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Information Technology and International Trade in Services: The Next Wave of Productivity Growth Catherine L. Mann CLMann at Brandeis.edu Brandeis University Peterson Institute for International Economics Prepared for the RIIE conference, Stockholm November 20, 2006 0 IT is a Special Economic ‘Driver’ Global sourcing accelerates change, diffusion, and policy demands • ‘General purpose technology’ – IT investment wrt income > 1 (growth elastic) – IT investment wrt price >> 1 (price elastic) – R&D intensive • Productivity enhancing – Gains from diffusion throughout US… (it’s not just about IT) – Diffusion varies across sectors… (new opportunities) – Affects labor tasks, wages, employment… (winners, losers) • Globalization/Outsourcing’s role – Reduces IT prices, contributes to diffusion and gains, but also to change in labor demands – For the US, the gains from IT hardware outsourcing may be $250 1 billion Services are a Special Sector Information technology globalizes, but local requirement specializes • Income and development elastic – Services demand wrt income > 1 (growth elastic) – Services share of GDP rises with economic development • Trade & FDI in services growing rapidly – Trade growth (1996-2002): 36% compared to 20% for goods – FDI stocks (1996-2002): $950B to $4.4T; 28% business activities 31% Finance activities • IT and Globalization’s role – Allows fragmentation, codification of tasks – Accentuates potential for customization as well as commoditization of tasks and activities – Will impact a wider swath of labor force at home and abroad 2 Globalization and IT Together • Fast pace of change… – In technology, geography of production and demand for IT • Strong synergies… – Technological change & global sourcing go hand-in-hand, each augments other. • Broad-based diffusion and application… – In GDP and employment-intensive services industries • Imply accelerating globalization. – Business implications—more fragmentation, specialization – Labor implications—widening gap in wage, employment prospects – Policy implications—laissez-faire or intervene? 3 IT Hardware Globalization, IT Hardware Prices & the US Economy: A Quantification Sources of price decline 1. US innovation is key: Technological change h generates 70-90% of price declines—globalized research is a new concern 2. But also global mktplace: Logic of macro gains …. IT price decline => IT purchase Diffused IT investment through US due to price elas. of demand > 1.0 …. IT investment =>transformation capital deepening, drives key changes in workplace practices, new products regression estimate that …. Transformation => productivity 10-30 % additional price IT accounts for more than ½ of increased productivity growth ‘90s; decline from global production & global markets … 10-30% more price decline? How important is 10-30% GDP growth 0.3 /yr higher (95-2000) additional price decline from => ¼- ½ trillion extra dollars 4 globalization? Why Invest in IT? IT in networks reduce own-firm costs Network linkages stronger for services than for mfg. Multiple, diverse ‘forward’ linkages in services yields more cost reductions 5 than for mfg which has more ‘backward’ linkages to fewer suppliers. IT Intensity & Productivity Growth: Positively related, wide variation, services lead & lag Leading sectors—already networked, common software ‘platform’. Lagging sectors—diverse firm sizes, complex relationships, regulations Lagging sectors may never catch-up but present new opportunity… 6 Opportunity may be realized at lower cost/price of IT, esp. software Slide 1 International Services trade IT intensity International comparative advantage Leading services sectors run international trade surplus Technology accelerates fragmentation and globalization of services Not just IT, but broad range of services and intellectual property Exposes more of the labor force to global technology forces. 7 Slide 5 Trade in computer and information services Rising affiliated imports,new deficit in CIS: A worry or not? Potential for the same price-reductions and productivity gains As from the globalization of IT hardware 8 Slide 5 International services trade IT intensity Productivity growth Trade in Services and Services Productivity Growth Positively Related, Controlling for IT Capital Stocks, Enterprise Concentration. As of 1997 IT capital stocks, hardware and telecoms more important. What will new capital stock data reveal? 9 Slide 5 Technology and the Labor Market Accentuates cycles, and for more of the economy Diffusion of IT leads to technology jobs throughout US economy —2/3 of IT workers work outside the IT sector. So, IT professionals exposed to both the tech cycle, business cycle, 10 Technology accelerates globalization’s effect Slide 5 IT-Related Labor Markets: a Microcosm for All Services? Globalization & diffusion of IT accentuates wage, employment gaps Low-wage in real trouble—from trade & technology Increased ‘codification’ puts some high-wage at risk (programming) 11 Increased jobs at middle & high-wage demand integrative & analytical Slideskills 6 R&D intensity of IT is very high Implications of global collaborative R&D? Insufficient R&D workers risks loss of technological leadership, With implications for balance of payments too. 12 Policies for the National Interest – Transformation challenge • National gains to the economic pie from global sourcing requires business environment conducive to transformation, and ensuring worker-job matches so that gains are widely shared. – Global challenge • National gains from accelerating globalization depends on other countries’ policies. Yet, services liberalization stalled in Doha. – Innovation challenge • National gains from global collaborative innovation require a ‘home base’ supply of domestic sci/tech people, universitybusiness consortia, and funding. 13