trade-ntensty classfcaton s determned for both countres separately. However, countres ndustry classfcatons by trade ntensty provde the same results. For the hgh-tech classfcaton sectors are classfed accordng to the OECD technology ntensty defnton (OECD, 2011). It comprses four groups of sectoral technology defntons: Hgh-technology ndustres (HITE); Medum-hgh-technology ndustres (MHTE); Medum-low-technology ndustres (MLTE); Low-technology ndustres (LOTE). The hghtech classfcaton s appled to both countres. A detaled lst of trade-ntensve and hgh-tech sectors s avalable n Table A3 n the Appendx. Accordng to Table 1a the nput factors ICT and non-ict captal deepenng do not show any sgnfcant spllover effects on sectoral TFP growth. These fndngs hold for both countres and throughout all specfcatons, random (column RE-I to RE-IV) and fxed effects (column FE-I). On contrary, we fnd nterestng spllovers on TFP growth regardng the effects of labor servces. As shown n the table, there are robust fndngs on decreasng TFP growth when labor servces are ncreased. Ths holds for all random effects specfcatons (column RE-I to RE-IV) and both countres. Decreasng labor servces, whch are manly due to hours worked and less to qualty effects, as latter are relatvely constant over recent perods, help to rase profts and effcency and thus postvely affect resdual value-added growth. The labor effects stll hold for the fxed-effects estmatons of German manufacturng sectors (column FE-I) but vansh for the US (column FE-I). Ths s nterestng as apparently ndustry heterogenety accounts for a sgnfcant fracton of the varaton n US sectoral TFP growth, such that sheddng labor s stll estmated wth a negatve sgn, but no longer appears to have statstcal sgnfcance across all sectors. Dsaggregaton of potental spllovers from dfferent ntermedate nputs, Table 1a reveals a clear pattern across specfcatons wth regard to mported and domestcally-produced ICT materals. For German manufacturng sectors, the random as well as the fxed-effects regresson suggest that both mported and domestcally-produced ICT materals generated postve TFP spllovers, whle only the latter are estmated statstcally sgnfcant. Even n 2 To obtan trade ntensty data provded by the OECD STAN Blateral Trade Database s employed (OECD, 2008). 14

16 case of the restrcted fxed-effects regresson ths effect remans sgnfcant (column FE-II). The sgnfcance of the spllover effect of domestcally-produced ICT materals a) consttutes the capablty of the German manufacturng sector to generate hgh-technology ntermedate products and b) serves as an explanaton for why ICT so far produced such weak results n productvty analyss for Germany. As standard growth accountng and productvty analyss usually focus on nvestments and captal stocks of ICT and ther effect on value-added growth, these approaches are unable to detect ICT effects stemmng from mplementng ICTembedded ntermedates n the producton process, as those are excluded from the valueadded concept by defnton. Ths seems to be partcularly relevant for countres characterzed by strong contrbutons of ntermedates nputs, lke Germany. For the US the regressons show a clear pcture that US manufacturng sectors strongly benefted from substtutng domestcally-produced for mported ICT materals. Postve effects from mported ICT materals are estmated hghly statstcally sgnfcant, whle domestcally-produced ICT materal are estmated hghly sgnfcant wth a negatve sgn. Ths pattern s confrmed throughout all random effects specfcatons (column RE-I o RE-IV) and concdes wth the rsng mportance of mported versus domestcally-produced ICT materals detected n the prevous growth accountng exercses. However, as soon as fxed effects are ntroduced n the regresson the negatvely estmated effect from domestcally-produced ICT materals vanshes, but stll s estmated wth a negatve sgn (column FE-I and FE-II). These TFP spllover effects suggest that US manufacturng sectors as opposed to German manufacturng sectors managed to ncrease ther productvty growth by mportng nstead of self-producng ICT materals. Explanng these dfferent results we start wth an assumpton of two dfferent producton structures regardng the German and the US manufacturng ndustry. We put forward that the reason for ths s n the dfferent capabltes of ICT components n the producton of fnal goods. The US seemngly profted from mportng cheap ICT components, whch are subsequently embedded n new computers sold at hgh prces. We could call ths the modular system, as components are prmarly mplemented n to a new devce, wthout any sgnfcant further adjustments and whch are then eventually sold to the consumer after a wellconducted marketng process. Ths s where growth n revenues and accordng to the prevous growth accountng exercses value-added growth comes from n the US, and what renders productvty spllovers from mported ICT materals hghly sgnfcant. In Germany, the case s dfferent. Whle cheap ICT components mght also be mported from abroad, German manufacturng s less n fabrcatng computers for the consumers and 15

17 sellng IT products after a well-conduced marketng but rather n producng sophstcated engneered, ICT-drven nvestment equpment, lke machnes. Hence, a comparable box system n whch ICT s embedded nto machnery equpment wll not be suffcent n ths producton structure. Instead, adjustng ICT components durng the fabrcaton of machnery equpment s hghly customzed to satsfy the downstream producng frm s needs and becomes an mportant source of generatng value-added. Ths may serve as explanaton why productvty spllovers from domestcally-produced ICT materals are estmated statstcally sgnfcant n Germany, whle mported ICT materals are not. For example, Bosch, a global German suppler of technology and servces n the areas of automotve and ndustral and buldng technology, s more of the knd of a process-based nnovator compared to US computer frms, lke Dell, whch resemble more of a hghly developed marketng-orented busness concept. These dfferent ndustry structures may also explan why especally TFP growth n the German Electrcal & Electronc Machnery sector, whch ncludes the Offce Machnery and Computers ndustry, shows substantally lower ncreases than the US (see Table A2 n the Appendx). Furthermore, substtuton of mported for domestcally-produced energy ncreased German manufacturng TFP growth n the random-effects estmaton, whle n the US none of these effects are statstcally sgnfcant (column RE-I to RE-IV). In Germany, ths effect remans vald even n the fxed-effects specfcaton (column FE-I), but wth a lower statstcal sgnfcance. However, as soon as captal and labor s excluded from the regresson, the spllover effects from mported energy turns statstcally nsgnfcant (column FE-II). Further nterestng nsghts n the determnants of sectoral TFP growth are provded by the estmated fxed effects as well as the estmated tme dummes for both countres. Accordng to Table 1b, whch dsplays the ndustry fxed effects of the regresson specfcaton of Table 1a, column FE-I and FE-II, controllng for prmary and ntermedate nputs sgnfcantly decreases productvty growth of German manufacturng sectors on a broad ndustry bass (column FE-I). After excluson of prmary nputs ndustry heterogenety turns statstcally nsgnfcant. Ths result suggests that condtonng ndustry TFP growth on the hghly sgnfcant labor servces varable already explans a lot of the varaton n German manufacturng TFP growth. As soon as labor s excluded there s too much varaton left n the error term that s not captured by the tme-nvarant ndustry fxed effects. For the US, ndependent of the regresson specfcaton the sectoral ndustry fxed effect for Electrcal & Electronc Machnery reveals strong postve TFP growth, whch s mssng n n case of Germany. 16

18 Analyzng the tme dummes suggests smlar results for the two dfferent fxed effects specfcaton n case of German manufacturng sectors (Table 1c, column FE-I and FE-II). Whle the unrestrcted specfcaton (column FE-I) shows some relevant common tme effects on TFP growth across manufacturng sectors, the restrcted specfcaton (column FE-II) renders all tme effects statstcally sgnfcant. Once agan, labor servces turns out to be a very mportant varable capturng a lot of the varaton n German manufacturng TFP growth. For the US, nether the unrestrcted nor the restrcted model affects the statstcal nference of the common tme effects. The table shows that cyclcal effects durng exerted a drag on US manufacturng sectors TFP growth as well as the recesson n 2001 due to the burstng of the Dotcom bubble. 5.2 Estmated Contrbutons of Spllover Effects and the Electrcal & Electronc Machnery Sector to Manufacturng TFP Growth Contrbutons of Spllover Effects As the prevous econometrc analyss has shown, there are dfferent spllover effects from ICT materals on German and US manufacturng TFP growth. Snce the regresson results manly estmate elastctes, but do not provde an assessment of the magntude of the actual effect n the data, we further employ an analyss of the contrbuton of each of the sgnfcant varables. Therefore we calculate the averages of the varables n the populaton and determne the varables effects at these averages. Snce the ncluson of labor servces was shown to be an nfluental factor n determnng sectoral TFP growth n Germany, we focus on a comparson of the varables magntude on TFP growth usng the unrestrcted fxed-effects model of specfcaton FE-I n Table 1a. Accordng to Fgure 11 German manufacturng sectors reveal a substantal growth effect from labor servces. As labor servces exhbt a negatve mpact on TFP growth and there has been a strong declne n ths varable throughout the perod, the estmated contrbuton s postve. However, a much stronger contrbuton stems from the domestcally-produced ICT materals, whch s almost twce n magntude as the contrbuton of the labor servces effect. For the US, mported ICT materals show a sgnfcant TFP growth contrbuton but wth a substantally lower magntude as n case of domestcally-produced ICT materals n Germany. However, accordng to ths contrbuton analyss the strong US TFP growth contrbutons and the resultng hgh value-added growth cannot be suffcently explaned. 17

19 Contrbutons of the Electrcal & Electronc Machnery Sector To overcome the nsuffcent explanaton of the strong TFP growth n US manufacturng sectors, we extend the analyss towards sectoral TFP growth contrbutons as depcted n Table A2 n the Appendx. Apparently, the TFP growth dfference between German and US manufacturng sectors s largely determned by the mmense contrbutons generated n the Electrcal & Electronc Machnery sector, whch ncludes the Offce Machnery and Electronc Equpment ndustry. The growth contrbutons of ths specfc sector are about twce as hgh n the US and durng even more than threefold that of Germany s. If we exclude the Electrcal & Electronc Machnery sector, the total economy US TFP growth, whch s the aggregate of sectoral contrbutons, converges to aggregate German TFP growth; at least for the perod from But there s stll an unexplaned part n TFP growth dfferences durng the post 2000 perod, when manufacturng TFP growth n Germany and the US started to dverge, even after the Electrcal & Electronc Machnery sectors are excluded. 5.3 Further Robustness Checks: Cross-Sectonal TFP Growth Dependences Instead of estmatng regressons to be robust n terms of ndvdual heterogenety (as well as heteroscedastcty and ntra-ndustry correlaton), ths secton wll provde further estmates for panel models wth cross-sectonal dependence. The reasonng for ths s possble correlaton of regresson dsturbances over tme and between ndustres, whch may produce msleadng statstcal nference. For valdaton of the prevous estmates, we therefore adjust the standard errors of the estmated coeffcents for possble dependence n the resduals by employng panel models wth AR(1) dsturbance. Ths may be relevant n determnng the drvers of TFP growth, partcularly as common macroeconomc factors possbly underle sectoral growth generatng processes. In the latter case, assumng that sectoral dsturbances are ndependent across sectors would be napproprate. Hence, the regresson equaton s assumed to have the followng form: Δ ln TFP,t α β Δ ln K β Δ ln K β Δ ln L β Δ ln X ε (9) 1 ICT,t 2 NICT,t 3,t 4,t,t where ε,t u υ and υ ρ υ z, t,t,t 1, t wth the parameter ρ resemblng the estmated autocorrelaton coeffcent of the dsturbances υ,t and z,t beng assumed to be..d. Accordng to the estmaton results n Table 2, the parameter ρ s close to zero for the random and the fxed-effects specfcaton of German manufacturng sectors (column REAR- 18

20 I to FEAR-II). Hence, there s only neglgble statstcal evdence of cross-sectonal dependence across German sectors. Gve these results t s not surprsng that statstcal nference of spllover effects provde qualtatvely smlar results compared to the estmated German TFP effects n Table 1a. In partcular, labor servces stll are determned a hghly sgnfcant drver of German manufacturng TFP growth. The same s true for domestcally-produced ICT materals, although statstcal sgnfcance decreases n case of the restrcted fxed-effects specfcaton (column FEAR-II). A reason for ths may be that excluson of labor servces, whch s an mportant determnant of TFP growth across a wde range of German manufacturng sectors, ncreases the correlaton between the unobserved heterogenety and the explanatory varables, thereby reducng statstcal effcency of both tme-nvarant fxed effects as well as explanatory varables. An ncrease n negatve correlaton between unobserved heterogenety and the explanatory varables to s ndcated by the regresson results (column FEAR-II). Once agan, the regresson results confrm the mportance of labor servces and domestcally-produced ICT materals to be ncluded n German manufacturng TFP growth regressons over the perod from 1991 to In case of the US, cross-sectonal dependence seems to be more mportant, as the estmated parameter ρ s about 0.2 across the two dfferent panel estmators and specfcatons (column REAR-I to FEAR-II). Interestngly, adjustng standard errors to account for crosssectonal dependence of sectoral TFP growth dsturbances sgnfcantly ncreases statstcal nference of spllover effects from mported ICT materals on US manufacturng TFP growth. These results hold ndependent of the employed panel estmator and specfcaton. Excluson of prmary nputs does not shown any server changes n the statstcal nference of mported ICT spllover effects, assocated by a decrease n correlaton between unobserved heterogenety and the explanatory varables to 0.02 for the restrcted specfcaton (column FEAR-II). Hence, mported ICT materals are suggested to be an solated growth factor that spurred sectoral TFP growth of US manufacturng sectors wthout showng any markedly nteracton wth any of the prmary nput factors. These regressons, whch adjust for cross-sectonal dependence n sectoral TFP growth dsturbances, confrm mported ICT materals to be the man drver of US manufacturng TFP growth durng the New Economy. 6. Summary and Concluson Recent growth accountng exercses attrbute strong productvty growth to ncreased nvestments n nformaton and communcaton technologes (ICT). Partcularly, dfferng ICT ntenstes across countres provde a useful explanaton for cross-country productvty growth 19

21 dfferentals, especally wth regard to the post 1995 productvty acceleraton n the US and the wdenng of the US-EU productvty gap. In contrast to the US, the German economy s characterzed by relatvely low average ICT nvestment ntenstes and low productvty effects from ICT nvestments durng the perod from Tryng to trace the effect from ICT durng the perod , ths study takes a dfferent vew by expandng the usually used concept of value added to gross output, addtonally ncludng dfferent types of ntermedate nputs. Thereby the focus s on ICT ntermedate nputs separated by orgn, whch s mported and domestcally produced. Expandng the concept of value added to gross output provdes us to nvestgate the effect from ICT on output and productvty growth beyond ts drect channel of ncreasng nvestments. The decomposton not only allows for tracng the varous sources of output growth, but further enables formally testng the productvty growth effect of ICT va the ndrect channel of spllovers on TFP stemmng from mplementaton of new technologes n the producton process of fnal nvestment goods. The fndngs of ths study suggest that mported ntermedate nputs played a more domnatng role n Germany than n the US, partcularly mported non-ict and ICT materals, although domestcally-produced ICT materals were mportant as well. In the US, man drvng forces were domestcally-produced non-ict servces and ICT materals, even though mported ICT materals were on the uprase post Moreover, there were decsve dfferences s countres TFP growth rates wth about twce the sze n the US. Accordng to robust econometrc analyss there have been strong spllover effects on TFP growth from ncreasng domestcally-produced ICT materals n Germany, whle for the US TFP growth orgnated from ncreasng mported ICT-materals. As argued n ths study the productvty effects from dfferent ICT ntermedate nputs stem from dfferent functons of ICT n the producton process. Whle German manufacturng productvty growth s assocated wth hghly customzed ICT-drven nvestment equpment ncorporatng domestcally adjusted ICT nputs, US manufacturng productvty growth suggests to depend on components, whch are prmarly mplemented n to new devces wthout any sgnfcant further domestc adjustments and are produced more cost-effcently by beng mported from abroad (modular system). Furthermore, the dstnctve treatment of ICT as an nvestment on the one hand and an ntermedate nputs on the other, may serve as an explanaton for why productvty effects n general and specfcally n Germany are hard to detect usng the concept of value added. 20