The Role of the IT Revolution in Knowledge Diffusion, Innovation and Reallocation

Abstract

What is the impact of information and communications technologies (ICT) on aggregate productivity growth and industrial reallocation? In this paper, I analyze the impact of ICT through facilitating knowledge diffusion in the economy. There are two opposing effects. The increased flow of ideas between firms and industries improves learning opportunities and spurs innovation. However, knowledge diffusion through ICT also results in broader accessibility of knowledge by competitors, reducing expected returns from research efforts and hence harming innovation incentives. The nature of the tradeoff between these opposing forces depends on an industry’s technological characteristics, which I call external knowledge dependence. Industries whose innovations rely more on external knowledge benefit greatly from knowledge externalities and expand, while more self-contained industries are more af-fected by intensified competition and shrink. This results in the reallocation of innovation and production activities toward more externally-focused, “knowledge-hungry ” industries. I develop a general equilibrium endogenous growth model featuring this mechanism. In the model, firms belonging to technologically heterogeneous industries learn from external knowl-