IT Industry Development and the Knowledge Economy

Abstract

It is generally accepted that knowledge has become a third major factor of production, in addition to the traditional factors — labor and capital. Information technology production is a significant factor in the knowledge economy both because it is a major enabler of that economy and because it is itself highly knowledge intensive. Many countries around the world are looking for ways to promote the development of the knowledge economy, and information technology industries in particular. An important question is to what extent — and how — small developed countries might succeed in this endeavor. This study suggests a modified and more comprehensive version of the Ein-Dor et al. (1997) model of IT (information technology) industry success in small developed countries. Whereas the earlier model of IT industry success was based solely on the macro-economic theory of Grossman and Helpman (1991), the revised model suggested here incorporates Romer’s (1990) work in New Growth economics. A significant advance over earlier work in this area is the use of both longitudinal and time slice data. This article provides an in-depth analysis of the IT industry in four countries over a five-year period: Finland, Israel, New Zealand and Singapore. It analyses some changes that occurred over the period 1994 through 1998 and thus provides a reasonably comprehensive picture of the factors affecting the production of IT in these small developed countries. Our study reveals that four of the five endogenous variables studied have a close relationship to the development of IT industries in small developed countries. These variables are research and development, technological infrastructure, firm strategies, and capital availability. On the other hand, domestic IT use does not seem to be a major factor in IT industry development. Our analysis thus largely supports the more comprehensive model of IT industry success. These findings should be of interest to both researchers and policy makers seeking to develop the knowledge economy and information technology industries in particular.