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# Open Physics

### formerly Central European Journal of Physics

Editor-in-Chief: Seidel, Sally

Managing Editor: Lesna-Szreter, Paulina

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Volume 15, Issue 1

# A mathematical/physics model to measure the role of information and communication technology in some economies: the Chinese case

Xuchen Lin
• Corresponding author
• Beijing University of Posts and Telecommunications, School of Economics and Management, Beijing 100876, China
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• Other articles by this author:
/ Ting-Jie Lu
• Beijing University of Posts and Telecommunications, School of Economics and Management, Beijing 100876, China
• Other articles by this author:
/ Xia Chen
• Beijing University of Posts and Telecommunications, School of Economics and Management, Beijing 100876, China
• Other articles by this author:
Published Online: 2017-03-08 | DOI: https://doi.org/10.1515/phys-2017-0003

## Abstract

Since the Reform and Opening-up in 1978, China has experienced a huge sustainable growth of gross domestic product (GDP) and an incredible development in Information and Communication Technology (ICT). This study aims to utilize an input-output (I-O) approach to explore the role of ICT in Chinese national economy. Specifically, we employ a static I-O framework, and analyze three topics in its application: the inter-industry linkage effect, the production inducing effect, and the supply shortage effect. We pay particular attention to the ICT manufacturing sector and ICT service-providing sector by taking the sectors as exogenous and investigating their economic impacts, respectively. The results suggest that (1) the ICT manufacturing sector has a high backward linkage effect, an intermediate forward linkage effect, a relatively low production inducing effect, and a low supply shortage effect, it suggests that ICT manufacturing sector has a powerful capacity for pulling the production activities of the whole economy. (2) The inter-industry linkage effect and supply shortage effect of ICT service-providing is low, but the production inducing effect of ICT service-providing is high, which suggests that the impact of an increase in ICT service-providing investment on the total output of all other sectors is large.

PACS: 89.65.Gh

## 1 Introduction

With the development and popularization of Information and Communication Technology (ICT), human society is experiencing a great revolution – the Information Revolution. ICT gave birth to the era of digital economy two decades ago, its production and intensive use have a profound impact on the efficiency and opportunity of firms’ production and supply of goods and services [1]. The development of ICT promotes the rise of the network economy, and the contribution of networking to economy not only contains direct economic benefits, but also contains indirect benefits to other manufacturing and service companies.

Since the Reform and Opening-up in 1978, China has actively seized the opportunities brought by emerging technologies, which has made China achieve outstanding economic performance in the past two decades. China’s annual per capita GDP increase rate achieved more than 8 % in the past 38 years (1978-2015); it has transformed itself from a backward agricultural country into the world’s second largest economy and the dynamism in the ICT sector is notable. In order to achieve and maintain this success, China makes ICT as a top priority of its development strategy. By examining the role of ICT on the Chinese national economy, it will be possible to provide valuable insights and political implications for embracing ICT to promote economic growth.

A lot of previous papers have reported research on the contributions of ICT to economic growth. However, this literature has primarily focused on the European countries and America. Examples of such studies include [26] on America, [7, 8] on the UK, [9] on Finland, [10] on Spain, [11] on Greece, and [12] on industry-level comparisons between the Europe and the United States. Based on this, we examine the contributions of ICT sectors to Chinese national economy. This study is motivated by three factors. Firstly, Asia is an active region of ICT production and diffusion, but the study of the contributions of ICT to national economy in this area is scarce, especially for China. Therefore, it is necessary to study on this subject in Asian countries, especially for those who have high-quality data available, such as China. Secondly, China has always been highly active in embracing ICT to boost economic growth. In the year of 2014, the traffic volume of service of China’s basic telecommunications industry achieved 1814.95 billion RMB [13]. The study of China’s case can offer comprehensive and profound insights of the contributions of ICT to economic growth, which come from the use and investment of ICT. Thirdly, as is known to all, the development of the ICT industry will bring about the technology spillover effect across the industry, and improve the productivity of labor, capital and other essential productive factors. As a result, public policymakers in China has a great interest in exploring the role of ICT in China’s economic growth. Thus, researchers need to provide policymakers with dependable information about the role of ICT in China’s economic growth.

Based on these factors, this paper investigates the role of ICT manufacturing and ICT service-providing in China’s economic growth using a static input-output (I-O) approach. The I-O model is quite practical for analyzing the ICT-related problems in the national economy circumstance, as it realizes all the interdependence of all sectors and their inter-industry consumption included in the sectoral output.

The remainder of this paper is organized as follows. Section 2 describes briefly the data used in this study and presents an overview of the static I-O model, specifically, we review several topics of I-O model such as the inter-industry linkage effect, the production inducing effect by the demand-driven model, and the supply shortage effect by the supply-driven model. Section 3 reports the results based on the data of China’s Input-Output Table for 2012. The final section makes some concluding remarks.

## 2.1 Data

The data for this study are derived from China’s I-O Table, which is published every 5 years. The input-output table, which reflects the utilization of the output from and the sources of the input into production by various industries of the national economy, composes a significant part of the Chinese national economic accounting system [14]. China’s I-O table for 2012 divides the national economy into 42 sectors, among which two sectors are related to ICT, one is Manufacture of Communication Equipment, Computer and Other Electronic Equipment (which includes Manufacture of Computers, Manufacture of Communication Equipment, Manufacture of Broadcasting, Television Equipment, of Radar and Related Equipment; Manufacture of Audiovisual Apparatus, Manufacture of Electronic Components and Parts, and Manufacture of Other Electronic Equipment), which can be regarded as the ICT manufacturing sector; the other is Information Transmission, Software and Information Technology Services (which includes Telecommunication and Other Information Transmission Services, and Software and Information Technology Services), which can be regarded as the ICT service-providing sector. Focusing on these two ICT sectors, this study utilizes China’s I-O table for 2012 to investigate the role of ICT in the Chinese national economy.

## 2.2 General framework of the I-O analysis

The I-O model shows the relationships among productive sectors in a given economic system. The basic balance equation of an I-O model containing N sectors can be described as follows: $∑j=1Nxij+Yi=∑j=1NaijXj+Yi=Xi, i=1,2,...,N$(1)

or

$∑i=1Nxij+Vj=∑i=1NrijXi+Vj=Xj, j=1,2,...,N$(2)

where Xi is the total gross output of sector i; aij is the direct input coefficient which divides xij, the inter-industry input of producing sector j from supply sector i by Xj, the total gross input of sector j; rij is the direct output coefficient which divides xij by Xi, the total gross output of sector i; Yi is the final demand of sector i, and Vj is the final value added by sector j. Equation (1) expresses the demand-driven model as viewing I-O tables horizontally, and Equation (2) describes the supply-driven model as vertically.

## 2.3 Demand-driven model

We transform Equation (1) into an abbreviated matrix form as X = (IA)−1Y, where I is the N × N identity matrix, X is the total output matrix, Y is the final demand matrix, and (IA)−1 is called the Leontief inverse matrix whose elements bij represent the total direct and indirect outputs in sector i per unit of final demand in sector j [15, 16].

However, this standard demand model can’t accurately evaluate the effects of new production activities of a certain industry sector on the rest of the economy, because it is external driving forces of the model that make the change in the final demand, such as changes in consumption habits of consumers or changes in government purchases. Based on this, the ICT sector needs to be handled as exogenous and put into a final demand group [1719]. Henceforth, such method is called the ICT sector-based I-O analysis. Decomposing the final demand into ICT-based final demand yi and all other final demand yj, outputs into xj and xi and direct input coefficient matrix, respectively, a variant of the Leontief I-O model can be obtained as follows: $(xixj)=(AiiAijAjiAjj)(xixj)+(yiyj)$(3) where i denotes the ICT sector and j denotes the rest of the economy. Thus $xj=Ajixi+Ajjxj+yjxj=(I−Ajj)−1Ajixi+(I−Ajj)−1yj$(4)

Assuming the final demand of all other sectors remain unchanged, the contribution made by one unit of output change in ICT sector to all other sectors Δxj can be calculated as $Δxj=(I−Ajj)−1Aji$(5)

Equation (5) can be used to analyze the substantial relationship between the production of the individual ICT sector and all other sectors, and assess the impact of an increase in ICT investment on the total output of the rest of the economy, i.e. the production inducing effect.

## 2.4 Supply-driven model

The supply-driven I-O model can be used to cope with the direct and indirect impacts of supply restrictions [20, 21]. Equation (2) can be transformed into an abbreviated matrix form as X′ = V′(IR)−1, where X is the total output matrix, V is the final value-added matrix, R is the output coefficient matrix, and a prime (′) denotes the transpose of the corresponding matrix. (IR)−1 is named the output inverse matrix, and its elements gij represent the total direct and indirect requirements in sector j per unit of final value added in sector i. As with the demand-driven I-O model, regarding the ICT manufacturing or ICT service-providing as exogenous and assuming that the value-added of all other sectors remain unchanged, we can define the impact of one unit output change in the ICT sector on the output of all other sectors as $Δx′j=Rij(I−Rjj)−1$(6)

Equation (6) can be used to evaluate the impacts of a unit shortage in the individual ICT supply on the output of all other sectors, that is, supply shortage effect.

## 2.5 Inter-industry linkage effect analysis

Based on the assumption that the economy of relevant industries can be promoted through linking input and output activities, the linkage effect analysis can be used to quantify the strength of the causal relationship among industries [22]. As a means for recognizing key industries, the linkage effect can be categorized into backward and forward effects. The backward linkage effect can be depicted as the “power of dispersion” index of an industry. It quantitatively describes the relative degree of the impacts of an increase in final demand of a certain sector on the total economy system [23]. This index is defined as $Fj=1N∑i=1Nb¯ij1N2∑i=1N∑j=1Nb¯ijj=1,2,...,N$(7) where N is the number of sectors and ${\sum }_{i=1}^{N}{\overline{b}}_{ij}$ is the sum of te he column elements in the Leontief inverse matrix $\overline{B}={\left(I-A\right)}^{-1}$. Conversely, the forward linkage effect is represented as the “sensitivity of dispersion” index. This index measures the increase in the production of sector i, driven by one unit increase in the final demand for all sectors in the economy system [20]. It is defined as $Ei=1N∑j=1Ng¯ij1N2∑i=1N∑j=1Ng¯iji=1,2,...,N$(8) where ${\sum }_{j=1}^{N}{\overline{g}}_{ij}$ is the sum of the row elements in the output inverse matrix $\overline{G}={\left(I-R\right)}^{-1}$.

If these two index values of a given sector are both greater than one for both the backward and forward linkage effects, it means that this sector plays a significant role in economic growth in boosting the whole economy(backward linkage effect) as well as supporting the whole economy (forward linkage effect).

In terms of the ICT sector, a higher backward linkage effect means that the production activities of the ICT sector may bring about greater use of the products from other sectors as an input for ICT manufacturing or ICT service-providing. In other words, the high amounts of intermediate inputs mean the production activities of the ICT sector need to consume a lot of products purchased from other sectors. On the other hand, the forward linkage effect implies that the products of ICT manufacturing or ICT service-providing may be used as an input to other sectors for their production. Backward and forward linkage effects are effective in evaluating the impacts of the ICT sector on the whole economy.

## 3.1 Inter-industry linkage effect analysis

Based the data of China’s I-O Table for the year of 2012, the backward and forward linkage effects of all sectors in 2012 are shown in Table 1.

Table 1

Sectoral forward and backward linkage effects

As is shown in Table 1, in terms of the ICT manufacturing sector, the backward linkage effect of the ICT manufacturing sector is greater than one and it is the highest among all of the 42 sectors, which implies that the ICT manufacturing sector has the most powerful capacity for pulling the production activities of the whole economy. And the forward linkage effect of the ICT manufacturing sector is approximately equal to one, which denotes that ICT manufacturing sector’s ability of supporting the whole economy is equal to the average level of all sectors.

In terms of the ICT service-providing sector, the backward linkage effect of ICT service-providing sector is lower than one, which implies that the ICT service-providing sector has a smaller impact on investment spending on the whole economy than other sectors. That is to say, the ICT service-providing sector has a relatively weaker capacity for pulling the production activities of the whole economy. And the forward linkage effect of the ICT service-providing sector is also lower than one, which means that when the whole economy is booming, the ICT service-providing sector is relatively less stimulated by the overall industrial growth than other sectors. That is to say, the production activities of ICT service-providing is not affected a lot by business fluctuations.

## 3.1.1 Production inducing effect

The second column of Table 2 shows the sectoral production inducing effects of the ICT manufacturing sector. From Table 2, we can find that the total production inducing effect for the ICT manufacturing sector is 0.9743. That is, by and large, the sum of the effects of a 1 RMB increase in ICT manufacturing investment on the outputs of other sectors is 0.9743 RMB. In 2012, the amount of total gross output of China’s ICT manufacturing sector was 6.48 trillion RMB, from which we can speculate that the net production into all other sectors by the ICT manufacturing sector ran into 6.31 trillion RMB. Note that Manufacture of Chemicals and Chemical Products (sector 12, 0.1509), Manufacture and Processing of Metals (sector 14, 0.1150), and Manufacture of Electrical Machinery and Apparatus (sector 19, 0.0667) are the top three sectors with highest production inducing effects caused by the ICT manufacturing sector in 2012. This reflects that the costs of Manufacture of Chemicals and Chemical Products, Manufacture and Processing of Metals, and Manufacture of Electrical Machinery and Apparatus play a significant part in the production costs of ICT manufacturing.

Table 2

Results of the ICT manufacturing-based input-output analysis

The second column of Table 3 shows the sectoral production inducing effects of the ICT service-providing sector. From Table 3, we can find that the total production inducing effect for the ICT service-providing sector is 1.2702. In other words, generally, the sum of effects of a 1 RMB increase in ICT service-providing investment on the outputs of other sectors is 1.2702 RMB. In 2012, the amount of total gross output of China’s ICT service-providing sector was 2.51 trillion RMB, from which we can speculate that the net production into all other sectors by ICT service-providing sector amounted to 3.19 trillion RMB. Note that Manufacture of Communication Equipment, Computer and Other Electronic Equipment (sector 20, 0.2173), Manufacture of Chemicals and Chemical Products (sector 12, 0.0987), and Manufacture of Electrical Machinery and Apparatus (sector 19, 0.0934) are the top three sectors with highest production inducing effects caused by the ICT service-providing sector in 2012. This reflects that the costs of Manufacture of Communication Equipment, Computer and Other Electronic Equipment, Manufacture of Chemicals and Chemical Products, and Manufacture of Electrical Machinery and Apparatus play a significant part in the production costs of ICT service-providing.

Table 3

Results of the ICT service-providing-based input-output analysis

## 3.1.2 Supply shortage effect

The supply shortage effects of the ICT manufacturing sector are shown in the third column of Table 2, from which we can find that the total supply shortage effects of the ICT manufacturing sector is 0.6429. There would have been a 4.17 trillion RMB production failure in other sectors if ICT manufacturing had never been supplied in 2012. The three sectors in which the supply shortage effects of ICT manufacturing sector is strongest are Manufacture of Electrical Machinery and Apparatus (sector 19, 0.0209), Manufacture of General-Purpose Machinery (sector 16, 0.0570), Manufacture of Transport Equipment (sector 18, 0.0505).

The sectoral shortage effects of the ICT service-providing sector are shown in the third column of Table 3, from which we can find that the total supply shortage effects of the ICT service-providing sector is 0.7705. There would have been a 1.93 trillion RMB production failure in other sectors if ICT service-providing had never been supplied in 2012. The three sectors in which the supply shortage effects of ICT service-providing sector is strongest are Construction (sector 28, 0.1076), Finance (sector 32, 0.0746), Manufacture of Communication Equipment, Computer and Other Electronic Equipment (sector 20, 0.0498).

## 4 Conclusions

Based on the data of China’s I-O Table for the year of 2012, this study utilizes comprehensive I-O approaches, including the inter-industry linkage effect analysis, the demand-driven model and the supply-driven model, to explore the role of the ICT manufacturing sector and ICT service-providing sector in Chinese national economy. With the exception of linkage effect analysis, the individual ICT sector is regarded as exogenous to evaluate the net effects when there are changes in investment or supply for the ICT sector. The results can be generalized as follows:

• The ICT manufacturing sector has a high backward linkage effect, an intermediate forward linkage effect, a relatively low production inducing effect and a low supply shortage effect, it suggests that the ICT manufacturing sector has a powerful capacity for pulling the production activities of the whole economy.

• The ICT service-providing sector has a low backward linkage effect, a low forward linkage effect, a high production inducing effect, and a low supply shortage effect, it suggests that the impacts of an increase in ICT service-providing investment on the total output of all other sectors are large.

## Acknowledgement

This paper was supported by a Major Program of the National Social Science Foundation of China under Grant No.15ZDB154, and National Basic Research Program of China (973 Program) under Grant No. 2012CB315805.

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Accepted: 2016-10-21

Published Online: 2017-03-08

Citation Information: Open Physics, Volume 15, Issue 1, Pages 18–26, ISSN (Online) 2391-5471,

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