The demand for information technology capital: An empirical analysis

Information technology (IT) capital currently represents seven percent of total capital stock in the U.S. and accounts for a rapidly growing share of capital expenditures, making it one of the most important innovations of recent times. Given the significant role of IT as a factor of production in every sector of the economy, it is important to analyze these growth trends. The adoption and subsequent diffusion of IT is naturally driven by the nature of the underlying demand. This paper studies the demand for IT capital for the period 1970-1987 at both the aggregate economy level and the industry sector level. In particular, the effects of innovation diffusion, price trends and sector output on the demand for computing are examined through an empirical analysis of data on IT investment at these levels. The relationships between the aggregate and the industry demand functions as well as inter-industry differences are investigated. The results provide: (i) A theoretical understanding of the nature of demand for IT capital; (ii) measurement of the level and growth of computerization in the economy; and (iii) predictive ability.