Does Information & Communication Technology(ICT) Investment Contribute To Cost Reduction?: An Empirical Analysis of Korean Industries

This paper investigates the cost reducing impact of ICT related investment along with substitution possibilities between ICT equipment and other inputs. The empirical analysis is based on a translog cost function model and annual data for Korean manufacturing indsutries(1984-99). Reflecting the trend of rapid increase in ICT investment in the 90's, the share of ICT capital to non-ICT capital(ICT intensity) has been raised from 1.79% in 1984 to 6.68% in 1999. The empirical results show that there are labor-saving technical change in the consumer goods industries, capital-saving and intermediate materials-augmenting technical change in the basic material manufacturing industries, and neutral technical change in the assembly and processing industries during 1984-99. We also examine cost saving effect of ICT-capital by estimating the cost/ICT-capital elasticities. The signs of estimated cost/ICT-capital elasticities in the consumer goods industries are negative and statistically significant. In addition, the weighted average of these values(weighted by the volume of output) is changed from -0.256 in 1984 to -0.278 in 1999. This implies that production efficiency has been achieved through the cost reduction accompanied by increase in ICT-capital in the consumer goods industries. Similar cost reducing impacts of ICT-capital are found in the industries such as primary metal products, fabricated metal products, and electronic and other electric equipment industry. We also investigate the relationship between ICT-capital and other inputs by estimating the Allen elasticities of substitution and input demand elasticities with respect to ICT-capital in the manufacturing sectors.