Study tracks role of IT investments in economic growth

Canadian businesses have invested heavily in information and communications technology (ICT) during the past two decades. This investment was a major factor in the accelerating growth in the business sector’s economic output in last half of the 1990s.

Investment in information and communications technology (ICT) has been growing at annual pace of 16.2% over the last 20 years, far outpacing investment in most other types of assets, according to report issued by Statistics Canada.

ICT includes computer hardware, computer software and telecommunications equipment.

Despite this rapid growth, however, ICT equipment accounts for a small share of the business sector’s aggregate capital. In 2000, the sector’s ICT assets totalled $60 billion in current prices, representing only 6.4% of fixed reproducible capital, which includes other machinery, equipment and structures, but not land or inventories.

Still, this was more than five times the total of $11 billion in 1981, which marks the start of the Statistics Canada study and when ICT accounted for an even smaller 3.9% share of the business sector’s fixed reproducible capital stock.

The accelerating economic growth in the business sector in the late 1990s stemmed not only from the recovery in the growth of capital services, particularly ICT; it was also a result of strong growth in labour inputs, especially the number of hours worked, and the resurgence of multifactor productivity growth.

From 1995 to 2000, gross domestic product (GDP) in the business sector increased an average 4.9% a year, about triple the average 1.5% growth rate from 1988 to 1995. Because of strong investment growth and an increasing input share, ICT was the only class of capital inputs to make a substantially larger contribution to output growth in the late 1990s compared with the 1980s.

"The rapid adoption of ICT reflected both the steep decline in the price of computing power, at the rate of 9.3% a year since 1981, and the explosion in ICT applications and capabilities. It also suggests that businesses made a sustained effort to improve both their performance and profitability," comments Statistics Canada in its Daily Bulletin.

Business investment in ICT more than doubled from 1995 to 2000 compared with the 1988-to-1995 period, as firms replaced and upgraded their high tech equipment and software.

Business investment in ICT grew an average 27.6% per year, five times faster than business sector output from 1995 to 2000. This helped GDP to post its highest growth since 1981.