IT Industry Success and the Knowledge Economy: A Four Country Study

Abstract:

It is generally accepted that knowledge has become a third major factor of production, inaddition to the traditional factors — labor and capital. Information technology production isa significant factor in the knowledge economy both because it is a major enabler of thateconomy and because it is itself highly knowledge intensive. Many countries around the worldare looking for ways to promote the development of the knowledge economy, and informationtechnology 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 andmore 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 successwas based solely on the macro-economic theory of Grossman and Helpman (1991), the revisedmodel suggested here incorporates Romer’s (1990) work in New Growth economics. A significantadvance over earlier work in this area is the use of both longitudinal and time slice data. Thisarticle 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 theperiod 1994 through 1998 and thus provides a reasonably comprehensive picture of the factorsaffecting the production of IT in these small developed countries. Our study reveals that four ofthe five endogenous variables studied have a close relationship to the development of ITindustries 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 thuslargely supports the more comprehensive model of IT industry success. These findings should beof interest to both researchers and policy makers seeking to develop the knowledge economyand information technology industries in particular.