Interim study report - Executive Summary (January 2008)
(The final study report will be available by the end of September 2008.)
This is the interim report of the Sectoral e-Business Watch study on the economic impacts and drivers of ICT adoption. It proposes a conceptual framework for the analysis of factors that determine the diffusion of information and communication technology (ICT) in businesses ("drivers"), of ICT-enabled innovation processes and, ultimately, the impact of ICT on companies performance. The study focuses on the following six sectors:
These sectors had been selected as priorities for the work of the Sectoral e-Business Watch in 200708. Their business activities are defined by the NACE Rev. 1.1 classification.
The developed conceptual construct allows for an economic analysis based on recent literature, expert interviews, and case studies. The hypotheses developed in this report will be subject to empirical testing in the final study.
The starting point of the analysis rests on the premise that ICT is an enabler of innovation, a direct consequence of the ambiguous relationship between ICT investment and firm performance. By considering ICT as an enabler of innovation allows the assumption that ICT has strategic relevance for firms i.e. in facilitating innovation. It has several drivers as well as impacts industry and market structure and firm performance respectively.
In order to create a conceptual framework for the analysis of the interplay between the drivers of ICT adoption, impacts of ICT diffusion and innovation, reference to the Structure-Conduct-Performance (SCP) paradigm is made. This conceptualisation allows for an economic approach that studies the drivers and impacts of ICT at the firm and sector level for the following industry dimensions: work force composition, value chain characteristics, and market structure as structure elements, innovation dynamics as conduct parameter, and employment and productivity as performance indicator.
For the purpose of this analysis, market structure workforce composition and value chain characteristics are considered as drivers of ICT adoption. The impact of ICT adoption and ICT enabled innovation is studied through productivity and employment as proxies for firm performance. This construct enables the understanding of not only uni-directional causal relationships but recognises the presence of firm performance impacting upon the drivers of ICT adoption.
The conceptual framework defines two dimensions of the forthcoming analysis. First it identifies drivers of ICT adoption and the process of turning it into marketable products and production processes (i.e., ICT enabled innovations). Second, it identifies the impact of a firm’s innovative activity enabled by ICT on firm and market structure characteristics. The data sources used for the empirical analysis are the SeBW Survey data and the EU Klems database.
The study aims to examine the varying heterogeneity across firms using two aspects; a firm’s skill base and technology use. Economic literature suggests that there is a complementarity between high skill labour and ICT use. Further, firms that have previous experience with ICT tend to be more intensive adopters of new technologies implying path dependence with respect to ICT adoption.
The conceptualisation of ICT as an enabler of innovation allows for a market based analysis of why different sectors exhibit differing payoffs despite similar levels of ICT investment. The differing payoffs are the result of varying adoption patterns and environmental conditions that are sector specific.
The following hypotheses will be empirically tested for the sectors covered, on the basis of SeBW Survey data:
The changing relationships between suppliers and buyers tend to promote the diffusion of ICT. Further, the readiness and technological competence of firms, their suppliers, customers and competitors determines the success of ICT use.
Similar to intra-firm changes, ICT has enabled new business structures and redefined B2B interactions through value chain management, thereby increasing efficiency through reduced transaction costs. This new structure allows the separation of product and information flows and facilitates the exchange of information and better responses to real-time business conditions.
The following hypotheses will be empirically tested for the sectors covered, on the basis of SeBW Survey data:
Competitive market pressure often drives a firm’s decision to adopt ICT. Though the incentive of monopoly profits and cost arguments, related to large firms, still remain, differing market structure characteristics and concentration levels imply differing ICT adoption across industries.
The onset of ICT and the internet have changed the traditional way in which business to consumer (B2C) and business to business (B2B) relations function, moving from supply driven to more demand driven production. Previously, a firm’s response to demand depended on its inventory levels i.e. supply driven demand which meant increased costs of storage and deficiencies as a result of time and scale. With demand driven production, firms are able to reduce their dependency on inventories and instead use ICT to react in real time to the changing needs of the consumers. Thus, these ‘lean manufacturers’, are able to use ICT to deliver the right product, at the right place and time.
This shift highlights an important feature, namely, current market structure characteristics and technology determine future innovation, technology and market structure. For example, ICT has offered small and new firms the opportunity to enter markets and in some cases to actually leap frog existing market leaders thereby changing market structure and determining the pattern of future innovation.
The following hypotheses will be empirically tested for the sectors covered, on the basis of SeBW Survey data:
The productivity improvements that occur in using ICT result in increased firm performance, a higher skill base and more efficient products and processes all of which feedback in to the drivers of ICT indirectly making productivity a driver of ICT adoption.
Firm performance is assumed to be the outcome of its conduct. For example, this would include investments made in ICT, where the availability of resources that can be used for innovative activities depends on the type and intensity of competition in which a firm operates. Further, ICT readiness and technical competence influence a firm’s ability to extract benefits out of the ICT investment. Despite extensive research on the use of ICT and its impact, empirical research is unable to state with clarity that ICT use leads to increases in productivity and firm performance.
However, we can say that ICT does have some impact on firm performance. This ambiguity, partially on account of measurement techniques, could be reduced when considering ICT as an enabler of innovation instead of being directly responsible for increased productivity or firm performance. In this context, the literature highlights the importance of complementary assets which include human capital, firm restructuring and working practices in combination with investment in ICT. However, as complementary and organisational investments are firm specific and vary strongly across organisations, the resultant payoffs and trajectories are varied. This implies that despite similar investments in ICT, firm and industry dependent characteristics determine the resulting payoffs.
The following hypotheses will be empirically tested for the sectors covered, on the basis of EU KLEMS data:
The skill base and ICT complementarity is increasingly recognised in literature. Investment in human capital allows the deployment of more advanced ICT and higher productivity levels. More advanced levels of ICT usage require professionals that are able to use the technology for optimal firm performance. In this sense, the relationship between ICT and skill base is circuitous i.e. greater investment in human capital facilitates more sophisticated ICT use which in turn increases the need for more trained professionals.
An important question in this context is whether ICT increases or decreases employment levels, and how this impacts on workforce composition. ICT enables either, product or process innovations; while the former normally is labour enhancing, the latter is labour saving. However, this being said, the impact of ICT on employment is not clear. Thus, this study aims to provide some new evidence to this question through empirical analysis which will follow in the final report.
The following hypotheses will be empirically tested for the sectors covered, on the basis of EU KLEMS data:
Increasingly more low skilled jobs in the EU are being facilitated through networks, subcontracting and outsourcing. The efficacy of ICT and ICT enabled innovation is dependent on high skill labour. Thus, in order to increase labour demand, the quality of labour should be improved. Therefore, EU and national government policy should focus on increasing education levels, promoting research and development ventures to improve human capital and create favourable conditions for ICT investment, which in turn would increase innovative potential. This policy implication will be further elaborated and consolidated in the final report.
