The Impact of Information communication and Technology on Firms’ Productivity

Abstract

This study aims to investigate the impact of Information and Communication Technology (ICT) on firms' productivity, considering the incentives for firms to invest in ICT. The research presents a theoretical analysis of the connection between ICT and firms' productivity in a context of imperfect information. The study uses a Cobb Douglas production function, which includes arguments for capital, labor, and materials. ICT use can impact inputs available for production both positively and negatively. The study finds that ICT contributes to firms' productivity by improving access to information, knowledge management, and reducing risks and searching costs. To increase Total Factor Productivity (TFP), the study recommends focusing on increasing access to ICT. This can be achieved through various channels, including cutting information search costs and enhancing information processing capabilities. The study shows that while ICT investment positively impacts firm productivity, there is a point where the benefits start decreasing, indicating diminishing returns on ICT investment. This implies that firms may underinvest in ICT if they prioritize profit over productivity. To increase TFP, policymakers should consider investment, embodied technology, and other factors of TFP for better business policy. The quality of inputs, such as labor and capital with higher ICT content, should be emphasized. Capacity building training for superior human resources, enhancing technological progress, and production efficiency are also crucial for driving economic growth and improving TFP.