Network Effects on Productivity from ICT Use

The productivity effects of using new technology are not easy to identify, quantify, or disentangle from other (related) factors impacting on productivity. While significant progress has been made in measuring the contribution of ICT production and investment to productivity, traditional standard growth accounts do not suffice to nail down which part of TFP growth can be linked to spillover effects and externalities from ICT. Increasingly network effects from digitalization, including higher returns to scale owing to more connectivity between businesses and innovative adaptations from ICT across the economy, are key to generating productivity growth.

Network externalities come in two parts: 1) a returns-to-scale effect, which directly relates to Metcalfe's law, which states that the value of a network increases with the square of the number of users of the network; and 2) the productivity effects from innovative adaptations from the use of, for example, the Internet and wireless technologies. The productivity impact of the two network effects, which was obtained from an econometric analysis for eight European countries (see Footnote 6), shows these effects to be quite low.[1] For example, between 2001 and 2007, the returns-to-scale (Metcalfe) effect accounted for as little as 0.16 per cent of TFP growth in the eight European countries. During the 2008-11 period, the returns-to-scale effect detracted 0.3 per cent of TFP growth. The effect of innovative adaptation on TFP growth—at less than 0.1 per cent throughout the 2001-11 period—is even smaller than returns to scale, but more sustainable.

Table 1.2 shows that the combined impacts of ICT production, investment, and use accounted for about one percentage point of output growth in the eight European economies from 2001 to 2007, which is substantial given the overall market sector output growth rate of just over 2 per cent. Close to half of the ICT effect comes from investment and the other half from productivity of ICT producers and ICT users. While the productivity contribution from ICT producers and ICT capital was largely sustained after the onset of the crisis, the returns-to-scale part of TFP by the non-ICT sector in particular contracted sharply and became negative, bringing the overall contribution of ICT to output growth in the 2008-11 period to 0.1 per cent, down from 1 per cent in the 2001-7 period.

  • [1] Austria, Finland, France, Germany, Italy, Netherlands, Spain, and the US. See Corradoand Jager (2015) for a fuller explanation of the dataset, the sources-of-growth analysis, andthe econometric estimates on ICT externalities.
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