Complementarity between ICT and Intangible Capital

Abstract: Major technological innovations, including ICT, often affect productivity with a long lag. One suggested explanation for this is that such technological innovations require intangible co-investments in for example business processes and human capital before being fully productive. Using industry level intangible capital data for 9 European countries for the years 1995-2007, I test this explanation for the case of ICT by examining whether ICT is more productive when it is complemented by intangible capital. Estimating a production function, I find that the output elasticity of ICT in an industry is positively related to the use of intangible capital in that industry. Decomposing intangible capital, I find that this complementarity is primarily driven by intangible assets related to organizational capital, workforce training and marketing. The results thus support the idea that ICT requires intangible co-investments in organizational capital and related intangibles to be fully productive.