ICT adoption in developing countries: firm-level evidence from Brazil and India Simon Commander (LBS) Rupert Harrison (IFS) 1 st June 2006

Structure of the talk  New firm-level data from Brazil and India  Summary of results in two areas:  ICT, organisational change and productivity  Constraints on ICT adoption  Conclusions and other work

New firm-level data  500 face-to-face questionnaires in each country, April-May 2005

New firm-level data  500 face-to-face questionnaires in each country, April-May 2005  6 three-digit manufacturing industries, representing 30% of manufacturing employment in Brazil and 20% in India

New firm-level data  500 face-to-face questionnaires in each country, April-May 2005  6 three-digit manufacturing industries, representing 30% of manufacturing employment in Brazil and 20% in India  Sample stratified by region and firm size

New firm-level data  500 face-to-face questionnaires in each country, April-May 2005  6 three-digit manufacturing industries, representing 30% of manufacturing employment in Brazil and 20% in India  Sample stratified by region and firm size  Broad range of detailed information on:  Performance outcomes (employment, sales etc)  ICT adoption and organisational change  Occupation and skill shares of the workforce  Management practices  Reported constraints on ICT adoption

The sample BrazilIndia Median emp.N N Electronic Components Plastic products Soap and detergents Auto components Machine tools Garments Total

Summary measure of ICT (1 – 5) 1)ICT is not used at all “How would you best describe the degree of ICT usage in your firm?”

Summary measure of ICT (1 – 5) 1)ICT is not used at all 2)ICT is used only for some office applications along with accessing the internet, ing, etc. “How would you best describe the degree of ICT usage in your firm?”

Summary measure of ICT (1 – 5) 1)ICT is not used at all 2)ICT is used only for some office applications along with accessing the internet, ing, etc. 3)ICT is used for some advanced applications. Most processes are automated but there is no integration into a central system. “How would you best describe the degree of ICT usage in your firm?”

Summary measure of ICT (1 – 5) 1)ICT is not used at all 2)ICT is used only for some office applications along with accessing the internet, ing, etc. 3)ICT is used for some advanced applications. Most processes are automated but there is no integration into a central system. 4)Most processes are automated and some of them are integrated into a central system. “How would you best describe the degree of ICT usage in your firm?”

Summary measure of ICT (1 – 5) 1)ICT is not used at all 2)ICT is used only for some office applications along with accessing the internet, ing, etc. 3)ICT is used for some advanced applications. Most processes are automated but there is no integration into a central system. 4)Most processes are automated and some of them are integrated into a central system. 5)Almost all processes are automated and integrated into a central system “How would you best describe the degree of ICT usage in your firm?”

Summary measure of ICT (1 – 5)

Other ICT measures BrazilIndia % of firms who have adopted PCs98 % of firms who have adopted servers9063 Number of PCs per employee Number of servers per employee % of non-production workforce using PCs % of prod workforce using ICT-controlled machinery

Other ICT measures BrazilIndia % of firms who have adopted PCs98 % of firms who have adopted servers9063 Number of PCs per employee Number of servers per employee % of non-production workforce using PCs % of prod workforce using ICT-controlled machinery PCs per 1000 people8611 ICT expenditure as % of GDP6.73.7

Other ICT measures BrazilIndia % of firms who have adopted PCs98 % of firms who have adopted servers9063 Number of PCs per employee Number of servers per employee % of non-production workforce using PCs % of prod workforce using ICT-controlled machinery PCs per 1000 people8611 ICT expenditure as % of GDP6.73.7

Date of adoption: PCs (both 98%)

Date of adoption: Servers (90%, 63%)

ICT adoption and productivity  Micro literature from developed countries has found very high estimated returns to ICT (Brynjolfsson and Hitt, 2000, 2003; Stiroh, 2002)

ICT adoption and productivity  Micro literature from developed countries has found very high estimated returns to ICT (Brynjolfsson and Hitt, 2000, 2003; Stiroh, 2002)  Possible explanations include: unobserved heterogeneity, unmeasured complementary investments in e.g. human capital, software, workplace organisation

ICT adoption and productivity  Micro literature from developed countries has found very high estimated returns to ICT (Brynjolfsson and Hitt, 2000, 2003; Stiroh, 2002)  Possible explanations include: unobserved heterogeneity, unmeasured complementary investments in e.g. human capital, software, workplace organisation  Some evidence that unmeasured complementary organisational changes may help to explain high measured returns to ICT (Bresnahan, Brynjolfsson and Hitt, 2002; Basu, Fernald, Oulton and Srinivasan, 2003)

ICT adoption and productivity  Micro literature from developed countries has found very high estimated returns to ICT (Brynjolfsson and Hitt, 2000, 2003; Stiroh, 2002)  Possible explanations include: unobserved heterogeneity, unmeasured complementary investments in e.g. human capital, software, workplace organisation  Some evidence that unmeasured complementary organisational changes may help to explain high measured returns to ICT (Bresnahan, Brynjolfsson and Hitt, 2002; Basu, Fernald, Oulton and Srinivasan, 2003)  No micro-econometric evidence in developing countries

ICT adoption and productivity Dep var: Log salesBrazilIndia (1) Levels (2) 2 year difference (3) Levels (4) 2 year difference Log employment0.392*** (0.109) 0.337*** (0.066) Log materials0.359*** (0.062) 0.434*** (0.051) Log fixed capital0.214** (0.083) 0.188*** (0.038) Log ICT capital0.173*** (0.042) 0.115*** (0.034) Observations R-squared

ICT adoption and productivity Dep var: Log salesBrazilIndia (1) Levels (2) 2 year difference (3) Levels (4) 2 year difference Log employment0.392*** (0.109) 0.190** (0.096) 0.337*** (0.066) 0.180** (0.078) Log materials0.359*** (0.062) 0.369*** (0.124) 0.434*** (0.051) 0.343*** (0.104) Log fixed capital0.214** (0.083) (0.132) 0.188*** (0.038) (0.099) Log ICT capital0.173*** (0.042) 0.193*** (0.070) 0.115*** (0.034) 0.101** (0.039) Observations R-squared

ICT adoption and productivity  High returns persist after controlling for occupation, skills, software, management practices and other controls

ICT adoption and productivity  High returns persist after controlling for occupation, skills, software, management practices and other controls  Measure two forms of organisational changes associated with ICT adoption in the literature: “Over the last three years which of these changes related to working practices for the production workforce have been introduced in your firm?” 1.Removed a level of hierarchy, or reduced no. of reporting levels 2.Improved monitoring of individual workers or groups of workers

ICT adoption and productivity  High returns persist after controlling for occupation, skills, software, management practices and other controls  Measure two forms of organisational changes associated with ICT adoption in the literature: “Over the last three years which of these changes related to working practices for the production workforce have been introduced in your firm?” 1.Removed a level of hierarchy, or reduced no. of reporting levels 2.Improved monitoring of individual workers or groups of workers  Similar questions for Admin & Clerical workforce and Managers

ICT adoption and productivity  No impact of organisational changes in the full sample

ICT adoption and productivity  No impact of organisational changes in the full sample  If we drop low ICT adopters (i.e. only desktop applications)  Strong evidence of complementarity between flattening hierarchies and ICT capital investment in Brazil  Strong direct effect of flattening hierarchies on productivity growth in India  No effect of improved monitoring in either country

ICT adoption and productivity  No impact of organisational changes in the full sample  If we drop low ICT adopters (i.e. only desktop applications)  Strong evidence of complementarity between flattening hierarchies and ICT capital investment in Brazil  Strong direct effect of flattening hierarchies on productivity growth in India  No effect of improved monitoring in either country  So there is evidence for complementarities between some types of organisational change and ICT investment…  …but not in the tail of low ICT adopters (c. 30% of the sample in Brazil, 40% in India)

Constraints on ICT adoption  High measured returns to ICT investment  Important policy question: what aspects of policy / economic environment constrain firms from adopting ICT?

Constraints on ICT adoption  High measured returns to ICT investment  Important policy question: what aspects of policy / economic environment constrain firms from adopting ICT?  We use regional variation in infrastructure and other reported constraints to identify effects on ICT adoption and returns to ICT  India: State mean number of days with power-related problems (power cuts or surges)  Both countries: region/state means of other reported constraints on ICT adoption

Constraints on ICT adoption  Region/state mean proportion of firms reporting as a constraint to ICT adoption: BrazilIndia Means.d.Means.d. Availability of skills Unions Labour regulations Internet availability / price Low internet usage Lack of government support

Constraints on ICT adoption  Region/state mean proportion of firms reporting as a constraint to ICT adoption: BrazilIndia Means.d.Means.d. Availability of skills Unions Labour regulations Internet availability / price Low internet usage Lack of government support Number of days disrupted

Constraints on ICT adoption  In India, firms in states with more power disruptions use less ICT and get lower returns from ICT investment

Constraints on ICT adoption R 2 = 0.80 Coefficient (s.e.) = *** (0.001)

Constraints on ICT adoption  In India, firms in states with more power disruptions use less ICT and get lower returns from ICT investment  And power disruptions are very highly correlated across states with other reported constraints on ICT adoption

Constraints on ICT adoption  In India, firms in states with more power disruptions use less ICT and get lower returns from ICT investment  And power disruptions are very highly correlated across states with other reported constraints on ICT adoption  Suggests that a cluster of ‘poor institutions’ and infrastructure are associated with low ICT adoption and low returns to ICT

Constraints on ICT adoption  In India, firms in states with more power disruptions use less ICT and get lower returns from ICT investment  And power disruptions are very highly correlated across states with other reported constraints on ICT adoption  Suggests that a cluster of ‘poor institutions’ and infrastructure are associated with low ICT adoption and low returns to ICT  Much less regional variation in Brazil (very concentrated around Sao Paulo and the South) so can’t identify similar effects

Constraints on ICT adoption  In India, firms in states with more power disruptions use less ICT and get lower returns from ICT investment  And power disruptions are very highly correlated across states with other reported constraints on ICT adoption  Suggests that a cluster of ‘poor institutions’ and infrastructure are associated with low ICT adoption and low returns to ICT  Much less regional variation in Brazil (very concentrated around Sao Paulo and the South) so can’t identify similar effects  Interestingly, the least constrained Indian states look similar to Brazil in terms of ICT adoption and returns to ICT investment

Conclusions and other work  Very high estimated returns to ICT at the firm level

Conclusions and other work  Very high estimated returns to ICT at the firm level  Some evidence for effects of complementary organisational changes once drop tail of firms with low levels of ICT

Conclusions and other work  Very high estimated returns to ICT at the firm level  Some evidence for effects of complementary organisational changes once drop tail of firms with low levels of ICT  Poor infrastructure and policy environment are associated with lower ICT adoption and returns to ICT across Indian states

Conclusions and other work  Very high estimated returns to ICT at the firm level  Some evidence for effects of complementary organisational changes once drop tail of firms with low levels of ICT  Poor infrastructure and policy environment are associated with lower ICT adoption and returns to ICT across Indian states  Other work: ICT and the demand for skills (Harrison, 2006)  Strong evidence for skill-bias of ICT adoption in Brazil and India  Larger effect in Brazil than in India  Robust to controlling for endogeneity of ICT adoption

Conclusions and other work  Very high estimated returns to ICT at the firm level  Some evidence for effects of complementary organisational changes once drop tail of firms with low levels of ICT  Poor infrastructure and policy environment are associated with lower ICT adoption and returns to ICT across Indian states  Other work: ICT and the demand for skills (Harrison, 2006)  Strong evidence for skill-bias of ICT adoption in Brazil and India  Larger effect in Brazil than in India  Robust to controlling for endogeneity of ICT adoption  One day conference at London Business School, 19 th June