Information Technology, Globalization, and Growth: Role for Scale Economies, Terms of Trade, and Variety

This paper considers three channels through which globalization of information technology products may affect economic growth: Terms of trade in IT products in international trade, economies of scale in IT production and trade, and variety in IT consumption and trade. The empirical question relevant for policy makers is, what is the relative magnitudes of these channels. To catalyze economic growth and enhance performance, should policymakers promote IT exports to exploit economies of scale in production? Or, should they promote imports and domestic consumption of a variety of IT products to gain from falling IT prices, get more variety, and through these channels support faster TFP? Using a sample of 36 countries for 2000-2007, the findings are: (1) Importers of IT gain relatively more than exporters, on average, from the declining prices of IT coming through international trade. (2) Despite falling IT prices, most exporters enjoy positive economy-wide benefits of trading in IT because of economies of scale in production. (3) The extent of variety of traded IT products is related to the deviation of a country’s experience from that of the average country in its peer group. Controlling for trade patterns, the countries that are below average (in terms of economy-wide benefits from trade in IT) are also those that import and export the least variety of IT products. This suggests that gains to variety in consumption outweigh gains from economies of scale in production.