DP13910 Productivity, Network Effects and Telecommunications Capital: Evidence from the US and Europe
Did the huge investment in telecommunications networks in the 1990s affect subsequent total factor
productivity? Using data from 13 European countries and the US, 1995-2013, we document the substan-
tial growth and then slowdown in “telecommunications” capital and ask if this is related to the growth
and slowdown in TFP. We explore this by disaggregating ICT equipment investment into “IT” and “CT”
equipment investment. We test for distinct effects from each using a simple framework where CT cap-
ital has network externalities and so potentially impacts TFP, with the marginal impact of CT capital
growth being higher in countries spending more on renting CT capital. We find: a) evidence of a robust
correlation between (lagged) growth in (rental share-weighted) CT capital services and TFP growth; b)
the estimated externality from CT capital potentially explains around 30-40% of TFP growth in North
European countries, 60% in Scandinavia and around 90% in the US; c) CT capital has a social return
around five times its private return; and d) a slowdown in the accumulation of CT capital accounts for
just over half of the post-2003 TFP slowdown in the US but only one-tenth of the TFP slowdown in the
EU
