Does Information & Communication Technology(ICT) Investment Contribute To Cost Reduction?: An Empirical Analysis of Korean Industries

Ki-Dong Lee

Korean Economic Review, 2004, vol. 20, 343-365

Abstract: This paper investigates the cost reducing impact of ICT related investment along with substitution possibilities between ICT equipment and other inputs. The empirical analysis is based on a translog cost function model and annual data for Korean manufacturing indsutries(1984-99). Reflecting the trend of rapid increase in ICT investment in the 90's, the share of ICT capital to non-ICT capital(ICT intensity) has been raised from 1.79% in 1984 to 6.68% in 1999. The empirical results show that there are labor-saving technical change in the consumer goods industries, capital-saving and intermediate materials-augmenting technical change in the basic material manufacturing industries, and neutral technical change in the assembly and processing industries during 1984-99. We also examine cost saving effect of ICT-capital by estimating the cost/ICT-capital elasticities. The signs of estimated cost/ICT-capital elasticities in the consumer goods industries are negative and statistically significant. In addition, the weighted average of these values(weighted by the volume of output) is changed from -0.256 in 1984 to -0.278 in 1999. This implies that production efficiency has been achieved through the cost reduction accompanied by increase in ICT-capital in the consumer goods industries. Similar cost reducing impacts of ICT-capital are found in the industries such as primary metal products, fabricated metal products, and electronic and other electric equipment industry. We also investigate the relationship between ICT-capital and other inputs by estimating the Allen elasticities of substitution and input demand elasticities with respect to ICT-capital in the manufacturing sectors.

Keywords: cost reduction; cost/ICT-capital elasticity; elasticities of substitution (search for similar items in EconPapers)
JEL-codes: O33 O47 (search for similar items in EconPapers)
Date: 2004
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