Are ICT, Human Capital and Organizational Capital Complementary in Production? Evidence from Italian Panel Data

Abstract

Information and communication technologies (ICT) are considered to play a central role in determining productivity. The discussion on the impact of ICT on growth and productivity was stimulated by the famous sentence of Robert Solow (1987): “You can see the computer age everywhere but in the productivity statistics” (the so called Solow paradox or productivity paradox). This quote was actually expressing concern that, while investment in ICT during the eighties and early 90s was growing exponentially in the U.S. and quality-indexed prices for computer were rapidly (and exponentially) falling, productivity in the Service industry, in which about 80% of IT investment is made, was actually stagnating. Trying to provide a solution to the productivity paradox, some scholars (mainly Brynjolfsson and co-authors) have argued that ICT capital does not -per se- increase productivity. In fact, productivity increases when investments in a set of complementary assets are made. These assets are ICT capital, Organizational Capital and Human Capital. In this paper we explore the ICT-Organizational Innovation-Human Capital complementarities issue for the Manufacturing sector in Italy. We use data from the 7th, 8th and 9th waves of the “Indagine sulle Imprese Manifatturiere Italiane” by Unicredit (previously managed by Capitalia-Mediocredito Centrale), which contains information on ICT investments, organizational innovations, the skill composition of the work-force and on many other variables (measured at the firm level). From these three waves we create an unbalanced panel, made up by firms observed either in waves 7 and 8, in waves 8 and 9 or in waves 7, 8 and 9. After generating values for real product and real capital, we take the wave-to-wave variation in the log of productivity and regress it on a series of explanatory variables, including ICT investment, the presence of organizational innovations, the skill composition of the work force and their interactions. By taking first differences (wave-to wave differences) we are able to control for unobserved fixed effects which might be related to the endogenous variable (labor productivity) and to some explanatory variables. On these differenced data we run OLS and find no evidence of the complementary hypothesis between ICT investment and organizational innovations, which is per se an interesting results because for many other (European) countries there exists significant evidence of complementarity. This is perhaps due to 1) the focus on manufacturing firms and 2) the fact that most firms in our dataset are medium-small firms (i.e. organizational change is more complementary with ICT investment for large firms). Our data also signal that the skill composition of the work-force is a strong determinant of productivity (either alone and when interacted with other potentially complementary assets). Finally, ICT investment is a complement to human capital, given that more ICT positively interacts with a high fraction of educated workers to stimulate productivity growth.JRC.J.3-Information Societ