The Impacts of Information Technology on Total Factor Productivity: A Look at Externalities and Innovations

The impacts of information technology (IT) on total factor productivity (TFP) are assessed through an integrative framework of IT-induced externalities and IT-leveraged innovations. Based on network externalities and endogenous growth theory, our study aims to reconcile the seeming discrepancy between the recent observed evidence and the prediction by neoclassical growth theory. We argue that computerization has reshaped the competitive landscape into a network economy with IT-induced externalities that benefit not only IT purchasers but also other stakeholders. Moreover, IT is a platform technology that can leverage innovations to enhance the technological level of production process. Consequently, these two factors of IT-induced externalities and IT-leveraged innovations exert positive impacts on TFP, suggesting IT plays a more pivotal role than input consumption and accumulation that neoclassical growth theory assumes for IT. We use panel data from 30 Organization of Economic Cooperation and Development (OECD) countries over the period of 2000 to 2009 to empirically test hypotheses on this IT-TFP link. Implications are drawn from our findings for future research to measure IT’s contributions at the macro level more accurately, and policymakers are urged to cultivate IT’s positive impacts on TFP to help sustain long-term economic growth.