Information Technology, Efficiency and Productivity: Evidence From Korean Local Governments

1. Information Technology, Efficiency and Productivity: Evidence From Korean Local Governments Nakil Sung University of Seoul, nisung@uos.ac.kr International Telecommunications Society 15th Biennial Conference 2004 Berlin, Germany

2. Contents • Research Motivation • Research Methods • Result 1: Efficiency and TFP Growth Estimation • Result 2: Regression Results • Conclusion

3. Research Motivation • Research Methods • Result 1: Efficiency and TFP Growth Estimation • Result 2: Regression Results • Conclusion

4. Research Motivation Yes, Too Many Studies on IT Productivity Effects • The first generation of studies often provided mixed empirical results on the Solow’s productivity paradox until the late 1990’s • The productivity paradox was partly resolved by observing faster productivity growth in developed countries. • The second generation of studies focuses on the performance of IT-using sectors. • Many studies agree that rapid productivity growth in IT-producing sectors led to better performance of national economy.

5. Research Motivation The Second Generation of ‘IT Productivity’ Literature • Recent studies are fairly successful in confirming positive effects of IT. • For example, Jorgenson (2001), Brynjolfsson and Hitt (1996, 2000), Stiroh (2001), Mun and Nadiri (2002). • These studies mainly use micro data such as industry or firm data. • The use of micro data is a good way of identifying ‘IT productivity effects’ because it provides researchers with a chance of distinguishing IT-heavy users from IT-light users.

6. Research Motivation But, More Studies Are Still Needed In Some Areas • As usual, the current literature does not distinguish (technical) efficiency from productivity. • Only Milana and Zeli (2002) examine the relationship between IT investments and technical efficiency. • Is there any better measure of IT-using activities? • Many studies use the purchase costs of IT-related equipment as a proxy for the state of IT. • On the other hand, the performance of IT users must be affected by effective use and applications of IT.

7. Research Motivation Korean Case Provides a Good Research Opportunity Because… • The Korean government has reported an index of IT-using activities (called Informatization Index) for all local governments. • This index measures a wide range of IT-related activities. • Also, like other countries, good and reliable data on local public services are publically available in Korea.

8. Research Motivation Informatization Index

9. Research Motivation Then, the Study Has Two Objectives • Measuring (technical) efficiency and productivity growth for all Korean local governments • By applying conventional methods • Examining the effects of IT on (technical) efficiency and productivity growth • By using the Information Indexes

10. Research Motivation • Research Methods • Result 1: Efficiency and TFP Growth Estimation • Result 2: Regression Results • Conclusion

11. Research Methods Research Strategy: Two Stage Approach • First Stage: Measurement of (technical) efficiency and TFP growth by using distance functions. • Both efficiency and productivity growth are defined and measured by using distance function • The distance function is estimated by applying data envelopment analysis (DEA). • Second Stage: Efficiency and productivity regressions • Efficiency scores and productivity growth rates are regressed on some regional characteristic variables and the Informatization Index.

12. Research Methods Y1 B Production Possibility Curve A O Y2 Technical Efficiency: Output-Oriented Measure Distance Function :

13. Research Methods Malmquist Productivity Index • Period-s (output-oriented) Malmquist productivity index • Malmquist productivity index between period-s and period-t

14. Research Methods Decomposition of Malmquist Productivity Index Efficiency Change Technical Change

15. Research Methods Data Envelopment Analysis • Charnes-Cooper-Rhodes (CCR) Model: constant returns-to-scale (CRS) assumption • Bankers-Charnes-Cooper (BCC) Model: variable returns-to-scale (VRS) assumption • convexity condition: The optimal solution to this LP problem is the output distance function.

16. Research Motivation • Research Methods • Result 1: Efficiency and TFP Growth Estimation • Result 2: Regression Results • Conclusion

17. Efficiency and TFP Growth Two Levels of Local Governments in Korea Metropolitan Cities: 7 Districts (Gu): 69 KOREA Provinces: 9 Cities (Shi): 70 Counties (Gun): 83 Samples

18. Efficiency and TFP Growth Input and Output Variables

19. Efficiency and TFP Growth Application of DEA Models • Both CCR (CRS) model and BCC (VRS) model are applied to input and output data over the period 1999-2001. Then the estimates are averaged. • Operation environment of local governments should be taken into account. • Method 1: First, evaluate local governments under handicaps and second, use this information to evaluate local governments in better environments. • Method 2: Evaluate local governments only within the group.

20. Efficiency and TFP Growth Average Technical Efficiency Scores (1999-2001) Note: STD implies standard deviation

21. Efficiency and TFP Growth Average TFP Growth Rates (1999-2001) Note: STD implies standard deviation

22. Research Motivation • Research Methods • Result 1: Efficiency and TFP Growth Estimation • Result 2: Regression Results • Conclusion

23. Regression Results Efficiency and Productivity Regressions • Definition of variables • TIE: technical inefficiency score, • dTFP: TFP growth rate (Malmquist productivity index) • RC: regional characteristic variables • ZSCORE: Informatization Index • Estimation technique: censored Tobit method • The TIE takes a value between 0 and infinity.

24. Regression Results Regional Characteristic Variables

25. Regression Results Technical Efficiency Regressions Note: *,**,** implies statistical significance at 10%, 5%, and 1% level, respectively

26. Regression Results TFP Growth Rate Regressions Note: *,**,** implies statistical significance at 10%, 5%, and 1% level, respectively

27. Research Motivation • Research Methods • Result 1: Efficiency and TFP Growth Estimation • Result 2: Regression Results • Conclusion

28. Conclusions Summary • Local governments in more populous regions tend to be more technical efficient and to experience higher TFP growth. • Local governments in more business- or industry-centered regions may operate closer to production frontier and enjoy higher TFP growth. • There exists a negative (positive) relationship between gross regional product and technical efficiency (TFP growth). • Local governments with higher level of informatization operate closer to production frontier and experience higher TFP growth rate.

29. Conclusions Contribution • The study successfully confirms a positive role of IT in improving technical efficiency and accelerating productivity growth. • The study provides strong cases on the development of e-Government projects in many countries.

30. Thank You For Your Attention!