Regional Economic Growth in Indonesia, Information and

Communication Technology Perspectives

Ridwan

, Nurwiyanta

, Sarwoko

and Alim Syariati

Universitas Janabadra, Yogyakarta, Indonesia

Universitas Islam Negeri Alauddin, Makassar, Indonesia

Keywords: ICT, regional economic growth, labor productivity, simultaneous equation, internet

Abstract: This paper aims to investigate the contribution of information and communication technology (ICT) to local

economic growth in Indonesia in the period 2008-2017, as it provided a critical backbone to the development

of the data industry in Indonesia, especially mobile data. This study tested a cross-section instrument on 33

provinces in Indonesia. The simultaneous equation model is employed to analyze the effect of ICT on regional

economic growth. This study assessed two policy settings, namely direct contribution to access and

availability for economic growth, and the indirect impact on labor productivity. The results revealed an

increase in the role of ICTs in encouraging regional economic growth in Indonesia, although most provincial

areas have limited ICT infrastructure. This paper opens an extended solution to the improvement of ICT

infrastructure and emphasizes a better in-depth analysis of ICTs on regional economic growth.

1 INTRODUCTION

The idea of long-term economic growth followed the

theoretical framework of Solow-Swan (Solow, 1957;

Swan, 1956). This model makes technology the main

ingredient in long-term growth and economic

development. Over the past few years, growth was a

process of increasing capital and labor to achieve

higher returns. This Solow-Swan model shows that

because of fewer profits, there are limits to the

increase in the amount of money and energy to achieve

sustainable growth. Improved technology can offset

this declining profit and provide an opportunity for a

country to experience productivity growth.

Technology has always been at the forefront of

economic growth and productivity. Increasing capital

and labor input in the production process alone is not

enough to maintain sustainable growth. Productivity is

the primary driver of growth after a country reaches

its capital and labor use limits. Recognizing the

importance of technology in industrial growth, more

and more countries and companies are allocating their

resources for investment in technology.

Furthermore, technological advances have

contributed to human well-being, including in terms

of new jobs, goods, health services, travel, and

communication. At the same time, technology also has

a disturbing power. Technology can influence how

labor is employed, and companies operate.

Technological changes in the fourth industrial

revolution at the moment may not be as drastic as they

have been in the past, but the acceleration of

technological improvements and adoptions is

happening even faster. The previous industrial

revolution took decades to truly change so that the

adjustment time was longer, especially in the labor

market.

Information and Communication Technology

(ICT) is one form of technology that is snowballing

today and can be an indicator in determining the

economy of a country. The high demand and

penetration of digital devices in various aspects of

human life has directly created a significant industry

in the field of technology and involves almost all

major nations in the world, with business value

increasing day by day (Indrajit, 2011). ICT has

become a new resource for economic growth. It is

observable from the impact of the use of ICTs in a

broad manner, which enables the implementation of

more efficient ways to produce, distribute, and

consume goods and services.

Several previous studies have shown that ICTs can

drive economic growth. The higher the development

of a country's information technology, the higher the

economic growth. There is a tendency that countries

with rapid ICT growth have fast economic growth as

Ridwan, ., Nurwiyanta, ., Sarwoko, . and Syariati, A.

Regional Economic Growth in Indonesia, Information and Communication Technology Perspectives.

DOI: 10.5220/0009207000320037

In Proceedings of the 2nd International Conference on Applied Science, Engineering and Social Sciences (ICASESS 2019), pages 32-37

ISBN: 978-989-758-452-7

well. In the United States, in the period 1995-1998,

ICTs were able to contribute to the economic growth

of 4.73% (Jorgenson, Dale and Stiroh, 2000). Also,

some European Union member countries (notably

Ireland, the Netherlands, and Finland) and some

OECD countries (for example, US, Australia, and

Canada) have recorded increases in economic growth

and productivity, stable inflation, and reduced

unemployment through the application of ICT.

In the Asia Pacific region, a country like

Indonesia provided evidence that ICT diffusion is

positively correlated with the level of economic

growth. The role of communication equipment

calculates research in Asia regarding ICT's role in

economic growth. The results showed that the

accumulation of capital of communication equipment

had a positive impact on all Asian countries during

the 1990s, and positive side measures were similar in

Asian countries (Kanamori, Fujiwara, and Mitomo,

2004). This study provides the first step in

understanding the impact of using ICT in Asia.

Recently, the rise of the information society in

Indonesia exhibits the continuous development of

ICT, especially telecommunication firms, as

magnified by the transition from fixed-line phones to

the mobile cellular phone. Besides, due to the rapid

growth of telecommunications in Indonesia, the term

"Digital Economy" has penetrated the urban and even

rural areas in Indonesia. Telecommunication has

eliminated the distance and reduced the differences

between communities. Information is no longer

constrained by time, location, or demographics,

providing a great value to society.

A study from the International

Telecommunication Union revealed 25 percent of

Indonesia's population had accessed the internet in

2016, showing the climate of information disclosure

and public acceptance of technological developments

and changes towards the information society. The

high number of internet users in Indonesia is

inseparable from the rapid growth of cellular phones

(Batunanggar, 2019). In 2017 there was 88.13 percent

of households in Indonesia having/controlled at least

one mobile telephone number. This figure is much

higher when compared to the conditions in 2012,

which only reached 83.52 percent.

This paper examines the causal relationship of

ICTs to growth, using panel data from 33 provinces

in Indonesia for the ten years 2008-2017, where ICTs

are multiplying in various regions in Indonesia. The

data compiled from three primary sources are the

dataset of the Statistics Indonesia (for regional

economic indicators), the International

Telecommunication Union (ITU) database (for ICT

penetration indicators), the Indonesian Ministry of

Communication and Information.

2 LITERATUR REVIEW

The contribution of Romer (1986; 1990) and Lucas

(1988), had provided a stimulus to investigate

endogenous factors that determine economic growth.

It centered on the central question or idea of which

"the main engine of growth."

One of the engines of growth is human capital. It

is static, instead of being static, it is very dynamic and

possessed abundant productive capabilities. Every

step of development would yield to the stock of

knowledge obtained. Therefore, this kind of

improvement would boost economic growth. Quah

emphasizes the demand for supply, argues that the

Information and Communication Technology (ICT)

revolution encourages the advancement of workforce

skills, consumer sophistication, and broad-based

education level improvement; furthermore, it urges

increased use of technology and increases the

productivity of labor, leading to the increase of

economic growth (Quah, 2002). Levine argues that a

lesser barrier to information, essential driver of ICT,

would promote increased investment (1997).

Even before the advent of ICTs, the imminent

impact of the increased access and participation on

information and effective communication yielded

economic growth, as evidenced in Japan, Korea, Hong

Kong, and Taiwan. The extraordinary economic

growth in the late 80th as a result of how companies

and people had better access to market information.

Besides, they benefit from more effective

communication with foreign partners and each other.

The slow development of productivity had been

observed as a critical inhibitor of economic growth in

many developing countries (Cirera, 2016). One of the

answers to the previous problem was the advancement

use of ICT (Cirera, Lage, and Sabetti, 2016), as it

could facilitate a more efficient approach to factors of

production utilization and promoting the application

of and to other technologies. Its potentiality as a

productivity driver in areas with lower ICT adoption

or underdeveloped infrastructure, such as Sub-

Saharan Africa.

Although the magnitude of ICT contributions to

the growth of productivity still sparked heated

conversation and debate, various study findings such

as Pilat (2004); Draca, Sadun, and Reenen (2006);

Litan and Rivlin (2001) revealed that ICT positively

affected the productivity growth. Polak found a low

elasticity, despite being positive of 0.3% (2014). This

low elasticity could be explained by the fact that ICTs

are integral parts of many production and capital

Regional Economic Growth in Indonesia, Information and Communication Technology Perspectives

technologies, which makes it difficult to separate the

effects of ICT investments on the impact of other

production factors. The debate over the contributions

of ICT remains an open question of whether ICT could

potentially become an important driver of productivity

growth and subsequently increase economic growth.

The rapid application of ICTs raises essential

questions about the possible impacts on the company's

operations. For example, Bloom, Sadun, and Reenen

(2012) investigate how ICTs affect worker autonomy,

differentiating between cost reduction in the

information, or even communication. They found that

as the independence of workers increased would

provide freedom, despite shrinking for the first time,

while in the future, decisions were decentralized, and

worker autonomy increased.

Several studies have empirically analyzed the

relationship between ICT and productivity. At the

sectoral level, Basu et al. (2004) examined ICT could

differentiated the US and UK productivity

performance. Focusing on the reduced ICT costs,

cheap ICT investments are likely to create significant

changes only if companies can radically apply their

other inputs and increase productivity. They

concluded that the different productivity patterns was

the result of unmeasured investments in intangible

organizational capital of these two countries after

1995.

Among all types of ICT investments that have an

impact on productivity, internet adoption is the main

application that triggers many kinds of research.

Sánchez, Gallego-Álvarez, and Rodríguez-

Domínguez (2011) investigated the effect of the

internet on productivity as evidenced in Spanish-based

corporations. They reported three channels where the

internet can affect productivity: (i) the reduced

transaction costs in the production and distribution of

goods and services; (ii) the increased management

efficiency, by a more effective management of supply

chains, and a more effective communication within

the company as well as customers and partners; (iii)

the increasing competition provided the platform of a

more transparent prices with a more expansive market

potentiality for buyers and sellers, who put pressure on

suppliers to implement techniques that translate into

cost savings. The important conclusions of this study

indicate a positive impact on the productivity of

internet adoption but it would decline as a certain level

of usage is reached.

Although ICTs cover a variety of applications,

internet adoption is in the frontrow driver of how it

developed rapidly inside the firms. Loundes (2002)

shows that the percentage of businesses using the

internet in Australia has doubled in three years. In

1998, 29 percent of Australian companies used the

internet, while it increased to 69 percent in 2001.

Recent data shows that internet penetration reaches

almost all companies in developed countries; 97.9

percent of businesses with ten or more employees in

OECD countries have internet connections (Cirera,

2016). Even developing countries have a high

percentage of companies using ICT (Cirera, 2016).

For example, the rate of Turkish and Mexican

companies that use the internet is more than 90 percent

(OECD, 2012). However, ICT adoption is not evenly

across all types of companies. Walczuch, Braven, and

Lundgren (2000) have shown that small companies in

the Netherlands do not adopt the internet at the same

speed as their larger counterparts.

Bresnahan et al., using company-level data,

suggest that the reduction in ICT prices will increase

investment in work organizations and product and

service innovations, which in turn increases the

demand for skilled workers to increase productivity

growth (Bresnahan, Brynjolfsson, and Hitt (2002).

The Bresnahan study, using US-level company data

from 1987 to 1994, found evidence of

complementarity among the three types of innovations

(ICTs, workplace reorganization, and complementary

new products and services). In other words,

companies that adopt innovation tend to use more

skilled labor, and the impact of ICT on labor demand

is more significant when combined with

organizational investment. In short, they highlight the

importance of ICT as an enabler of organizational

change, which leads to productivity growth.

Furthermore, using the same company-level data,

Brynjolfsson and Hitt specifically investigate the

influence of computerization on productivity and

output growth (Brynjolfsson and Hitt, 2003).

According to them, ICTs affect productivity because

companies change their production processes and

produce complementary innovations in and

throughout the company. Their main conclusion is that

the estimation of computerized contributions to output

growth continues to increase in the long run. In the

short term, the output contribution measured from

computerization is roughly the same as the computer

capital cost, but in the long run, their participation is

significantly more significant than their expenses.

Furthermore, Polder et al. (2010) investigated the

impact of ICT on productivity using data for more than

5,000 Dutch companies from 2002 to 2006. Polder,

including ICT investment as an input to innovation

similar to investment treatment in R & D within the

framework proposed by Crépon, Duguet, and

Mairessec (1998). Their central hypothesis is that

ICTs affect productivity through an innovation

process. Thus, ICT is input to the innovation process,

such as the input of other knowledge for R & D. In

other words, ICTs enable higher levels of productivity

through an innovation process because this is an input

of innovation to increase output and ultimately leads

to higher company performance. The findings of

ICASESS 2019 - International Conference on Applied Science, Engineering and Social Science

Polder et al. show that investment and use of ICTs are

essential drivers of innovation output in

manufacturing and services. Besides, they found that

the strong effect of ICT on productivity is through

organizational innovation.

Internet penetration in Indonesia is increasing,

from 25.37 percent in 2016 to 32.34 percent in 2017.

One indicator illustrating this phenomenon is the

correlation between the percentage indicator of the

population using the internet and per capita GRDP,

which shows a positive relationship of 0.723

(Statistics Indonesia, 2017. Judging from the growth

of research conducted by Nata found that ICT

investment in Indonesia both in telecommunications

and hardware and software has a strong influence on

the growth of the Indonesian economy, and the high

growth rate of ICT investment has triggered high

economic growth in Indonesia (Nata, 2007). Hardware

has an active role if viewed in terms of it's physical,

whereas software has a high contribution in terms of

service services.

3 METHOD

The analytical method used in this study is the panel

data method with quantitative analysis and

strengthened by qualitative analysis. This study will

conduct a simultaneous modeling framework of ICT,

human capital, labor productivity, and regional

economic growth in a model that explicitly connects

all variables is the most appropriate equipment to see,

both directly and indirectly, the impact of ICT on

regional economic growth. Therefore, in this study, a

simultaneous equation regression model will be used

using the two-stage least square (TSLS) regression

technique to see the relationship between ICT, human

capital, labor productivity, and regional economic

growth. Thus, the general specifications of the

structural equation system used in this study are:

P = f(ICT, HC) (1)

Y = f(P, ICT, HC) (2)

Where P is labor productivity; Y is regional

economic growth; ICT is information and

communication technology which is proxied by the

ICT Development Index, and HC is human capital

proxied by the Human Development Index.

Given the size of regional economic growth seen

from ICT, human capital, and labor productivity,

structural equations (1) and (2) become:

= α

+ α

ICT

+ α

+ ε

(3)

= β

+ β

ICT

+ β

+ ε

(4)

Next equation (3) is substituted to equation (4):

= β

+β

(α

+α

ICT

+α

)+β

ICT

+β

+ε

= β

+α

ICT

+α

+β

ICT

+β

+ε

= β

+α

+(α

+β

)ICT

+(α

+β

)HC

+ε

(5)

Where P

is labor productivity; Y

is regional

economic growth; ICT is Information and

Communication Technology proxied by the ICT

Development Indeks; HC

is Human Capital proxied

by the Human Development Index; i is the province

I, where i = 33 provinces in Indonesia; t is year t,

where t = 2008-2017; α, β is estimated parameters; α

is intercepting; and ε is error term.

The Two-Stage Least Square (TSLS) method can

work on a simultaneous equation system that is over-

identified and exactly-identified. For an exactly-

identified equation, besides being estimated by the

TSLS method, it can also be assessed by the indirect

least square (ILS) method to produce parameter

values that meet the best linear unbiased estimator

(BLUE) criteria.

Then through equation (5), brought to the reduced

form equation. The reduced form equation in question

is as follows:

= π

+ π

ICT

+ π

+ µ

(6)

Where:

= regional economic growth

= (β

+ α

)

= (α

+ β

)

= (α

+ β

)

= composite term error

4 RESULTS AND DISCUSSION

Based on the estimation results using 33 districts/

cities, it shows that the direct effect of ICT on

Productivity (P) is 0.386, which means that an

increase of 1 point ICT Index will result in an increase

in labor productivity of 0.386 percent with a

significance level of 1% (0.01). This means that the

effect of ICT on P is significant, presented in table 1.

These results are in line with Quah's view, which

states that ICT penetration will encourage skill

improvement and increase the education level of the

workforce, thus increased labor productivity and,

finally, economic growth (Quah, 2002). Likewise,

Levine (1997) argues that ease of accessing ICTs is

believed to be an important driver of increasing

productivity faster, which in turn increases economic

growth.

Based on the estimation results in Table 1, it

shows that the direct effect of Productivity (P) on

regional economic growth (Y) is 0.173, which means

an increase of 1 percent labor productivity will

Regional Economic Growth in Indonesia, Information and Communication Technology Perspectives

increase the economic growth of 0.173 percent with a

significance level of 0.013. These results are

consistent with Cirera's opinion that states that low

productivity growth is one of the main factors that

inhibit economic growth in many developing

countries. One potential for productivity growth is the

adoption and use of ICT. Information technology can

facilitate productivity growth by utilizing production

factors more efficiently and promoting the

application of other technologies. The potential of

ICT as a productivity enabler is even more enormous

in areas far from the availability of technology,

especially in developing countries, which until now

have tended to have lower rates of ICT adoption and

underdeveloped ICT infrastructure (Cirera, Lage and

Sabetti (2016).

Based on the estimation results in Table 1, it

shows that the direct effect of ICT on Y is 0.331,

which means that an increase of 1 point ICT Index

will result in a rise in regional economic growth (Y)

of 0.331percent with a significance level of 1%.

These results support Nata's study, which found that

ICT investment in Indonesia in both

telecommunications and hardware and software has a

strong influence on Indonesia's economic growth, and

the high level of ICT investment has triggered high

growth in Indonesia (Nata, 2007). Hardware has an

active role when viewed in terms of its physical,

while software has a high contribution in terms of

service. The fact is that internet penetration in

Indonesia is multiplying, from 25.37 percent in 2016

to 32.34 percent in 2017; moreover, it encourages the

development of internet usage in economic activities

or digital economy phenomena. One indicator that

can illustrate this phenomenon is the correlation

between the percentage of the population using the

internet and the GDP per capita which shows a

positive relationship of 0.723 (Statistics Indonesia,

2018).

Table 1: The Estimate Results.

Directions

of Effect

Estimate t-statistic Prob.

P <----

ICT

0.386*** 3.804 0.000

Y <----

ICT

0.331*** 7.139 0.000

P <----

0.076** 2.100 0.036

Y <----

0.015 0.917 0.359

Y <----

0.173* 2.491 0.013

***p<0.01;

**p<0.05;

*p<0.1

5 CONCLUSIONS

An important finding in this study is that ICTs have a

significant relationship to regional economic growth

in Indonesia. This relationship begins with the

influence of ICT penetration on labor productivity.

Information and communication technology can

facilitate productivity growth by utilizing production

factors more efficiently and promoting the application

of other technologies, which in turn, encourages

increased use of technology and increases labor

productivity and, as a result, encourages economic

growth.

ACKNOWLEDGMENTS

Thanks for comments and suggestions from

reviewers and audiences of The 2nd International

Conference on Applied Science, Engineering, and

Social Sciences 2019 (2nd ICASESS 2019).

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Regional Economic Growth in Indonesia, Information and Communication Technology Perspectives