Information infrastructure and economic growth: A transactions cost approach

Firms are generally assumed to be profit maximizing in nature. When new technologies become available that offer a reduction of marginal costs, such firms are likely to adopt them. Consider, for example, information technology (phones, data sharing via networks, fax). As information technology has proliferated in the last twenty years, firms have quickly adopted the technology in order to reduce uncertainty surrounding production decisions.;Having incorporated such technology into their various operating processes, firms making location decisions (whether to move production to an area offering certain advantages) tend to choose only those locations which offer a certain level of information access. Since information access is not yet global in nature, firms have not, in general, chosen to locate in less developed countries (at least those without information infrastructure) worldwide.;Current developments in the information infrastructure revolution, however, will erase the limited accessibility of information globally. Firms will be able to have consistent reliable access to information wherever they choose to locate. As a result, those countries which have already chosen to upgrade other types of infrastructure, such as educational systems and transportation networks, will be able to attract productive capital (such as foreign direct investment). Profit maximizing firms will choose to locate in such locations because of the offering of lower costs for other resources as well as to take advantage of the positive Marshallian externalities associated with networks and information use.;This study examines the effects of this information infrastructure revolution. The current revolution involves the use of digital satellite-based telecommunications services that will offer seamless distribution of information on a global basis.;This study begins by exploring the relationship between increased levels of information and resultant reductions in transaction costs associated with producing in developing countries. As such costs are reduced, increased technology transfers result in more rapid rates of human capital accumulation and income growth. As well, the ability of the revolution to be the impetus behind “path-leaps”, or tendencies away from the path-dependent nature of the current developmental trajectory is developed. Using this analysis, the ability of countries who have been upgrading other forms of infrastructure to accelerate their growth is considered.;The study then proceeds to a formal endogenous growth representation that shows how the incorporation of higher levels of information infrastructure allows for decreasing cost production processes globally. Paul Romer's model of endogenous technological change (1990) is augmented to incorporate increasing levels of information infrastructure. The model demonstrates that the information infrastructure revolution may offer accelerated economic growth. Higher levels of productivity and thus higher levels of income are realized by the host country as human capital stocks increase as a result of the accelerated investment and growth.;The study then uses a case study approach to analyze those countries which have used intentional transactions cost reduction to attract technology transfer through foreign direct investment. As developing countries are better able to exploit their comparative advantages and as income levels in such countries begin to rise, the accumulation of human capital will be such that these countries may begin to realize more rapid rates of economic growth and development.