Information & Communication Technology and capital market perspectives

Abstract

Capital markets in the late 1990s were shaped by the US stock market bubble which imploded in 2001. The new economy hype has shown all typical bubble aspects of a new sector taking-off: many new firms entering the market, few newcomers realizing enormous profits and a small number of firms with sustained profits. As the New York stock market dominates international stock markets, there were considerable international spillover effects from the US bubble which implied negative costs of capital for firms in most OECD countries and thus stimulated overinvestment in the late 1990s and a following phase of underinvestment. However, telecommunications services and software have remained dynamic drivers of the digital economy. Part of the overvaluation in the stock market in the late 1990s was caused by fraudulent investment bankers who publicly recommended investment in Information & Communication Technology (ICT) shares while putting the thumb down on New Economy firms in internal meetings. The main motive for such inconsistent public reinforcement of the stock market rallies apparently was the desire of investment bankers to stimulate positive cross-selling effects for the mergers & acquisitions department of the bank. Fraudulent accounting at some New Economy firms further drove the stock market boom and contributed to biased pricing. When prices in capital markets suddenly and strongly fell from their high levels in 2000, this move reflected some normalization of stock market prices in the New Economy segment. Is the New Economy over? An analysis of the perspectives of the digital economy requires a focus on the valid core of Information & Communication Technology. As regards the role of ICT, there is one key indicator for the strategic role of this sector for both productivity and growth. The number of software engineers in the US in 2000 was higher than the number of all conventional engineers which indicates that there is an enormous number of highly skilled people who build the digital economy. Indeed, ICT was the key driver of productivity and income growth in the US and part of Europe in the 1990s. High productivity growth in ICT production and productivity effects from the use of ICT have raised economic growth in most OECD countries and several