This paper analyses the importance of the ICT sector, and in particular the Software sector, for the European economy. It does so by looking into the question of how value-added is created through the lens of improved productivityand competitiveness using ICT in various European economies. In analysing these channels of value-added, this paper looks specifically into how complementary policies play a crucial factor in the employment of software in order to enable a significant effect on economic growth. Examples of these complementary policies are various and vary from labour market regulations to product market regulations. As a result, this paper shows which of these additional policy measures can further benefit the European economy whilst employing software and other ICT-related services. In doing so, this paper has developed and used two research methodologies which are presented in the annex of the paper and of which only the results are shown in the main part of this work.
2. Why complementary policy?
Why are policies outside the ICT sector itself important for ICT to be an enhancer for the European economy? And what policy-related factors can explain differences in productivity when using software? These questions are important as even though this sector represents a modest 2.1 percent of the EU’s total domestic value-added, the ICT sector’s indirect contribution to the economy is significant, as this paper shows. The reason for this important indirect effect must be found in the fact that software and other computer-related services play an intermediate “vehicle” in the so-called downstream economy in an attempt to generate higher productivity in each sector. Each industry outside the ICT sector uses software and computer services, which acts as a channel through which production processes in these using industries can be optimised. Without the use of software, organising production chains can become a lot more ineffective.
As a result, in the overall economy software acts as an indispensable means to effectively use production factors such as labour, capital or R&D and innovation in each downstream industry. Economic growth is a result of two ways in using these factor inputs: either through increased accumulation of factors or through the productive use of these factors. The role of ICT and its contribution to the economy must be found in the latter explanation of this growth trajectory in which productive resources can be unleashed in the production process. However, productivity growth in Europe has become stagnant over the recent years. In part, this stagnant productivity growth may reflect the declining technological progress or, for some countries, the low accumulated stock and use of ICT in itself. Yet, a second type of explanation lies in the so-called low “spill-over” effect in the sense that stalled reforms and policy rigidities slow down the endorsement and therefore the use of new technologies of ICT in the wider downstream economy.
Put differently, the productive use of ICT nowadays is not so much likely to stem from investments in the ICT sector itself, or ICT investments made in the ICT-using industries, but rather from the dissemination of ICT in the wider economy in which industries incorporate and interweave more software and computer services in their production processes. Van Ark (2014a) distinguishes three stages in a cycle of ICT deployment that feeds into economic growth, namely (a) that of investment in the ICT producing sector itself, (b) investment deepening in the so-called ICT using sectors in the wider economy, and finally (c) the “augmented” productivity effect from actually using ICT in the wider downstream economy. Since the current productivity levels in Europe remain weak and as the first two stages have been progressed over the last decade, it is precisely the latter part of this sequence that appears to lag progress in most European countries. This puts the focus of how ICT can be effectively used in the wider economy.
This, in turn, shifts attention to how the spread and usage of ICT in the economy can be accommodated by other policies that focus on how software and computer services can be embedded. These are the so-called complementary policies. For instance, lower regulations in product markets are likely to lead to resource re-allocations between firms within each industry, which can be accelerated by the use of software which before was not possible to use in more rigid markets. Similarly, more private capital to young start-up firms which are likely to use more ICT or software in their innovations could lead these firms to undertake riskier innovations that have a greater impact on growth. As one can see, these policies are, however, not always directly related to the ICT sector itself. Indeed, various works such as OECD (2007) suggest that the strong decline in productivity across Europe relates to complementary policies measures that could further enhance the employment of ICT in the wider economy.
When looking at Europe, some countries in particular still have some sectors where there is a lack of competition due to higher regulations in product markets which could prevent other downstream industries, and particularly services, from effectively deploying ICT and software services. This prevents countries from increasing value-added and productivity. If markets are inflexible in Europe, industries are frustrated in their process of innovations and product development, including business reorganisations, which are all much dependent on the use of ICT and software services. In addition, complementary policies may also stifle the creation of value-added in the ICT sector itself in Europe. Labour market regulations may have a stronger adverse effect on creating value-added in the ICT sector as this sector is comprised of many young dynamic entrepreneurial firms that are better placed in a flexible environment for hiring and firing employees.
Other factors are also likely to have a similar strong effect on the effective use of ICT services. For instance, the level of expenditure of R&D that each sector uses may be strongly connected with the use of ICT and software. If that is the case, then country policies which encourages firms to use more R&D may be particularly helpful in industries that already use a lot of ICT and software. Likewise, since many innovations are done with the help of ICT, and as many innovation activities won’t take place without applying for patents, industries using a lot of ICT in their innovations so as to enhance productivity could, as a consequence, be strongly dependent on an efficient patent system. There are various other policy sources that are assessed as having an indirect importance on the wider usage and embedment of software and computer or ICT services in other industries, which this paper will assess.
As a result, the importance of ICT needs to be found in how productive the wider economy employs the services that the ICT sector brings forward, which can be enhanced with the implementation of complementary policies. In addition, complementary policies may also play a role in how value-added is created and enhanced within the ICT sector itself. However, this paper investigates the first channel, namely the one related to productivity in the wider economy: which complementary policies benefit industries and sectors that use ICT (and in particular software) most intensively. Hence, this paper looks into a wider set of policy measures that have been identified across the policy literature as potentially important drivers for enhanced productivity through the use of ICT (i.e. software) in other downstream industries. (OECD, 2007; van Ark, 2014).
 Moreover, whilst ICT in Europe makes up a smaller share of total EU investment compared to the US, this in turn generates a lower contribution of ICT to overall productivity and eventually GDP growth when compared (Van Ark, 2014b).
 Note that one study, namely Arnold, Nicoletti and Scarpetta (2008) state that also some of these complementary reform policies also hindered for countries to capitalise on the technological boom in ICT to as to effectively accumulate ICT capital.