ICT AND PRODUCTIVITY IN DEVELOPING COUNTRIES:
NEW FIRM-LEVEL EVIDENCE FROM BRAZIL AND INDIA
Simon Commander, Rupert Harrison, and Naercio Menezes-Filho*
Abstract—This paper uses a unique new data set on manufacturing firms
in Brazil and India to estimate production functions, augmented by infor-
mation and communications technology (ICT). We find a strong positive
association between ICT capital and productivity in both countries that is
robust to several different specification tests. The paper also breaks new
ground when using the Indian data to investigate the effect of the institu-
tional and policy environment on ICT capital investment and productiv-
ity. We find that poorer infrastructure quality and labor market policy are
associated with lower levels of ICT adoption, while poorer infrastructure
is also associated with lower returns to investment.
I. Introduction
T HERE is now a large literature on the impact of infor-
mation and communications technology (ICT) and
associated changes in working practices on productivity.
Most of that literature is concerned with the developed
economies, where it is widely accepted that ICT has had
positive implications for productivity and output growth.
Yet if investment in ICT can lead to similar productivity
growth in developing countries, understanding the business
practices and policy environment that allow those gains to
be realized is of considerable interest. This paper provides
some of the first large-sample econometric evidence on the
relationship between ICT and productivity in developing
countries and on the impact of the policy environment on
ICT adoption and returns to ICT.
We use new and unique survey information on nearly
1,000 firms from two major developing countries, Brazil
and India, to understand better what types of manufacturing
firms have been adopting ICT and with what consequences
for performance. Firm-level analysis allows taking into
account heterogeneity in investment and productivity that is
likely to be particularly important in the case of ICT. It also
allows us to account for differences in organizational capi-
tal and skill structure across firms. Our approach is to esti-
mate ICT-augmented production functions. We find a
strong and positive association between ICT capital and
productivity. The estimated elasticities are higher than
found on average in developed countries. This can be partly
Received for publication March 7, 2008. Revision accepted for publica-
tion January 8, 2010.
* Commander: European Bank for Reconstruction and Development
and IE Business School, Madrid; Harrison: University College London;
Menezes-Filho: INSPER and University of São Paulo.
We thank the editor and the referees for very constructive and helpful
comments on an earlier version. We also thank Rakesh Basant for many
enlightening discussions about India, Ralph de Haas and John van Reenen
for detailed comments, as well as participants at a conference at London
Business School. We thank Randolph Bruno, Tony Clayton, Rachel Grif-
fith, Axel Heitmueller, Steve Machin, and Martha Prevezer for discus-
sions and help at various points. We thank Sunila Benjamin and her col-
leagues at AC Nielsen, Bangalore, and Ricardo Guedes and his
colleagues at Sensus, Belo Horizonte, for data collection. The research
has been generously supported by UK DfID.
The Review of Economics and Statistics, May 2011, 93(2): 528–541
Ó 2011 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology
explained by omitted variables. Estimating in differences
does not significantly reduce the elasticities, but we do find
some evidence that the high elasticities are concentrated in
firms that have undertaken complementary organizational
investments. What is also striking is the similarity of our
findings across these two countries. While the average level
of adoption does vary, the coefficients in our production
functions are all in a similar range. This suggests that
despite major differences across these two countries, we are
able to identify a large positive and common effect of ICT
adoption on productivity.
This paper also breaks new ground in investigating the
impact of the policy and institutional environment on both
the level of ICT investment and the returns to that invest-
ment. As such, ICT provides an insightful case for looking
at the impact of policy on technology adoption and invest-
ment more generally. To that end, we use exogenous varia-
tion in measures of infrastructure quality and labor regula-
tion across the Indian states or regions in our sample.1 We
find that poorer infrastructure quality and pro-worker labor
regulation are both associated with lower levels of ICT
capital intensity. Poorer infrastructure is also associated
with lower returns to ICT capital investment. We find that
this result also applies to returns to investment in non-ICT
capital, which suggests that poor infrastructure quality
may be associated with low returns to capital investment in
general.
The paper is organized in the following way. Section II
provides an overview of the recent literature from both
developed and developing country contexts. Section III
describes the properties of the new data set that we have
collected and analyzed. Section IV is concerned with the
impact of ICT investment and other coinvestments on the
performance of firms in our sample. Section V examines
the constraints on ICT adoption operating at the level of a
state or region, as well as the consequences for the returns
to ICT investment. Section VI concludes.
II. ICT Adoption and Its Consequences for Performance
There is a growing consensus that the adoption of ICT in
the developed countries has been associated with significant
improvements in performance.2 The evidence also suggests
considerable variation across countries, with European
economies experiencing far lower increases in productivity
linked to ICT than in the United States, where the strong
acceleration in productivity growth since the mid-1990s has
been associated with improvements in both ICT-producing
1
For data reasons, this was not possible for Brazil.
2
There are exceptions; see, for example, Gordon (2000).
 ICT AND PRODUCTIVITY IN DEVELOPING COUNTRIES
and ICT-using sectors.3 While much of this analysis has
been done using growth accounting,4 firm-level analysis
has mostly confirmed the strong and positive association of
ICT with productivity. Such work has also thrown light on
why this has been the case, with the focus less on adoption
than what adoption can facilitate. In particular, the comple-
mentarity between computer investment and other forms of
allied investment, such as organizational change, has been
emphasized.5 Examples of complementary investments
involve the use of new business processes, teamwork,
decentralization, or changes in monitoring and hierarchies.
Such organizational complements, leading to improvements
in intangibles such as new or better-quality goods,
improved service speed, and greater customization, have
been found to be important in explaining why particular
firms have reaped productivity benefits and others have
not.6 Indeed, it has also been argued that incomplete imple-
mentation of complementary organizational changes can
lead firms to be less productive than those that have not
implemented any reforms.7 Measures of management prac-
tices have also been found to be positively correlated with a
range of performance indicators. For example, Bloom,
Sadun, and Van Reenen (2006) find that for firms operating
in the United Kingdom, the productivity of ICT capital has
been significantly higher in U.S.-owned establishments than
in other firms. Finally, implementation of organizational
and management changes can impose substantial learning
and adjustment costs. This argument, for example, has
been used to explain differences in returns to ICT across
countries.8
In developing countries, the evidence on both ICT adop-
tion and its consequences remains scant. The level of
income appears to be a major determinant of ICT adoption.
It is clear that there is large variation in ICT adoption across
and within countries and sectors.9 These differences can be
traced to a wide range of factors, including differences in
government policy. For example, shifts in policy, such as
privatization, lowering of trade barriers, and deregulation,
can help raise investment in communications sectors and
improve access to ICT technology, particularly in middle-
income countries such as Brazil. Even so, some firm-level
surveys point to significant constraints on adoption, includ-
ing those of an institutional nature, as well as constraints
originating from the labor market, most notably relative
skill shortages. Despite these constraints, the small body of
3
See Oliner and Sichel (2000, 2002), Jorgenson (2001), Stiroh (2002),
and Bosworth and Triplett (2001).
4
A number of industry studies have largely been inconclusive, mostly
due to problems in aggregation and measurement bias; see Stiroh (2004).
5
See Bartel, Ichniowski, and Shaw (2005), Bartel, Bresnahan, Bryn-
jolfsson, and Hitt (2002), Black and Lynch (2001), Ichniowski, Shaw, and
Prennushi (1997).
6
See Bloom and van Reenen (2006), Black and Lynch (2001, 2004),
Bresnahan et al. (2002).
7
Bresnahan et al. (2002).
8
See Basu et al. (2003).
9
See World Bank (2005) and World Economic Forum (2005)–(2006)
for cross-country indicators; see also Pohjola (2003).
529
available evidence suggests that ICT adoption has acceler-
ated and that ICT may exert a positive impact on some
adopters’ performance. A World Bank study using data
from a number of developing countries reports a positive
correlation between a simple measure of ICT use and a
number of performance indicators, including growth in
sales, employment, and reinvestment.10 Motohashi (2005)
uses a large panel of Chinese manufacturing firms over the
period 1995–2002 and finds that ICT capital contributes
significantly to productivity, particularly in foreign-owned
firms. However, none of these studies is able to explore the
ways in which ICT contributes to productivity growth and,
in particular, the possible role of complementary invest-
ments and policy.
III. Data Description and Context
Our data set consists of a unique firm-level survey of
nearly 1,000 firms in two major developing countries, Bra-
zil and India. The survey was implemented in both coun-
tries between April and May 2005 through a series of face-
to-face interviews. The survey was designed to give
detailed responses to a set of questions relating to ICT
adoption and its timing, as well as changes to management
and organizational features associated with adoption. In
addition, changes to the skill and educational structure of
employment, firm-level constraints to ICT adoption, as well
as variables capturing key characteristics of the firm in
terms of size and performance and the competitive environ-
ment, were collected.
For most questions, data were collected for either two or
three points in time—2003, 2002, and 2001. In each coun-
try, a target of 500 firms in six three-digit manufacturing
branches—autocomponents, soaps and detergents, electrical
components, machine tools, wearing apparel, and plastic
products—was selected. Stratification was by industry,
region, and size (employment) with quota sampling. In
India, firms were sampled in nine states. In Brazil, firms
were sampled in seven regions, although two states, São
Paulo and Minas Gerais, accounted for over 46% of total
firms surveyed. In India, the distribution was less skewed in
terms of location. Table A1 gives the distribution of the
sample over region and branch. In terms of response rates,
in Brazil, the ratio of refusals to responses was 3.4, while in
India it was 4.5. Appendix A provides more information
about the sampling strategy.
Table 1 provides some basic descriptive statistics for the
sample for each country broken down for mean and median
values of size (employment), sales, materials and wage
shares, and capital intensity, as well as the mean rate of
growth in sales and employment over the period 2001–
2003. All production variables were collected from our sur-
vey. Appendix B describes the variables in more detail.
10
See World Bank (2006) and chapter 4 in particular.
530 THE REVIEW OF ECONOMICS AND STATISTICS

TABLE 1.—DESCRIPTIVE STATISTICS FOR FULL SAMPLE

Brazil India
Mean Median s.d Observations Mean Median s.d Observations
Employment 207 70 431 387 367 70 1,074 476
% change in employment 22.0 7.8 63.2 368 19.7 14.3 37.7 471
% change in sales 57.8 25.0 128.0 294 31.8 23.1 56.5 447
Materials share 0.44 0.41 0.31 194 0.41 0.40 0.25 433
Wage share 0.22 0.16 0.25 195 0.09 0.05 0.14 446
Capital intensity 0.75 0.32 1.19 156 0.56 0.25 1.03 395
ICT intensity 0.04 0.01 0.18 278 0.02 0.00 0.13 430
Changes in ICT intensity 0.02 0.00 0.13 273 0.02 0.00 0.13 430
Software intensity - - - - 0.01 0.00 0.06 426
Levels are for 2003, and changes are for the two-year period 2001–2003. A small number of outliers are excluded from the above calculations as follows: % change in sales greater than 1,000% over the two-year
period; materials share greater than 2; wage share greater than 2, capital intensity greater than 10; ICT intensity greater than 3 in either 2001 or 2003; software intensity greater than 1.

There was a good deal of variation in all variables. With FIGURE 1.—SUMMARY INDEX OF ICT ADOPTION, 2001 AND 2003
respect to employment size, however, the median values were
actually very similar across countries, as is the ranking by
branch. Employment in auto components tended to be signifi-
cantly larger than in other branches. Average employment
growth has been quite similar in both countries, although
median growth in India was double that in Brazil. In terms of
shares, the major difference between the countries was with
respect to labor. In India the mean and median wage shares
were only 30% to 40% of those in Brazil. Capital intensity
was also higher in Brazil but by a far smaller margin.
The six branches of manufacturing that have been
sampled were picked not only because they provide signifi-
cant variation in their production processes, and hence in
their likely adoption of ICT, but also because they comprise
a significant component of output and employment in man- Thin bars are for 2001, thick bars for 2003.

ufacturing in both countries. In India, these six branches

accounted for nearly 17% of total manufacturing employ-
ment and over 20% of value added. In Brazil these shares
were around 30% and 32%, respectively.11 Over the period
1998–2003, Brazilian employment growth was far stronger
than in India, while net value-added growth was negative in
Brazil but averaged just below 7% in India.
In terms of policy, both countries, particularly India,
have seen clear changes over our reference period. Tele-
communications have been liberalized, with significant
entry of new providers, particularly for mobile services and
Internet service providers in India. With respect to the trade
regime, unweighted tariff rates in India, for the six branches
fell on average by over 60% between 1999 and 2005. At the
start of the period, the average tariff rate was 33.5%, falling
to 15% by 2005, except in electronics, where it was only
1.9%. In Brazil, we have comparable tariff data only for
1998, but the tariff structure has remained basically unal-
tered since then, as most trade liberalization occurred
between 1990 and 1995. By 1998, Brazilian tariffs were
mostly close to the Indian rates that existed in 2005 and
hence were substantially lower than the Indian tariff rates at
11
Breakdowns by branch for employment and value-added shares as
well as growth rates are available on request.
the start of the period, with the exception of auto compo-
nents, which received protection of 46%. In the case of
labor legislation, in neither country was there significant
change over our reference period.
IV. ICT and Productivity
To describe ICT adoption in both countries, we use an
indicator constructed from responses to a question regard-
ing the degree of ICT use in a given firm. These ranged
from ICT not being used at all to all processes being auto-
mated and integrated into a central system.12 Each response
was scored for each firm, and responses were given for two
points in time, 2001 and 2003.
Figure 1 plots the distribution of responses for both years
using the 1–5 scale that was applied (the thin bars are for
2001 and the thicker ones for 2003). The share of Indian
12
The possible responses and their scores were: IT is not used at all ¼ 1.
IT is used only for some office along with accessing the Internet and
e-mail ¼ 2. IT is used for some advanced applications. Most processes
are automated but there is no integration into a central system ¼ 3. Most
processes are automated, and some of them are integrated into a central
system ¼ 4. Almost all processes are automated and integrated into a cen-
tral system ¼ 5.
 ICT AND PRODUCTIVITY IN DEVELOPING COUNTRIES 531

TABLE 2.—MEASURES OF ICT ADOPTION IN 2003

Brazil India
Mean Median s.d Observations Mean Median s.d Observations
Summary measures
Adoption index 3.50 4 1.22 491 2.94 3 1.05 476
Usage index 11.64 12 3.48 461 10.71 10 3.36 473
Hardware
ICT capital as % of sales 4.18 0.59 17.78 278 3.34 0.44 17.01 379
PCs per employee 0.28 0.20 0.29 379 0.22 0.15 0.25 473
Servers per employee 0.04 0.02 0.07 372 0.02 0.00 0.05 473
Workforce usage
% of non-production workers using PCs 69.6 90.0 37.9 484 53.9 59 34.6 476
% of production workers using 23.3 10 31.2 468 15.3 6 23.3 473
ICT-controlled machinery
For ICT capital as a % of sales, a small number of outliers are excluded with ICT capital as a % of sales greater than 300%.

firms with little or no adoption (scores of 1 or 2) is higher
than in Brazil in both years. In 2001, over 60% of Indian
firms were using ICT in a minimal way, as against 45% in
Brazil. Second, there has been a rapid increase in the share
of firms using ICT in both countries. Third, it is still the case
that by 2003, a far smaller share of Indian firms had the
highest adoption scores (4 or 5) compared to Brazil. At the
top end of the distribution, nearly 30% of Brazilian firms
had automated almost all processes with ICT integrated into
a central system, as against only 10% of the Indian sample.
Table 2 provides some further descriptive statistics for a
set of indicators of ICT. Aside from the adoption index,
mean and median scores and standard deviations for a usage
index are also reported. This index was put together from a
question regarding the intensity of use for ICT for four
functions: accounting services, inventory management,
marketing and product design, and the production pro-
cess.13 While the adoption index can be seen as an indicator
of the depth of ICT use in a given firm, the usage indicator
gives a sense of the breadth of ICT use in a firm. In addi-
tion, the table reports measures of ICT capital (normalized
by either sales or employees) and shares of nonproduction
workers using either PCs or ICT-controlled machinery.
Both the summary measures and hardware usage are always
higher for Brazil, but so is their standard deviation. In terms
of workforce use, there are particularly sharp differences,
since on average, nearly 70% of nonproduction workers
used a PC in Brazil in 2003 as against 54% in India, while
for the proportion of production workers using ICT-con-
trolled machinery, the share was around 23% in Brazil as
against 15% in India.14
13
Possible responses were: Firm did not use any ICT ¼ 1. Used ICT for
some processes ¼ 2. Used ICT for most processes ¼ 3. Used ICT for all
processes ¼ 4. Possible scores thus ranged from 4 to 16.
14
In a previous version of this paper, we estimated multivariate regres-
sions of the determinants of ICT adoption in Brazil and India. We found
that the size of the firm matters in both countries, that older and multina-
tional firms use more ICT in Brazil but not in India, and joint ventures in
India use more ICT. The ICT indices are strongly related to education
shares in Brazil, but the relationship is notably weaker in India. Unions
are not significant in either country, and there was not much variation in
ICT across branches (results available on request).
To examine the effect of ICT on productivity, we start by
estimating firm-level augmented Cobb-Douglas revenue
functions estimated separately for Brazil and India,
Yit ¼ Ai Bit Lait Mitb Kitc ICTitd ; ð1Þ
where Y is sales of firm i in year t; A and B are fixed and time-
varying productivity shifters, respectively; L is labor; M is
materials; K is physical capital stock; and ICT is ICT capital
stock.15 Taking logs gives the following econometric specifi-
cation, where lowercase letters denote natural logarithms,
yit ¼ alit þ bmit þ ckit þ dictit þ fi þ eit ; ð2Þ
where f is an unobserved firm fixed effect and e is a time-
varying residual, both of which may or may not be corre-
lated with any of the inputs. The main coefficient of interest
is the elasticity of output with respect to ICT capital, d, and
the implied (gross) rate of return to ICT capital for any
given firm is given by the elasticity divided by ICT inten-
sity d/(ICTit/Yit).
Table 3 reports the results. All results include industry,
region/state, and age dummies, plus indicators for firms
with zero ICT stock. The estimations use the information
available for 2003. Note that the number of observations in
the Brazil sample has dropped due to the fact that many
Brazilian firms reported only ranges rather than levels for
key financial variables.16 The results reported in table 3
appear to be robust and reasonably similar for the two coun-
tries.17 Column 1 reports the basic production function with
the addition of an ICT capital stock variable. All base vari-
ables are highly significant. The coefficients on materials
are quite close to the median materials share in both coun-
15
This empirical approach is common in the micro literature on ICT
and productivity. See, for example, Bloom, et al. (2006), Brynjolfsson
and Hitt (2004), and Stiroh (2004).
16
Looking at means for in- and out-of-sample firms, we come signifi-
cant differences with respect to the share of workers using PCs and, in
Brazil, the share of administrative and clerical workers in total employ-
ment. Descriptive statistics for the variables used in the production func-
tion analysis are available on request.
17
We also estimated the same specification using data for all three
years in our sample, with very similar results.
532 THE REVIEW OF ECONOMICS AND STATISTICS

TABLE 3.—BASIC PRODUCTION FUNCTIONS IN LEVELS An important feature to note from these specifications is
(1) (2) (3) that the coefficients on ICT capital correspond to very high
A: Brazil
median rates of return in both countries (from column 1).
ln Employment 0.370 0.417 0.366 While high returns to ICT investment have also been found
(0.121)*** (0.118)*** (0.121)*** in developed countries,19 we still need to explain these
ln Materials 0.314 0.332 0.309
(0.071)*** (0.067)*** (0.070)*** apparently very high returns in our data set. Although it is
ln Capital 0.303 0.272 0.274 possible that a high cost of ICT capital due to depreciation
(0.081)*** (0.080)*** (0.080)*** and obsolescence may provide a partial explanation,20 this
ln ICT 0.124 - 0.102
(0.052)** (0.055)* is unlikely to be the whole story. More likely, candidates
Adoption ¼ 3 - 0.053 0.036 are omitted observable and unobservable factors that may
(0.218) (0.219) be correlated with ICT, as well as measured or unmeasured
Adoption ¼ 4 - 0.553 0.512
(0.234)** (0.237)** complementary investments.
Adoption ¼ 5 - 0.434 0.365
(0.206)** (0.212)*
Observations 132 132 132 A. Robustness, Differences, and IV
R2 0.85 0.86 0.86
B: India It is possible that ICT is itself correlated with other
ln Employment 0.339 0.355 0.304 omitted variables, such as skills and other firm characteris-
(0.063)*** (0.063)*** (0.062)***
ln Materials 0.428 0.436 0.423
tics, and that this may explain why returns to ICT are high.
(0.048)*** (0.046)*** (0.047)*** To probe this in more detail, table 4 reports the baseline
ln Capital 0.198 0.216 0.202 production function (column 1) and then splits employment
(0.037)*** (0.036)*** (0.036)***
ln ICT 0.115 - 0.100
up by occupation and skill types (column 2). In addition,
(0.032)*** (0.032)*** column 3 uses lagged ICT capital to address possible trans-
Adoption ¼ 3 - 0.365 0.326 mission of bias from errors of measurement in the other
(0.107)*** (0.108)***
Adoption ¼ 4 - 0.568 0.534
components, while column 4 includes a measure of cash
(0.136)*** (0.134)*** flow (the ratio of gross profits and sales) in the estimation
Adoption ¼ 5 - 0.253 0.227 to control for capital constraints and demand shocks that
(0.149)* (0.149)
Observations 335 335 335 might be correlated with ICT investments. column 5 deals
R2 0.87 0.87 0.88 with the possible endogeneity of inputs by using the inter-
Robust standard errors in brackets; all specifications include industry, state and age dummies and indi- mediate inputs as proxies for the unobserved productivity
cators for firms that reported zero ICT stock. *, ** and *** denote significance at the 10%, 5%, and 1%
levels, respectively. shocks, as proposed by Levinsohn and Petrin (2003).
Finally, column 6 implements a standard growth accounting
framework, which has been used to estimate the effects of
tries. The coefficients on labor are, however, larger than the computers on productivity (see Brynjolfsson & Hitt, 2004,
salary and wage shares. More important, the ICT capital for example).
stock is also highly significant in both cases, with a larger None of these tests results in dramatic changes to the
elasticity in Brazilian sample. estimated ICT coefficients. Including measures of skill and
We also use other measures of ICT. In particular, Col- occupation slightly increases the ICT coefficient in Brazil
umn 2 of table 3 replaces the ICT capital stock variable and decreases it in India by about 20%. Lagged ICT expen-
with dummy variables for the extent of ICT adoption, ditures reduce ICT returns in Brazil (by about 12%), but
where the reference group is firms that use only desktop hardly alter returns for the Indian firms. Including a mea-
applications or do not use ICT at all. In Brazil the main sure of cash flow, however, results in a substantial decline
impact is from firms using ICT in an integrated fashion in the ICT estimated coefficient in both countries, suggest-
(groups 4 and 5), which on average are about 50% more ing that some of the ICT returns might in fact be picking up
productive than other firms. In India the main effect is from investment opportunities. It is interesting to note that when
groups 3 and 4. This is consistent with the information on cash flow is included, the ICT coefficient becomes very
adoption patterns reported in the previous section. Column similar in Brazil and India (at around 0.098) and remains
3 then uses the ICT capital stock variable, as well as the statistically significant in both cases. Using Levinsohn and
dummies for usage at the same time. Interestingly, the latter Petrin’s (2003) estimator does not significantly affect the
still contain a significant amount of information even after estimated ICT coefficients in either Brazil or India, despite
controlling for ICT capital stock.18 increasing its standard error in the Brazilian case, possibly
due to the smaller sample size coupled with the short time
18
We also have a measure of software for Indian firms. Interestingly, dimension of the data. Finally, implementing the growth
introducing the stock of software as an additional regressor attracts a posi- accounting methodology, whereby the input elasticities are
tive coefficient (0.070), but it is not statistically significant and reduces
the coefficient on ICT by over 55%. Software is highly correlated with
19
hardware (rho ¼ 0.82), however, and both are complements in produc- See, for example, Brynjolfsson and Hitt (2004) and Stiroh (2002).
20
tion. Stiroh (2004).
 ICT AND PRODUCTIVITY IN DEVELOPING COUNTRIES 533

TABLE 4.—ROBUSTNESS TESTS

(1) (2) (3) (4) (5) (6)
Occupation Lagged Cash Levinsohn and Growth
Baseline and Skills ICT Flow Petrin (2003) Accounting
A: Brazil
Log ICT capital 0.124 0.138 0.109 0.097 0.114 0.100
(0.052)** (0.058)** (0.056)** (0.041)*** (0.088) (0.094)
Observations 132 122 132 126 270 86
B: India
Log ICT capital 0.115 0.090 0.116 0.098 0.134 0.138
(0.032)*** (0.036)** (0.033)*** (0.033)**** (0.062)*** (0.044)***
Observations 335 312 335 335 777 244
Robust standard errors in brackets. All specifications include the controls of table 3. *, **, and *** denote significance at the 10%, 5%, and 1% levels, respectively.

set to their theoretical values, does not change the magni- TABLE 5.—TWO-YEAR DIFFERENCES 2001–2003
tude of the estimated coefficients either. (1) (2) (3)
In order to eliminate other unobservable fixed effects that Occupation Instrumental
may be correlated with ICT, in table 5 the same specifica- Baseline and Skills Variables
tions are estimated in first differences using the change over A: Brazil
the two-year period 2001–2003: Log employment 0.175 - 0.178
(0.119) (0.093)**
Dyit ¼ aDlit þ bDmit þ cDkit þ dDictit þ Deit : ð3Þ Log materials 0.429 0.404 0.388
(0.155)*** (0.156)*** (0.119)***
Column 1 in table 5 is a baseline first-differences specifica- Log gross fixed assets 0.214 0.246 0.175
(0.128)* (0.133)* (0.106)*
tion.21 For both Brazil and India, the coefficient on ICT Log ICT capital 0.166 0.163 0.242
capital is highly significant and large in the differences spe- (0.080)** (0.069)** (0.104)**
cification. These results mean that firm-level fixed effects Observations 90 90 90
are not biasing the estimates of the levels specifications in R2 0.83 0.50 0.44
either country. This is broadly consistent with the findings Hansen’s J-chi (6) - - 2.17
F-statistic (first-stage) - - 3.61
reported in Stiroh (2004). In column 2, we control for
changes in the share of occupations and skills; this has little B: India
Log employment 0.182 - 0.164
effect on the ICT capital coefficient in either country.22 (0.074)** (0.065)***
Table 5 also addresses the possibility that technology Log materials 0.343 0.356 0.359
investments may be correlated with other productivity (0.103)*** (0.107)*** (0.095)***
Log gross fixed assets 0.154 0.150 0.154
shocks by implementing an instrumental variable proce- (0.098) (0.097) (0.093)*
dure. For instruments, we need variables that are correlated Log ICT capital 0.100 0.079 0.167
with changes in ICT capital but not with productivity or (0.038)** (0.038)** (0.104)
Observations 249 249 249
demand shocks. Following Brynjolfsson and Hitt (2004), R2 0.37 0.46 0.33
we use lagged measures of technological infrastructure and Hansen’s J-chi (6) - - 4.06
human capital, accumulated through the history of the firm F-statistic (first-stage) - - 3.24
Robust standard errors in brackets. All specifications include industry, state, and age dummies. Col-
and collected in our survey, which can be thought of as umns 1 and 2 include indicators for 0 ICT stock. Column 3 implements a GMM procedure using the ratio
facilitating incremental investments in ICT and are uncorre- of servers to PCs, a dummy for no PCs, the share of workers with a high school or college education in
2001, and the perceived local price and ICT usage as instruments. *, **, and *** denote significance at
lated with demand shocks, since they are predetermined. As the 10%, 5%, and 1% levels, respectively.

additional instruments, we use the information on factors

that inhibit ICT investments, as reported by the firms in our
survey. Specifically, we use as instrumental variables at the
firm level the ratio of servers to PCs; indicators if the firm
had no computers a/or no access to the Internet; the shares
of production and of nonproduction workers with a high
school education or more (all measured in 2001), and indi-
21
Before estimation, the data were cleaned to eliminate outliers with
particularly large jumps in any of the main variables. Any firms with
decreases by a factor of 5 or more or increases by a factor of 10 or more
in any of the main variables over the period were dropped.
22
The skill and occupation shares were jointly statistically insignificant
in the regressions for both countries.
cators that the prices of computers were perceived as too
high and that few suppliers and clients of the firm had
access to the Internet.
Column 3 of table 5 reports the estimates of a generalized
method of moments (GMM) procedure, which is efficient
in the presence of nonspherical errors. The ICT coefficient
increased in both Brazil and India, reaching similar magni-
tudes in both countries, though not statistically significant
at conventional levels in the Indian case. The F-statistics on
the excluded instruments show that they are relevant to
534 THE REVIEW OF ECONOMICS AND STATISTICS

TABLE 6.—ORGANIZATIONAL CHANGE

Flattening Improved Monitoring Improved Management
Full High Adopters Full High Adopters Full High Adopters
(1) (2) (3) (4) (5) (6)
A: Brazil
Log employment 0.159 0.389 0.181 0.428 0.181 0.442
(0.103)* (0.128)** (0.105)* (0.134)*** (0.106)* (0.150)***
Log materials 0.378 0.337 0.393 0.370 0.387 0.372
(0.140)*** (0.146)** (0.149)*** (0.147)** (0.145)*** (0.151)**
Log gross fixed assets 0.137 0.043 0.111 0.021 0.152 0.039
(0.112) (0.148) (0.116) (0.132) (0.117) (0.137)
Log ICT capital 0.055 0.035 0.070 0.032 0.164 0.029
(0.064) (0.065) (0.078)* (0.094) (0.141) (0.131)
Organizational change 0.181 0.420 0.052 0.106 0.031 0.144
(0.099)* (0.208)** (0.035) (0.061)* (0.124) (0.192)
OC  ICT Capital 0.172 0.313 0.042 0.083 0.042 0.087
(0.100)* (0.143)** (0.033) (0.048)* (0.122) (0.151)
Observations 103 68 103 68 103 68
R2 0.44 0.53 0.44 0.51 0.45 0.50
B: India
Log employment 0.160 0.137 0.155 0.130 0.170 0.149
(0.070)** (0.086) (0.070)** (0.089) (0.070)** (0.091)
Log materials 0.357 0.276 0.350 0.272 0.352 0.270
(0.103)*** (0.114)** (0.105)*** (0.117)** (0.103)*** (0.116)**
Log gross fixed assets 0.154 0.170 0.157 0.184 0.149 0.167
(0.095) (0.118) (0.095)* (0.121) (0.095) (0.120)
Log ICT capital 0.093 0.084 0.088 0.083 0.085 0.065
(0.039)** (0.038)** (0.040)** (0.042)** (0.045)* (0.046)
Organizational change 0.032 0.080 0.010 0.034 0.051 0.072
(0.055) (0.066) (0.026) (0.043) (0.067) (0.088)
OC  ICT Capital 0.011 0.030 0.008 0.009 0.011 0.017
(0.042) (0.049) (0.020) (0.035) (0.057) (0.071)
Observations 266 158 266 158 266 158
R2 0.38 0.51 0.38 0.50 0.38 0.51
Robust standard errors in brackets, All specifications include industry, state, and age dummies, *, ** and *** denote significance at the 10%, 5%, and 1% levels, respectively.

explain changes in ICT capital and Hansen’s J-tests do not
reject the null for instrument validity in both cases.23 LIML
and 2SLS estimations produced very similar results: 0.255
(0.141) and 0.245 (0.131) for Brazil and 0.226 (0.149) and
0.187 (0.113) for India, which is reassuring in view of any
weak instruments problem (Bound, Jaeger, & Baker, 1995).
Overall, the results of the IV procedure show that any corre-
lation between unobservables and ICT expenditures seems,
if anything, to be biasing the estimated ICT coefficients
downward.
B. Complementary Organizational Changes
In understanding how ICT has an impact on performance,
the role of complementary investments, particularly with
respect to the reorganization of working practices and firm
management, might be expected to be relevant. In particular,
it could be conjectured that complementary organizational
changes could help explain the high measured returns to
ICT. Three measures of organizational change are used in
the analysis. The first is whether a firm ‘‘removed a level of
hierarchy or reduced the number of reporting levels’’ and
whether such change was explicitly related to IT over the
past three years. This question was asked with regard to the
23
First-stage results are available on request.
working practices of three groups of employees—produc-
tion workers as a whole, clerical and administrative workers,
and managers—and its value could therefore range from 0
(no change) to 3 (change across all three occupation types).
The second was whether a firm had ‘‘improved monitoring
of individual workers or groups of workers’’ related to IT.
The third was whether a firm had ‘‘improved management
decision making based on up-to-date information.’’ This
third question was asked only with respect to changes in the
working practices of managers, and its value is either 0 or 1.
For each type of organizational change, the specification
that is estimated is an extension of the basic difference spe-
cification in equation (3) that now includes a linear term in
the relevant measure of organizational change (OC) and its
interaction with the change in ICT capital:24
Dyit ¼ aDlit þ bDmit þ cDkit þ d1 Dictit þ d2 OCit
þ d3 Dictit
OCit þ Deit : ð4Þ
The results presented in table 6 show that in Brazil, a
reduction in hierarchy or flattening has no effect either
24
A positive coefficient on d would not be sufficient to infer comple-
mentarity if there was unobserved exogenous variation in the costs and
returns of different organizational practices and ICT investment. How-
ever, because we lack adequate instruments, the most we can say is that a
positive estimate is consistent with complementarity.
 ICT AND PRODUCTIVITY IN DEVELOPING COUNTRIES
directly or on the interaction for the full sample. However,
once firms that make minimal or no use of IC are excluded,
a very strong and positive interaction is found (column 2).
For Brazilian firms that use ICT more intensively, the return
to ICT capital stock is significantly positive only if they
also undertake organizational change at the same time. In
India there is no effect from our measures of organizational
change on either sample. Table 6 also reports the same
exercise, this time using the improved monitoring measure
of organizational change. In neither country do we find any
effects. This suggests that the results from flattening have
not been driven by unobserved heterogeneity that is corre-
lated with the propensity to undertake organizational
change. Finally, table 6 reports the management measure of
organizational change. In neither country can any signifi-
cant effect be found.
In short, our analysis using production functions finds a
strong, positive association between ICT capital and pro-
ductivity. The estimated elasticities are notably higher than
those found in the literature on OECD countries. Interest-
ingly, using first differences and instrumental variables does
not reduce the estimated elasticities significantly. Our ana-
lysis of possible complementary changes finds some evi-
dence that the high elasticities are located in firms that
invest in reducing hierarchy, at least in the case of Brazil.
Improved monitoring and management are insignificant.
V. Variation across Indian States
If ICT investment can be an important source of produc-
tivity growth in developing countries, then an interesting
question for policy is how the institutional environment
affects both the adoption of and the returns to ICT. In order
to address this question, exogenous variation across nine
Indian states in measures of infrastructure quality and labor
market regulation is used, controlling for other state charac-
teristics such as the relative supply of skills and income per
capita. The analysis is limited to India as there were too
few observations in Brazil to identify the effects of interest
from cross-state variation. In addition, the key measures of
infrastructure quality and labor market regulation were not
available for Brazil.
The first approach is to identify the reduced-form impact
of infrastructure quality and labor regulation on ICT capital
intensity in a cross-section of Indian states, paying close
attention to issues of simultaneity and causality. A similar
approach is taken by Besley and Burgess (2004), when
investigating the impact of labor regulation on the pattern
of manufacturing growth across Indian states. They found
that more proworker labor regulation is associated with
lower investment, employment, productivity, and output in
registered manufacturing, while the effect goes the other
way for unregistered manufacturing. Aghion et al. (2005)
also found that the negative impact of proworker labor reg-
ulation on output, employment, and productivity growth
increased after India’s market liberalization in 1991.
535
TABLE 7.—DESCRIPTIVE STATISTICS ACROSS INDIAN STATES
Mean Median Minimum Maximum s.d
Mean days disrupted 21.76 16.71 10.3 33.0 7.88
Labor market regulation 0.66 0.00 2.00 4.00 1.70
Log relative wage 0.75 0.77 0.54 1.32 0.21
Log income per capita 5.40 5.47 4.48 5.79 0.29
Based on 434 observations across nine Indian states.
A second approach is to identify the impact of infrastruc-
ture quality and labor regulation on the estimated returns to
ICT capital across states in a production function. This is
similar to the approach of Bloom et al. (2006), who have
found that U.S. multinationals in the United Kingdom both
use more ICT than other firms (including non-U.S. multina-
tionals) and have a significantly higher productivity of ICT
capital.25
A. Infrastructure Quality
Two principal measures of the institutional environment
in which firms make their decisions about ICT investment
are used. The first is constructed from a question in the
Indian firm-level questionnaire, that asked the number of
days in 2001 and 2003 a given firm experienced ‘‘power
related problems (power cuts or surges, either partial or
total) from the public grid.’’ The value for 2001 is then
averaged within states, creating a variable that ranges from
10.3 days in Tamil Nadu to 33.0 in Delhi. Descriptive sta-
tistics are presented in table 7. This variable is interpreted
as an exogenous measure of infrastructure quality at the
start of the time period (2001–2003). However, there are
clearly a number of potential concerns about this interpreta-
tion. First, averaging up to the state level will remove
potentially endogenous firm-level variation in the number
of days disrupted by power-related problems. But the state
mean may still be regarded as endogenous due to firms’
location decisions, which may be correlated with ICT adop-
tion for reasons other than infrastructure quality. However,
given that the median firm age in the Indian sample is 19
years and the tenth percentile is 8 years, and the well-docu-
mented difficulties associated with shutting down and open-
ing new plants in India, it seems reasonable to assume that
location decisions predate information about the level of
infrastructure quality in 2001. The second concern is with
the interpretation of this variable as a measure of infrastruc-
ture quality in general as opposed to power-related infra-
structure in particular. The interpretation of the variable as
a measure of general infrastructure quality can be seen as a
conservative approach that recognizes the likelihood that
the quality of power infrastructure is correlated with other
relevant aspects of a firm’s economic environment.
Supporting evidence for this broad interpretation is found
by examining the correlation across states between this
25
Gust and Marquez (2004) develop a similar model based on adjust-
ment costs in labor. Commander and Svejnar (2011) examine the impact of
the wider business environment in developing countries on productivity.
536 THE REVIEW OF ECONOMICS AND STATISTICS

measure and firms’ own reports of the extent to which dif- vant hypotheses, and so results both with and without this
ferent factors have constrained their ICT adoption deci- additional control are presented.
sions. Firms were asked, ‘‘Over the last three years, to what
extent have the following aspects prevented your firm from C. ICT Intensity across Indian States
investing in ICT to the preferred level?’’ The cross-state
correlations between the state mean number of days dis- This section presents results for the impact of the state-
rupted by power-related problems and the proportion of level variables discussed above on firms’ ICT intensity. The
firms in a state reporting that a particular factor constrained basic specification now includes the state-level measures of
their ICT adoption were almost all high and significant, par- infrastructure quality and labor market regulation:
ticularly for skills, labor laws, the low number of customers    n
ICTist w
and suppliers using the Internet, and a lack of government ln ¼ a1 Dst1 þ a2 Rst1 þ a3 ln p
support for ICT. In addition, the correlations across states Yist w st
 
between the different reported constraints are also extre- Kist
mely high, possibly suggesting a cluster of poor institutions þ a4 ln þ Xis0 b þ uis ; ð5Þ
Yist
or aspects of the economic environment in some states that
are not conducive to ICT adoption.26 where ICT is the ICT capital stock of firm i in state s in
2003, Y is firm sales; D is the state mean number of days
disrupted by power-related problems in 2001; R is the state
B. Labor Market Regulation and Other State-Level Data labor regulation index (for 1995); wn and wp are the wage
of nonproduction and production workers, respectively; K
The second state-level measure of the institutional envir-
is firm non-ICT capital stock; and X is a vector of controls
onment is a labor regulation index for 1995 constructed by
that includes the log of state income per capita, industry,
Besley and Burgess (2004). This variable comes from state-
size and age dummies, and a number of firm characteristics,
specific text amendments to the Industrial Disputes Act
including ownership, listed status, joint ventures, and union
1947, which were coded as proworker (positive), proem-
membership. All standard errors in this section are adjusted
ployer (negative), or neither in order to construct a cumula-
for clustering at the state level. To the extent that the mea-
tive index of labor market regulation. For the states in the
sures of infrastructure quality and labor regulation can be
sample, the index ranges from 4 in the most proworker state
considered truly exogenous for firms’ ICT adoption deci-
(West Bengal) to 2 in the most proemployer states
sions, the estimated coefficients represent their reduced-
(Andhra Pradesh and Tamil Nadu). The variable is not
form impact on equilibrium ICT intensity. The underlying
available for Delhi, so two approaches are used. A value of
economic mechanisms may work through the effect on the
0 (the same as the neighboring states of Haryana and Uttar
marginal cost or marginal returns to ICT investment. The
Pradesh) was assigned, while in the second instance, Delhi
coefficient on the log relative wage of nonproduction work-
was dropped from the sample altogether. Descriptive statis-
ers could be expected to be negative, consistent with skill
tics are presented in table 7. One key drawback of the labor
bias. Any endogeneity of the relative wage would be likely
market regulation measure is that it stopped in 1995, so to
to bias the coefficient toward zero. Non-ICT capital inten-
the extent that labor regulations have been modified since,
sity is likely to be endogenous to ICT capital intensity, so
it will be measured with error. Assuming that this error is
results that exclude this term are presented first. A positive
not systematically related to other relevant state characteris-
coefficient on non-ICT capital intensity may be consistent
tics, this should mainly have the effect of reducing the
with capital-ICT complementarity but may also be the
chances of finding a significant effect on ICT adoption or
result of unobserved heterogeneity that is correlated with
the returns to ICT.
both non-ICT and ICT capital intensity, for example,
Measures of the state mean log relative wage of nonpro-
through variation in the cost of capital. In addition, data on
duction to production workers and the log of state net
non-ICT capital are not available for all firms.
domestic product per capita in 2001 are also used as con-
The first column of table 8 shows the results for the basic
trols. The mean log relative wage can be interpreted as a
specification, excluding log income per capita and non-ICT
measure of the relative supply of skilled labor. Log state
capital intensity. The coefficients on the state mean number
income per capita is included in order to control for unob-
of days disrupted by power-related problems and the labor
served heterogeneity across states that is correlated with the
regulation index are both negative and significant, suggest-
quality of infrastructure, labor market regulations, or rela-
ing that both poorer infrastructure and more proworker
tive supply of skilled labor.27 To the extent that state
labor regulation are associated with lower levels of ICT
income per capita is itself a result of any of the these fac-
investment. The coefficient on the log relative wage is also
tors, this is likely to be a particularly tough test of the rele-
negative and significant. Column 2 includes the log of state
26 income per capita as an additional control, which enters
Correlations are available on request.
27
As discussed above, cross-country studies of ICT diffusion have positively as expected. The coefficients on the mean num-
found that income is an important factor. ber of days disrupted and the labor regulation index remain
 ICT AND PRODUCTIVITY IN DEVELOPING COUNTRIES 537

TABLE 8.—ICT INTENSITY ACROSS INDIAN STATES

(1) (2) (3) (4) (5)
Dependent variable: ln (ICT/Sales) Full Sample Full Sample Capital Sample Capital Sample Excluding Delhi
Mean days disrupted 0.034 0.060 0.050 0.047 0.072
(0.017)** (0.010)*** (0.009)*** (0.009)*** (0.011)***
Labor market regulation 0.192 0.129 0.124 0.148 0.075
(0.097)** (0.051)** (0.036)*** (0.041)*** (0.038)**
Log relative wage 1.543 0.671 0.717 0.784 0.740
(0.581)** (0.445) (0.398)* (0.463)* (0.193)***
Log income per capita 1.267 1.279 1.392 0.724
(0.235)*** (0.194)*** (0.251)*** (0.137)***
ln (Capital/Sales) 0.250 0.236
(0.116)** (0.134)*
Observations 434 434 367 367 299
R2 0.09 0.11 0.12 0.17 0.18
Robust standard errors in brackets. All specifications also include industry, firm size, and age dummies, as well as controls for union membership, foreign ownership and joint ventures, listed status, and state own-
ership. *, **, and *** denote significance at 10%, 5%, and 1% levels, respectively.

negative and significant, with the former becoming more
negative and the latter slightly less negative. The coefficient
on the log relative wage becomes less negative and insignif-
icant once log income per capita is included as a control.
The size of the estimated effects is economically signifi-
cant. Moving from the state with the highest mean number
of days disrupted (Delhi, with 33.0) to the state with the
lowest (Tamil Nadu, with 10.3) is associated with, on aver-
age, a 400% increase in ICT intensity.28 Moving from the
state with the most proworker labor regulation index (West
Bengal, with 4) to the state with the most proemployer
index (Andhra Pradesh or Tamil Nadu, with 2) is asso-
ciated with, on average, more than a 200% increase in ICT
intensity.29 While large, these effects are well within the
range of variation observed in the data: both the mean and
median ICT intensity in the most ICT-intensive state (Tamil
Nadu) are about ten times larger than in the least ICT-inten-
sive state (West Bengal).30
In order to control for non-ICT capital intensity, column
3 presents the same specification as column 2 but on a smal-
ler sample for which data on non-ICT capital are available.
The results are essentially unchanged, although the log rela-
tive wage becomes marginally significant at 10%. Log non-
ICT capital intensity is included for the same sample in col-
umn 4 and enters positively and significantly, as expected.
Again the other results are essentially unchanged. Finally,
column 5 excludes Delhi from the sample, given that the
value of the labor regulation index for Delhi is imputed
from two neighboring states. The size of the coefficient on
labor regulation is roughly halved, but it remains signifi-
cant. The other results are not significantly affected,
although the coefficient on log state income per capita also
becomes smaller, and the coefficient on the log relative
wage becomes much more precisely estimated once Delhi
is excluded.
28
This is calculated as exp(22.7  0.060).
29
This is calculated as exp(6  0.129).
30
The mean and median ICT intensities in Tamil Nadu are 0.107 and
0.010, respectively, compared to 0.017 and 0.001 in West Bengal.
D. Returns to ICT across Indian States
These results suggest that poorer infrastructure quality
and more proworker labor regulation are both associated
with significantly lower levels of ICT adoption across
Indian states. They have interesting implications for policy,
but without further information, little can be said for certain
about the underlying economic mechanisms at work. For
example, these results are consistent with the simple model
developed by Bloom et al. (2006) in which higher adjust-
ment costs (due in this case to either poorer infrastructure
or more restrictive labor regulations) in factors complemen-
tary with ICT are associated in equilibrium with both lower
levels of ICT adoption and lower returns to ICT.31 To
investigate this further, we follow their approach when
examining the impact of the same variables on the esti-
mated returns to ICT capital in a production function.
The basic specification, with lowercase denoting natural
logarithms is an extension to the differenced production
function:
Dyist ¼ aDlist þ bDmist þ cDkist þ d1 Dictist
þ d2 Dictist
ðDst1  Dt1 Þ þ Ss þ Deist ; ð6Þ
where in this case, the change in log ICT capital is inter-
acted with the deviation of the state mean number of days
disrupted from its sample mean.32 The coefficient d2 thus
captures the extent to which the elasticity of output with
respect to ICT capital varies across states in a way that is
correlated with the state mean number of days disrupted by
power-related problems. Other state-level variables such as
the labor regulation index can be added in the same way as
D. To be as unrestricted as possible, S represents a full set
of state dummies so that the linear term in D is not sepa-
31
The model of Besley and Burgess (2004) also implies both lower
investment and lower returns to investment in states with more proworker
labor regulations.
32
D is included as a deviation from its sample mean in order to aid
interpretation of the coefficient on the linear ICT term as the ICT capital
elasticity evaluated at the sample mean of D.
538 THE REVIEW OF ECONOMICS AND STATISTICS

TABLE 9.—ICT ELASTICITY ACROSS INDIAN STATES

(1) (2) (3) (4) (5) (6)
Dependent Variable: D ln Sales Full Sample Full Sample Full Sample Full Sample Full Sample Excluding Delhi
D ln Employment 0.148 0.160 0.160 0.160 0.144 0.138
(0.038)*** (0.038)*** (0.037)*** (0.038)*** (0.039)*** (0.043)**
D ln Materials 0.359 0.358 0.359 0.359 0.361 0.367
(0.117)** (0.116)** (0.115)** (0.116)** (0.119)** (0.126)**
D ln Capital 0.153 0.153 0.156 0.155 0.154 0.167
(0.098) (0.094) (0.094) (0.094) (0.098) (0.099)*
D ln ICT 0.077 0.084 0.083 0.084 0.079 0.081
(0.029)** (0.033)** (0.037)* (0.035)** (0.034)* (0.051)
D ln ICT  Mean Days Disrupted 0.008 0.009 0.009
(0.002)*** (0.002)*** (0.002)***
D ln ICT  Labor Market Regulation 0.010 0.003 0.002
(0.011) (0.012) (0.011)
D ln ICT  Log Relative Wage 0.032 0.037 0.038
(0.128) (0.094) (0.114)
D ln ICT  Log Income per Capita 0.018 0.049 0.066
(0.095) (0.034) (0.079)
Observations 266 266 266 266 266 217
R2 0.39 0.38 0.38 0.38 0.39 0.38
Robust standard errors in brackets. All specifications also include industry, state, and age dummies. *, **, and *** denote significance at 10%, 5%, and 1% levels, respectively.

rately identified. Additional controls are as above and FIGURE 2.—POWER DISRUPTIONS AND ICT CAPITAL ELASTICITY
include industry, size and age dummies, and a number of
firm characteristics, including ownership, listed status, joint
ventures, and union membership. As above, all standard
errors are adjusted for clustering at the state level.
The results are presented in the first column of table 9.
The coefficients on the four linear inputs are very similar to
those reported earlier, and the coefficient on the interaction
term is negative and highly significant. This suggests that
the elasticity of output with respect to ICT investment is
significantly lower in states with more frequent power dis-
ruptions. The size of the effect is again economically signif-
icant: the coefficient of 0.077 on the linear ICT term repre-
sents the estimated elasticity at the sample mean number of
days disrupted, which is just under 22. The states with the
lowest and highest number of days disrupted have values of
In a bivariate regression of estimated state-specific elasticities against mean number of days disrupted,
the variable about 10 either side of the mean, so the pre- the R2 is 0.81, and the coefficient (and clustered standard error) is –0.007 (0.001).
dicted ICT capital elasticity is roughly equal to 0 in the
state with the most disruptions (Delhi) and roughly double
the mean at about 0.16 in the state with the fewest disrup-
tions (Tamil Nadu). Column 2 estimates the same specifica- each state is proportional to the number of observations
tion using the labor regulation index in place of mean days from that state. The relationship is clearly negative, as
disrupted, but the interaction is not significant. The same is shown by the fitted line. This is driven by three South
true for the mean log relative wage and the log of income Indian states that have high estimated elasticities and low
per capita in columns 3 and 4. Column 5 includes all four mean numbers of days disrupted: Tamil Nadu, Maharastra,
interactions together, and the result for mean days disrupted and Andhra Pradesh. Interestingly, the estimated elasticities
remains robust while the other coefficients remain insignifi- for these three southern states are similar to those estimated
cant. Finally column 6 excludes Delhi, and the results are for Brazil of between 0.1 and 0.2, while the estimated elas-
essentially unchanged. ticities for the North and East Indian states (plus Karnataka)
By interacting the change in log ICT capital with state with higher mean numbers of days disrupted are all clus-
dummies the basic specification was estimated such that the tered between 0.03 and 0.03.33
elasticity of output with respect to ICT capital is allowed to
be different within each state. Figure 2 plots the resulting
state-specific elasticities against the state mean number of 33
The small number of observations from Uttar Pradesh clearly consti-
days with power-related problems. The size of the circle for tutes an outlier.
 ICT AND PRODUCTIVITY IN DEVELOPING COUNTRIES 539

FIGURE 3.—POWER DISRUPTIONS AND MEDIAN IMPLIED RETURN TO ICT CAPITAL TABLE 10.—ALL FACTOR ELASTICITIES ACROSS INDIAN STATES
(1) (2)
Power All
Disruptions Interactions
Dependent Variable: D ln Sales Only
D ln Employment 0.148 0.085
(0.028)*** (0.030)***
D ln Materials 0.388 0.378
(0.080)*** (0.066)***
D ln Capital 0.110 0.137
(0.040)** (0.037)***
D ln ICT 0.068 0.074
(0.031)** (0.040)*
D ln Employment  Mean Days Disrupted 0.010 0.009
(0.006)* (0.004)**
D ln Materials  Mean Days Disrupted 0.017 0.016
(0.010)* (0.006)***
D ln Capital  Mean Days Disrupted 0.028 0.023
(0.007)*** (0.004)***
In a bivariate regression of state median rate of return against mean number of days disrupted, the R2 D ln ICT  Mean Days Disrupted 0.007 0.007
is 0.62 and the coefficient (and clustered standard error) is, –1.32 (0.31). (0.002)*** (0.003)**
Interactions with labor market No Yes
regulation, log relative wage, and log
income per capita?
Observations 266 266
R2 0.41 0.46
If average ICT capital intensity in the states with low Robust standard errors in brackets. All specifications also include industry, state, and age dummies.
estimated elasticities is significantly lower than in the states *, **, and *** denote significance at 10%, 5%, and 1% levels, respectively.

with higher elasticities, then it would be possible for the

implied median rates of return to ICT capital investment to
be similar across states despite varying estimated elastici-
ties. To investigate this, Figure 3 plots the implied median
rate of return to ICT capital for each state against the mean
number of days disrupted.34 The relationship remains
strongly negative, with the R2 from a bivariate regression
equal to 0.62 and the coefficient (clustered standard error)
equal to 1.32 (0.31). The states clearly fall into two clus-
ters—one with very high median rates of return and low
mean numbers of days disrupted and the other with lower
rates of return and higher mean numbers of days disrupted.
E. Robustness
Our specification allows only the elasticity with respect
to ICT capital to vary. It is possible that the estimated
effects described above are not specific to ICT capital but
also apply to other factors. The results in table 10 suggest
that this is indeed the case. The first column includes inter-
actions between the mean days disrupted variable and all
four inputs in the production function, not just ICT capital.
The interactions with both non-ICT and ICT capital are
strongly negative and significant, while the interactions
with the variable factors, employment and materials, are
positive and weakly significant. Similar interactions with
the other state-level variables are not significant (not
shown), and when all the interactions are included simulta-
neously in column 2, the results for the interactions with the
34
Note that the rates of return are displayed as fractions, not percen-
tages, so the implied rate of return in Tamil Nadu is about, 3700%, not
37%.
mean days disrupted variable are not significantly affected,
although they generally become more precisely estimated.
Overall these results suggest that the results for ICT capi-
tal also extend to non-ICT capital. One interpretation is that
poor infrastructure quality is associated with low returns to
capital investment in general. Interestingly, and in contrast
to the results for ICT capital, there is no evidence that poor
infrastructure quality (or labor regulation) is associated with
lower levels of non-ICT capital intensity. In an equivalent
regression on the same sample, except with the log of non-
ICT capital over sales as the dependent variable, none of
the coefficients was significant.35 The same remains true
when the log of ICT capital over sales was included as an
additional control and when Delhi was dropped from the
sample.
Finally, one possibility is that different returns to invest-
ment across states are driven by different industry composi-
tion.36 This seems unlikely given the spread of observations
across industries and states. However, in order to investi-
gate this possibility, the specification from column 1 of
table 10 was estimated separately for each of the six indus-
tries in the sample, so that the coefficients were identified
purely from within-industry variation. Given the small
number of observations in each industry, the estimates were
fairly unstable and not very precisely estimated. However,
35
The effect of mean days disrupted is negative but insignificant with a
coefficient (clustered standard error) of 0.016 (0.011). The coefficient
(clustered standard error) on the labor regulation index is 0.099 (0.095).
36
The same is clearly not true for different degrees of ICT capital inten-
sity, since the results include a full set of (three digit) industry dummies,
and so are estimated within industry.
540 THE REVIEW OF ECONOMICS AND STATISTICS
the interaction between mean days disrupted and the change
in log ICT capital was negative in five out of six industries,
while the interaction with non-ICT capital was significantly
negative in three out of the six industries.
VI. Conclusion
This paper uses a unique new data set that we have col-
lected on a thousand firms in manufacturing in two impor-
tant developing countries, Brazil and India. The data allow
us to look at the extent of ICT adoption at the firm level and
the consequences of adoption for performance. In addition,
we are able to relate adoption and the return to adoption to
region- or state-level institutional features in India.
With respect to the association between ICT and produc-
tivity, our analysis suggests that, in line with some of the
evidence from developed countries, there have been very
high returns to ICT. Differencing and implementing instru-
mental variables techniques do not significantly reduce the
estimated elasticities, and there is some evidence (for Brazil
at least) that the high elasticities are concentrated in firms
that undertake simultaneous investments in flattening orga-
nizational structures.
Finally, our survey allows us to throw new light on the
way in which institutional features of a region or state may
affect both ICT adoption decisions and returns to ICT adop-
tion. Our results suggest that both poorer infrastructure
quality and proworker labor regulation are associated with
lower levels of ICT capital intensity, while only poorer
infrastructure is associated with lower returns to ICT capital
investment. The latter result also applies to the returns to
investment in non-ICT capital, suggesting that poor infra-
structure quality may be associated with low returns to capi-
tal investment in general. Interestingly, and in contrast to
the results for ICT capital, there is no evidence that poor
infrastructure quality is associated with lower levels of non-
ICT capital intensity. The analysis suggests that much of
the policy challenge in India consists of addressing the
sources at the state level of these inefficiencies and institu-
tional weakness.
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APPENDIX A
Design of the Survey
The survey was administered to 500 firms each in Brazil and India on
a face-to-face basis in April and May 2005. The firms were selected in six
branches of manufacturing: electronic components, plastic products, soap
and detergents, autoparts, machine tools, and wearing apparel. In India,
we used the Prowess and First source databases of firms for the sampling
frame. Stratification was by branch and region. In India, the Prowess data
set contains extensive financial data on each firm, so we used this as the
 ICT AND PRODUCTIVITY IN DEVELOPING COUNTRIES 541

TABLE A1.—SAMPLE DISTRIBUTION BY REGION/STATE AND SECTOR

Electronic Plastic Soap and Auto Machine Wearing
Components Products Detergents Parts Tools Apparel Total
A: Brazil
Norte 2 4 2 1 0 3 12
Nordeste 1 12 9 1 7 19 49
Sul 18 26 9 24 33 25 135
Centro 2 6 8 3 3 4 26
Rio/Espirito Santo 4 8 6 6 7 10 41
São Paulo 29 20 31 37 23 33 173
Minais Gerais 20 5 12 6 8 5 56
Total 76 81 77 78 81 99 492
B: India
Andhra Pradesh 8 10 1 4 4 0 27
Delhi 14 22 10 27 5 23 101
Gujarat 2 15 2 1 1 4 25
Haryana 0 0 0 6 0 0 6
Karnataka 12 4 1 8 10 3 38
Maharashtra 25 56 22 32 17 22 174
Tamil Nadu 10 8 2 18 9 7 54
Uttar Pradesh 3 1 1 5 0 0 10
West Bengal 4 10 8 9 6 4 41
Total 78 126 47 110 52 63 476

primary source for sampling. For branch, quotas were set relative to their
size. The Prowess universe contained 437 firms; we sampled 175. The
remaining 325 were taken from First Source. The order used to achieve
these quotas was thus from industry or branch to Prowess and First Source
(in that order) and then by region. Within the final regional quota cell,
firms were selected randomly. In terms of regions, sampling was orga-
nized in fourteen regional centers located in nine states in India. In Brazil,
the sampling frame was the Industrial Census (PIA). Stratification was by
branch, region, and employment size. Sampling occurred in thirteen states
from five regions of the country. Table A1 provides a description of the
sample by region and sector.
APPENDIX B
Variable Definitions
ICT adoption index: Takes integer values from 1 to 5 according to
answers to the question, ‘‘How would you describe the degree of
ICT usage in your firm?’’ where the options are as follows: (1) ICT
is not used at all; (2) ICT is used for some office applications along
with accessing the Internet, and e-mailing for example; (3) ICT is
used for some advanced applications, with most processes auto-
mated but no integration into a central system; (4) most processes
are automated, and some of them are integrated into a central sys-
tem; and (5) almost all processes are automated and integrated into
a central system.
ICT usage index: Takes integer values from 4 to 16. For each of four
functions (accounting services inventory management marketing
and product design, and production process) firms were asked to
choose from the following four options: (1) do not use any ICT, (2)
use ICT for some processes, (3) use ICT for most processes, and (4)
use ICT for all processes. The variable is the sum of these answers
across the four different functions.
ICT capital stock: Constructed using a perpetual inventory method
from information on ICT capital investment in 2001, 2002, and
2003. The assumed depreciation rate is 0.315, and the price of ICT
capital is assumed to fall by 20% per year (both following Stiroh,
2004). For the initial stock, real ICT capital investment is assumed
to have been growing by 50% a year for both countries, which is
close to the median growth rate in the sample during the 2001–2003
period.
Admin: The proportion of the workforce in 2003 consisting of adminis-
trative and clerical workers.
Managers: The proportion of the workforce in 2003 consisting of man-
agers.
Other: The proportion of the workforce in 2003 who were not produc-
tion workers, administrative and clerical workers, or managers.
Prod:US: The proportion of production workers in 2003 who had com-
pleted upper secondary but not college.
Prod: Coll: The proportion of production workers in 2003 who had
completed college.
Admin:US: The proportion of administrative and clerical workers in
2003 who had completed upper secondary but not college.
Admin:Coll: The proportion of administrative and clerical workers in
2003 who had completed college.
Union: Dummy variable equal to 1 if the firm reported that any of its
workforce belonged to a union.
OC (Flattening): Takes integer values from 0 to 3 according to
whether firms reported that it had ‘‘removed a level of hierarchy or
reduced the number of reporting levels’’ for three types of workers
(production; administrative and clerical; managers) during the years
2001, 2002, or 2003.
OC (Improved monitoring): Takes integer values from 0 to 3 according
to whether firms reported that they had introduced ‘‘improved moni-
toring of individual workers or groups of workers’’ for three types
of workers (production; administration and clerical; managers) dur-
ing the years 2001, 2002, or 2003.
OC (Improved monitoring): Takes values of 0 or 1 according to
whether firms reported that they had introduced ‘‘improved manage-
ment decision making based on up-to-date information’’ during the
years 2001, 2002 or 2003.
Mean days disrupted: For India only, the state mean number of days in
2001 that firms reported experiencing ‘‘power-related problems
(power cuts or surges, either partial or total) from the public grid.’’
Median days disrupted: For India only, the state median number of
days in 2001 that firms reported experiencing ‘‘power-related pro-
blems (power cuts or surges, either partial or total) from the public
grid.’’