There is broad consensus regarding the significant role of Information and Communication Technology (ICT) in the past decade, both in the renewal of labor productivity growth in the U.S. and in the development of this productivity gap between the U.S. and the European Union. Israel’s high-tech sector, which is mostly engaged in ICT production, grew rapidly during the 1990s and became a hotbed of innovation and technological development on a global scale. However, labor productivity growth in Israel remained slow during this period, and it seems that the traditional sectors in industry and services did not benefit from the success of the ICT sector. The main goal of this article is to shed light on these two phenomena. The article uses unique data on sectoral investments in ICT equipment in Israel between 1990 and 2003 and estimates production functions for industrial sectors that have been expanded to include ICT capital. The estimates found high elasticity of output relative to ICT capital, which increased significantly with the technological intensity of the sectors. Additionally, it was found that ICT capital was the most significant contributor to industrial growth between 1995 and 2000—before the “dot-com bubble burst.” Since ICT capital in Israel is highly concentrated in high-tech industries, growth was limited to these industries alone. Therefore, assisting the adoption of ICT capital in traditional industries is necessary to achieve broad economic growth. The Israeli experience described in the article, although focused solely on industrial sectors, provides an example of the advantages and limitations associated with a national growth strategy centered on the local ICT sector, successful as it may be.
/ Publications /
