Determinants of IT Investment at the Country Level

ITR-162.doc Determinants of IT Investment at the Country Level Kenneth L. Kraemer, Jason Dedrick and Eric Shih Center for Research on Information Technology and Organizations (CRITO) and Graduate School of Management University of California, Irvine ABSTRACT Much has been written about the determinants of capital investments by countries with the usual conclusion that wealth and capital availability are the most important factors. However, investment in a specific category of capital goods may be driven by specific factors beyond such macroeconomic factors. In this paper, we analyze the determinants of investment in information technology (IT), using data on 31 countries for the period 1985-1995 to study the impact of the structure of the economy, wealth, PC prices, education, and telecommunications infrastructure on IT investment. We found a strong relationship between the structure of the economy, measured by the share of national employment in finance and business services, and IT investment as a percent of GDP. We also found a relationship between national wealth (GDP per capita) and IT investment. These factors explain about 60% of the variance among countries’ levels of IT investment. Based on these analyses, we conclude that IT investment is driven by the structure of the economy and by the level of wealth in a country. Other factors, such as telecommunications penetration, education levels and prices did not provide additional explanatory power in estimating IT investment. I. INTRODUCTION Much has been written about the determinants of capital investments by countries with the usual conclusion that wealth and capital availability are the most important factors (Barro, 1997). The availability of capital is determined by domestic savings and inflows of foreign savings (in the form of investment, lending, or foreign aid), and varies widely among countries (Gillis et al., 1987). When we move beyond determinants of total investment and start to look at the composition of that investment, new factors come into play. For instance, there is reason to believe that the determinants of investment in information technology (IT) 1 are not simply like other capital investments which are usually made in anticipation of demand for manufactured products. IT investments are likely to be driven more by the service sector because services are more information intensive and therefore have a greater need for IT (Bell, 1973). Historically, the service sector has lagged behind manufacturing in productivity growth, so services companies have strong incentives to substitute IT for labor in the expectation of increased productivity. Since services Information technology in its broadest meaning includes computers, telecommunications and management science techniques. This papers focuses on the computer component of IT.