Discussion Paper No. 2002/88 Digital Divide and Growth Gap. Youngsoo Lee, 1 Jeonghun Oh, 2 and Hwanjoo Seo 3

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1 Dscusson Paper No. /88 Dgtal Dvde and Growth Gap A Cumulatve Relatonshp Youngsoo ee, 1 Jeonghun Oh, and Hwanjoo Seo 3 September Abstract Ths paper, usng a cumulatve growth model and a catch-up model, verfes the cumulatve relatonshp between IT nvestment and economc growth, and then examnes whether ths relatonshp enlarges the dfferences n the economc growth among OECD countres. We observe the followng results: frst, those countres makng a rapd progress n IT captal formulaton enhance labour productvty faster than the average OECD member countres. Second, non-it captal has larger mpacts on the economy than IT captal. Thrd, those countres wth relatvely lower productvty levels can reduce the gap usng knowledge spllovers from advanced countres. Fourth, IT nvestment and expanson ncrease labour productvty n OECD member countres. Ffth, countres wth a sold nfrastructure and sklled human resources ncrease IT nvestment even more actvely. astly, the cumulatve relatonshp between IT nvestment and productvty s shown to be vald and thus ths mght enlarge the dsparty between countres accordng to the economc possbltes provded by IT nvestment. Keywords: IT, growth gap, cumulatve relatonshp JE classfcaton: O3, O4, E Copyrght Author(s) 1 Hankuk Avaton Unversty (Seoul), yslee@mal.hangkong.ac.kr; Korea Unversty (Seoul), ojh@mal.korea.ac.kr; 3 Sangj Unversty (Wonju), seohwan@mal.sangj.ac.kr Ths s a revsed verson of the paper orgnally prepared for the UNU/WIDER Conference on the New Economy n Development, 1-11 May, Helsnk.

2 Acknowledgement Ths research has been supported by grants from Natonal Computerzaton Agency. UNU World Insttute for Development Economcs Research (UNU/WIDER) was establshed by the Unted Natons Unversty as ts frst research and tranng centre and started work n Helsnk, Fnland n The purpose of the Insttute s to undertake appled research and polcy analyss on structural changes affectng the developng and transtonal economes, to provde a forum for the advocacy of polces leadng to robust, equtable and envronmentally sustanable growth, and to promote capacty strengthenng and tranng n the feld of economc and socal polcy makng. Its work s carred out by staff researchers and vstng scholars n Helsnk and through networks of collaboratng scholars and nsttutons around the world. UNU World Insttute for Development Economcs Research (UNU/WIDER) Katajanokanlatur 6 B, 16 Helsnk, Fnland Camera-ready typescrpt prepared by sa Roponen at UNU/WIDER Prnted at UNU/WIDER, Helsnk The vews expressed n ths publcaton are those of the author(s). Publcaton does not mply endorsement by the Insttute or the Unted Natons Unversty, nor by the programme/project sponsors, of any of the vews expressed. ISSN ISBN (prnted publcaton) ISBN (nternet publcaton)

3 I Introducton Measurng returns on IT nvestment s a complcated matter due to the fact that such nvestments are not exogenous, but are nfluenced by certan economc factors such as natonal wealth, prce level of economc resources, IT nfrastructure, etc. As a result, there have been nherent problems to show causalty n the models that relate productvty growth to IT nvestment. Prevous studes on IT mpacts on economy have been focused on the unlateral relatonshp, whch s to dscover whether IT nvestment brngs about economc growth.1 They have been nterested n examnng whether IT nvestment makes postve contrbutons to the dffuson of new technology, productvty mprovement, reduces unemployment rate, enhances consumer utlty, and the postve management outcome. On the other hand, the studes on the IT nvestment functon, whch s to dentfy the factors nfluencng IT nvestment, are relatvely nsuffcent. Kraemer and Dedrck (1994, 1) present a conceptual hypothess that there s a cumulatve relaton between IT nvestment and economc growth. They argue that IT nvestment and economc growth are nextrcably lnked. Frst, the economc factors, lke natonal wealth, wage rates, IT nfrastructure, and the prce level of IT products, determne IT nvestments. Growng natonal wealth provdes the fnancal resources for IT nvestments and expands demand for IT products, both n busnesses and households. Increases n wages provde a greater ncentve for frms to nvest n IT, ether to replace workers or to mprove the productvty of workers. The presence of a hgh qualty nformaton nfrastructure and the prce compettveness of IT products promote IT nvestments to take advantage of the potental capabltes of IT products at lower costs. Snce natonal wealth, wage rates, IT nfrastructure, and the prce level of IT products are determned by economc growth and productvty mprovement, the ncreased level of economy and productvty can eventually lead to IT nvestments. The other half of the vrtuous crcle s the mpact of IT nvestments on economc growth. The postve economc mpacts are drven by lower purchasng costs, reductons n nventores, lower sales and marketng costs, and more effcent producton processes. Thus, wdespread IT technology dffuson creates possbltes for frms to be equpped wth more effcent and effectve facltes n producton and to be able to reduce cost per unt producton. These postve economc mpacts result n productvty mprovement and economc growth. The conceptual hypothess presented by Kraemer and Dedrck (1994, 1), however, was followed by only a correlaton analyss nstead of drect estmaton wth an approprate model to show the contrbuton of IT nvestment to economc growth. 1 Those researches from varous perspectves on the mpacts of IT nvestment on economc growth are as follows: the mprovement of productvty (Kraemer and Dedrck 1994 and 1999; Olner and Schel 1994; Morrson and Berndt 199; oveman 1994; Jeong et al. 1), changes n the labour market (Autor et al. 1998; Berndt et al. 199), technologcal nnovaton (Gera et al. 1997), and the compettveness of frms (Brynjolfsson 1996; Htt and Brynjolfsson 1996). For more detaled nformaton on ths ssue, see Trplett (1999). 1

4 Ths paper embodes the dea proposed by Kraemer and Dedrck (1994, 1) usng a cumulatve growth model and catch-up model to characterze the cumulatve relatonshp between IT nvestment and economc growth, and then to verfy whether ths relatonshp enlarges the dfferences n economc growth among OECD countres. Hence, the frst am of ths paper s to ntroduce a cumulatve growth model for the analyss of mutual dependence relatonshp between IT nvestment and economc growth. IT nvestment leads to mprovement of productvty and the ncreased productvty eventually results n advanced IT nfrastructure and other resources for hgher IT nvestment. The second objectve of ths paper s to examne, usng a catch-up model, whether the new technologcal and economc opportunty from IT nvestment wll augment the dfferences n growth rates among countres or reduce them. In other words, the possblty wll be checked that the presence of a hgh qualty nformaton nfrastructure and of sklled human resources n developed countres ncreases the effcency of IT nvestment and thus enlarges the dsparty. Ths paper performs a relatve analyss wth OECD country data on the mpact of IT nvestment on economc growth. The mpact of IT nvestment on economc growth n OECD countres and the relatonshp between IT nvestment and dscrepancy n GDP growth rates among those countres are stressed n the analyss. Contrary to prevous studes on the causalty relatonshp between IT nvestment and economc growth, ths paper analyses the cumulatve relatonshps, not only the mpact of economc growth on IT nvestment, but that of IT nvestment on economc growth. Because of ths cumulatve relatonshp, the dfferences n growth rates among countres wll wden or shrnk accordng to the amount of IT nvestment n each country. We fnd the followng results. Frst, those countres makng rapd progress n IT captal formulaton enhance labour productvty faster than the average OECD member-state. Second, non-it captal has larger mpacts on the economy than IT captal. Thrd, those countres wth a relatvely lower productvty level can reduce the gap by utlzng knowledge spllovers from advanced countres. Fourth, our results ndcate that IT nvestment and expanson ncrease labour productvty n OECD member countres, and that countres wth a sold nfrastructure and sklled human resources ncrease IT nvestment even more actvely. Ths fndng has some mplcatons on the contnung debate regardng the productvty paradox. astly, the cumulatve relatonshp between IT nvestment and productvty s shown to be vald and thus ths mght enlarge the dsparty between countres accordng to the economc possbltes provded by IT nvestment. The rest of the paper s organzed as follows. The model explanng the relatonshp between IT nvestment and economc growth s ntroduced n secton. In secton 3, the emprcal test s performed and the results are explaned. Concludng remarks and future study plans are gven n secton 4. See Kaldor (1957), Verspagen (1993), and Amable (1993).

5 Emprcal model3 The model developed here consders two countres accordng to the technologcal capabltes as n the Amable (1993) and Verspagen (1993) models. These two countres are assumed to have dfferent levels of knowledge stock so that there are opportuntes for spllovers. One s technologcally advanced and denoted by. The other s technologcally nferor and denoted by. We construct the followng equatons, whch descrbe the nternatonal knowledge spllovers and ther mpacts on the domestc economy. In the Equaton (1), we defne the productvty gap, G, between the advanced and nferor countres.4 G PRO = ln PRO (1) Here, the dfference n the growth rates s logarthmcally specfed and represented by the productvty gap. The productvty of the nferor country (pro) n Equaton () s determned by IT nvestment, t, and knowledge spllovers from the advanced country, as s generally assumed n catch-up theory (Abramovtz 1986; Amable 1993; Verspagen 1993). IT nvestment, as prevously mentoned, s assumed to result n productvty mprovement. Knowledge spllovers n the nferor country () are dependent not only on technologcal dstance but also on ts capabltes to assmlate advanced knowledge. It s assumed that the larger the dstance between the current level of technologcal knowledge and the one to be mtated, the hgher the probablty to mprove ts productvty. Technology spllovers, however, wll not take place f the capablty of the recevng country s too low. Even wth a favourable outsde condton, rapd economc growth cannot be expected to take place n a country that has laws and regulatons that nhbt the assmlaton of advanced knowledge and sklls. The extent to whch a country can apply potental knowledge s not an automatc process but crucally depends upon ts socal capabltes and absorpton capacty to assmlate t. Therefore, the contrbuton of knowledge spllovers to productvty mprovement does not come automatcally but s dynamcally determned by the amount of knowledge spllovers and absorpton capacty to realze t. Now we assume that the amount of spllovers ncreases n proporton to the knowledge gap, G, and the capablty to assmlate advanced knowledge s denoted by parameter χ (Harrs 1993; Parente and Prescott 1994). χ conssts of two components. The frst component s the absorptve capacty and dependent on SOC, educaton system, and polcy. Second s an nsttutonal barrer such as a law or regulaton bannng the adopton of foregn advanced technologes. 3 Our model s heavly nspred by Amable (1993). 4 See Verspagen (1993). In the model, the captal letter represents a level and the lower-case letter represents the growth rate, respectvely. 3

6 IT nvestment (t) as n Equaton (3) s a functon of the productvty level because ncreases on the demand sde through productvty mprovement wll eventually call for more IT nvestment (Amable 1993). Under ths cumulatve growth model, IT nvestment leads to productvty mprovement and the ncreased productvty results n hgher IT nvestment constructng the vrtuous relatonshp. IT nvestment as n Kraemer and Dedrck (1994, 1) depends upon the level of properly establshed human captal (sec). The hgher level of human captal leads to an ncrease n IT nvestment wth a hgher rate of return. The hgher wage rates, rw, provde a greater ncentve to nvest n IT, ether to substtute labour or to mprove productvty n order to sustan them. It s also possble that an ncrease n wages has negatve mpacts on IT nvestment through lower profts. Human captal n Equaton (4) depends on productvty gap, G, mplyng the level of technologcal development. It s assumed that the rate of enrolment n secondary school (sec) s a functon of prmary school enrolment rate (prm) (Amable 1993). Fnally, n the Equaton (5), λ represents the level of wage labour nexus and results n the followng cases as n the theory of regulaton (Boyer 1988: 1) Ths s the case where wage and productvty growth have a perstaltc movement and wage rate s determned by nsttutonal compromse. In ths case, λ converges to 1; ) On the other hand, n the case where the wage rate s determned by demand and supply curves n the labour market nstead of nsttutonal compromse, λ converges to. pro = β + β t + χ G () t ε pro + φ sec + ϕ rw + ε = (3) sec γ G + η prm + γ = (4) rw = λ + λ pro (5) The Equatons ()-(5) yeld the followng Equaton (6). pro 1 βφγ = ( β + βε + βφγ + βϕλ + βφη prm ) G 1 βε βϕλ 1 βε βϕλ χ + G 1 βε βϕλ (6) As we can see n Equatons (7)-(1), the advanced country has the same movement as the nferor one, except n Equaton (7) and (9). Snce the productvty gap G s, there are no such effects n Equatons (7) and (9). pro = µ + µ (7) t t π pro + ϖ sec + θ rw + π = (8) 4

7 sec ϑ prm + ϑ = (9) rw = ρ + ρ pro (1) Equatons (7)-(1) are summarzed n Equaton (11): pro = 1 ( µ + µπ + µϖϑ + µθρ + prm 1 µπ µθρ µϖϑ ) (11) Equaton (1) yelds the followng Equaton (1 ) to represent the changes n productvty gap ( Ġ ) 5.. G = pro pro (1 ) From Equaton (1 ), Equaton 6, and Equaton (11), dynamcs of the productvty gap among countres can be summarzed as follows:. G = A + B G C G (1) where 1 A = ( µ + µπ + µϖϑ + µθρ + µϖϑ prm 1 µπ µθρ 1 ( β + βε + βφγ + βϕλ + βφη prm 1 βε βϕλ ) ) < > (13) γβφ B = > 1 βε βϕλ χ C = > 1 βε βϕλ < ( µπ + µθρ) <1 and < ( βε + βϕλ) <1 6 Searchng for equlbrum values of the productvty gap, Equaton (1) s set to zero. Ths yelds the followng equaton. A + B G = C G (14) 5 Ġ =. dg. G stands for the changes n productvty gap. dt 6 Ths condton should be satsfed to keep the system stable from the cumulatve and self renforcng effects whch are rased by the mutual nteracton between IT nvestment and productvty. See Dxon and Thrlwall (1975) and Verspagen (1993) for more detaled explanaton. 5

8 Fgure 1 The dynamcs of the productvty gap 1-) C < B: γβφ > χ. G 1 R1 1 G 1-) C > B: γβφ < χ. G R G G 4 6

9 1-) C=B: γβφ = χ. G 5 R3 6 G The straght lne denoted by represents the left-hand sde of Equaton (14), whle the lne labelled by R corresponds to the rght-hand sde of the equaton. Where the lne R s below the lne, the productvty gap grows, snce the amount of the spllover flowng to the nferor country s smaller than the ncrease n the productvty gap determned by other factors n the model (.e. the IT and human captal stocks, etc.). On the other hand, where the lne R s above the lne, the productvty gap becomes smaller. There are three possble stuatons n Equaton (14) and Fgure 1. Frst, n the case of (1-), the level of human captal stock n the nferor country s nsuffcent and the mpact of knowledge spllovers on the productvty of the nferor country s small. In other words, shortcomngs from the low level of human captal stock n the nferor country have larger mpacts on the productvty growth than knowledge spllovers would have. There are two dfferent cases here accordng to the level of productvty development due to other factors such as IT stock, and other exogenous varables wth postve mpacts on productvty: (1) s the case n whch the mpacts of other factors on productvty are smaller n the nferor country than n the advanced country and () s the opposte. There s an equlbrum pont 1 n 1. The ntal state at the left-hand sde of the equlbrum (1) does not exst snce the advanced country always has a hgher level of productvty. On the other hand, a small devaton from ths equlbrum pont to the rght wll result n a growth of the productvty gap. Wth a small contrbuton of knowledge spllovers as well as the other factors, t wll lead the nferor country away from catchng-up. In the case of an ntal pont somewhere at the lefthand sde of equlbrum (), the nferor country wll be able to mprove ts productvty and catch up wth the advanced country due to other factors. In the second case of (1-), regardless of the ntal productvty dscrepancy, the system wll converge to the equlbrum pont 3 wth a small mpact of knowledge spllovers on 7

10 productvty growth. When the nferor country has an assmlatng capablty as n 4, t wll be able to catch up wth the advanced country regardless of the ntal state. astly, 1- s the case where the negatve mpacts from the low level of human captal stock n the nferor country have the same sze as the postve ones from knowledge spllovers. In ths case, the trend of the productvty gap s totally determned by the other factors n the model. If the other factors contrbuton to the productvty growth s smaller n the nferor country than n the advanced country, productvty gap wll keep ncreasng. In the opposte case of 6, the nferor country wll be able to catch up the advanced country regardless of the ntal gap. 3 Data sources and results 3.1 Data sources We perform a panel analyss wth the cross secton and tme seres, poolng data from seventeen OECD member countres over the perod The data for our analyss are from OECD database and nclude GDP, labour force, IT nvestment and fxed captal formulaton, government expendture, and the rates of enrolment n the prmary and secondary schools.7 To estmate the result, a regresson model s developed as shown below: y t K = a1 + ak xkt + et (15) k = = 1,, N, t =1., T, where yt and x kt are the dependent and ndependent varables, respectvely, combned wth N observatons n cross secton data and T observatons n tme seres data. The constant term s a 1 and et s assumed to be a random error wth mean and σ varance. It s preferable to use the random effect model to estmate Equaton (15) rather than the fxed effect model snce the former mproves the effcency n the model. However, the random effect model tends to rase the model specfcaton error problem unless µ and x are ndependent. Followng Hausman specfcaton test, we use the random effect model f the null hypothess of no correlaton between µ and x s not rejected. Otherwse, the fxed effect model s used for our emprcal results. 7 IT nvestment data from OECD (1999) nclude IT hardware, IT servces and software, and telecommuncaton servces. The 17 OECD member countres nclude Greece, Netherlands, Norway, US, Belgum, Swtzerland, Span, Ireland, UK, Australa, Japan, Canada, Austra, Portugal, France, Fnland, and Korea. 8

11 4 Emprcal results In ths paper, we examne not only the cumulatve relatonshp between IT nvestment and productvty growth, but correspondngly also generate the productvty gap among countres. 4.1 IT nvestment and productvty gap We obtan the followng equatons from Equaton (1) n order to examne the role of IT nvestment n generatng productvty gap among countres. G = a + b G G = c + d t (A) (B) In Equaton (A) and (B), the value G s obtaned by subtractng the labour productvty growth rate of the ndvdual country from the average value of the OECD member countres. It represents the gap of productvty growth among countres. In Equaton (A), ts mnus value mples that the productvty growth rate of the ndvdual country ncreases faster than the average rate of OECD member countres.8 We add non-it captal and human captal to these two equatons and examne the parameter value of each varable. Table 1 presents our emprcal results. The estmated results from the random effect model have been used for all equatons, snce the null hypothess of no correlaton between µ and ndependent varables s not rejected at the 1 per cent confdence level n Hausman specfcaton test. The R of.7~.41, a useful measure of ftness, allows us to conclude that t s assocated wth a good ft of our model regardless of the panel data pooled wth cross secton and tme seres data. Our emprcal results ndcate that the estmated coeffcents of the growth rate of IT and non-it captal stocks and productvty gap have negatve sgns wth statstcal sgnfcance as predcted. On the other hand, the estmated coeffcent of human captal, whch mples the assmlatng capablty of the ndvdual country, has a mnus sgn wth no statstcal sgnfcance. The key mplcatons from our emprcal results can be presented as follows. Frst, the emprcal result from estmated Equaton (1) ndcates that an economy wth a hgher level of IT nvestment grows faster than the average OECD member-state. In other words, the productvty gap among countres decreases as IT nvestment grows. Second, t s shown that both IT and non-it captal stocks play an mportant role n reducng the productvty gap among OECD member countres. Estmated Equaton (3) generated by ncludng non-it captal stock n Equaton (1) shows hgher value of R 8 We calculated the values of IT captal stock and total captal stock from fxed captal formulaton and IT nvestment data n OECD DB. And we obtan non-it captal stock by subtractng IT captal stock from total captal stock. 9

12 and goodness of ft. It s worth pontng out that non-it captal stock plays a bgger role n reducng the productvty gap than IT stock, snce our estmaton yelds IT captal stock coeffcents of -.14 and non-it captal stock coeffcent of -.3, respectvely. Ths result s n accordance wth Kraemer and Dedrck (1), who analysed data from 46 countres durng the perod of 1985 to astly, the estmated coeffcent of productvty gap G, whch represents the spllover effects, shows a mnus sgn wth statstcal sgnfcance n estmated Equatons () and (6). Ths result ndcates that the countres wth a relatvely low level of productvty among OECD natons grow faster, by utlzng the knowledge spllovers from advanced countres. Ths result also accords wth those from Verspagen (1993) and Amable (1993), who performed emprcal analyss on the catch-up theory and verfed that nferor countres reduced the gap by usng the knowledge from advanced countres as well as ther own know-how. Table 1 The estmated results from reduced equatons Estmated equaton Constant t G K sec R Hausman test n 1 -.3*** (.5) -.16*** (.44).7 χ (1) =.7 (.8) *** (.33) -.4*** (.11).36 χ (1) =.61 (.43) *** (.4) -.14*** (.5) -.3*** (.6).4 χ () = (.9) (1.39) -.17*** (.5) -.3 (.5).9 χ () =3.4 (.1) (1.3) -.14*** (.5) -.3*** (.7) -.4 (.5).41 χ (3) = 6.1 (.11) (1.38) -.11* (.6) -.3* (.) -.4 (.5).38 χ (3) = 3.83 (.8) 89 Notes: 1) Standard errors n parenthess. ) t = growth rate of IT captal stock per capta; G = productvty gap; K=growthrateofnon-IT captal stock per capta; sec= secondary educaton enrolment rato. 3) ***, **, and * ndcate sgnfcance at 1%, 5%, and 1%, respectvely. 4. The cumulatve relatonshp between IT nvestment and productvty growth We estmated the cumulatve growth model of Equaton ()-(5) usng three-stage least square regresson and the results are presented n Table. Productvty functon, human captal functon, and real wage growth functon are estmated n the smultaneous equaton form to show the cumulatve relatonshp between IT nvestment and productvty growth. 1

13 Table The estmated results from smultaneous equatons pro = t +.3G.7gov (1.39) (.5**) (1.74*) (-1.4) RMSE = 3.5 t = pro.6rw +.61sec.95r (-1.18) (.87***) (-1.61*) (1.6*) (-1.65*) RMSE = 8.7 sec = G +.38pr (5.1***) (-1.56) (.3**) RMSE = 1.44 rw =.4+.3pro (.4) (1.7*) RMSE = 1.84 Notes: 1) t values are enclosed n parenthess. ) pro = growth rate of labour productvty; t= growth rate of IT captal stock per capta; G = productvty gap; gov = government expendture/gdp; rw= growth rate of real wage; sec = secondary educaton enrolment rato; r = nterest rate; pr = prmary educaton enrolment rato. 3) ***, **, and * ndcate statstcal sgnfcance at 1%, 5%, and 1%, respectvely. 4) Three stage least squares regresson s used for ths estmaton. In the frst equaton of productvty functon, the estmated coeffcents of IT nvestment and productvty gap have postve sgns as predcted and are statstcally sgnfcant. On the other hand, the estmated coeffcent of government expendture has a mnus sgn wth no statstcal sgnfcance.9 Ths result s smlar to the one from the reduced equaton and mples that IT nvestment wth knowledge spllovers ncreases an ndvdual country s productvty. Wth regard to the varables n the second equaton of the IT nvestment functon, the estmated coeffcents of productvty growth and human captal show postve sgns as predcted and those of real wage growth and nterest rates have negatve sgns. Among these varables, the estmated coeffcents of productvty growth and nterest rate are statstcally sgnfcant at the 1 per cent sgnfcance level.1 Ths s consstent wth the results from Kraemer and Dedrck (1) n the sense that nvestment for IT captal 9 Followng Barro (1991), we also assume that government expendture (gov) has negatve effect on productvty growth snce most government expendtures consst of unproductve areas lke natonal defence. 1 In the estmated equaton for IT captal growth, the coeffcents for real wage and secondary educaton enrolment rato are statstcally sgnfcant at 1.8 per cent and 1.6 per cent, respectvely. 11

14 ncreases as market demand expands wth suffcent human captal and low nterest rate. In other words, we fnd evdence that IT captal accumulates favourably under an economc envronment wth low fnancal cost and suffcent human captal. Turnng to the estmated coeffcent of real wage growth, our result s nconsstent wth Kraemer and Dedrck (1) and shows negatve sgn to mply that an ncrease n the wage rate results n smaller profts and thus a decrease n IT nvestment. One explanaton for ths nconsstency s that a decrease n profts through an ncrease n the wage rate has larger effects on IT nvestment than those from labour force substtuton. The thrd equaton of human captal functon s determned by the productvty gap and prmary educaton enrolment rate. The estmated coeffcents of the prmary educaton enrolment rate and productvty gap show postve and negatve sgns, respectvely, as predcted. The estmated coeffcent of the former s statstcally sgnfcant, but that of the latter s not. astly, real wage functon s determned by the productvty level and the estmated coeffcent shows a postve sgn wth statstcal sgnfcance, as predcted. The estmated value of coeffcent s relatvely low at.3, whch represents a flexble labour market snce 198s.11 5 Concludng remarks Usng an emprcal analyss wth data on OECD member countres over the 199s, ths paper examnes the mpact of IT nvestment on the productvty gap between countres and the cumulatve relatonshp between IT nvestment and productvty. Our reduced and smultaneous equaton models are estmated and ndcate the followng results. Frst, those countres makng rapd progress n IT captal formulaton enhance labour productvty faster than the average OECD member country. Second, non-it captal has larger mpacts on the economy than IT captal. Thrd, countres wth a relatvely lower productvty level can reduce the gap usng knowledge spllovers from advanced countres. Fourth, our results ndcate that IT nvestment and expanson ncrease labour productvty n OECD member-states and that countres wth a sold nfrastructure and sklled human resources ncrease IT nvestment even more actvely. Ths fndng provdes some mplcatons on the contnung debate regardng productvty paradox. astly, the cumulatve relatonshp between IT nvestment and productvty s shown to be vald and thus ths mght wden the dsparty between countres accordng to the economc possbltes provded by IT nvestment. There have been extensve research results from varous perspectves on the mpacts of IT nvestment on the economy. But most prevous studes examnng IT mpacts on the economy have focused on the unlateral relatonshp, whch s to dscover whether IT nvestment brngs about postve economc results such as hgher economc growth, the 11 As Boyer (1988) ndcates, wage formaton consttutes wth productvty growth. Its estmated value s close to 1 before 198s. On the other hand, the flexble labour market n the 198s attenuates the ntmate relatonshp between productvty growth and real wage. 1

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