Rational Explanations of ICT Investment

  • Russel Cooper
  • Gary Madden
Part of the Contributions to Economics book series (CE)


After the 2000 NASDAQ decline, and subsequent downturn in global information and communications technology (ICT) markets, the telecommunications industry remains an important source of productivity growth and technology diffusion (OECD 2002, 2003). For example, packaged software sales, whose estimated value in 2001 is US$ 196 billion, are still expanding at 16% p.a. in OECD Member Country markets. Further, global mobile telephony subscription increased from 11 million subscribers at 1990 to 945 million subscribers at end-2001. Finally, Internet subscription reached a penetration of 8.2 users per 100 persons globally at end-2001, i.e., equaling 1999 mobile telephony market penetration (ITU 2002b). Reasons proffered for the NASDAQ decline, and the bursting of the dot.com bubble more generally, include unrealistic market growth expectations, firm activity not aligned with core competency and the accumulation of unsustainable debt. However, such rationalizations themselves require explanation. That is, whose expectations are at issue, those of firms making infrastructure investment decisions or those of shareholders making portfolio investment choices? With asymmetric information these expectations may differ, and so should policy response. Additionally, for both the dot.com and shareholder groups, unrealistic growth expectations may arise from premature timing in an unfamiliar environment. While it is the nature of uncertainty that expectations are mostly wrong, such expectations are still rational should they prove correct on average, i.e., averaged over the circumstances that might occur. Based on this criterion, over a time interval and in an environment subject to technology change it is difficult to confirm that expectations are irrational. Specifically, it is uninformative to characterize management decisions as poor ex post. Further, a claim that firm activity is not aligned with core competency is at variance with the view that, in a modern economy, it is prudent to operate a portfolio of interests. Finally, conventional wisdom in the form of advice to management is often fashion driven, viz., debt is only a problem when it is unsustainable, and assuming that foreseen unsustainable events are avoided, this explanation does not add anything to the unrealistic expectations variant.


Capital Stock Call Option Portfolio Choice Incumbent Firm Technology Shock 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Abel AB (1983) Optimal investment under uncertainty. American Economic Review 73: 228–33Google Scholar
  2. Abel AB, Dixit AK, Eberly JC, Pindyck RS (1996) Options, the value of capital, and investment. Quarterly Journal of Economics 111: 753–77CrossRefGoogle Scholar
  3. Arrow KJ (1962) The economic implications of learning by doing. Review of Economic Studies 29: 155–73CrossRefGoogle Scholar
  4. Barro R, Sala-i-Martin X (1995) Economic growth. McGraw-Hill, New YorkGoogle Scholar
  5. Bresnahan TF, Trajtenberg M (1995) General purpose technologies: Engines of growth? Journal of Econometrics 65(1): 83–108CrossRefGoogle Scholar
  6. Dixit AK (1992) Investment and hysteresis. Journal of Economic Perspectives 6(1): 107–32CrossRefGoogle Scholar
  7. Dixit AK, Pindyck RS (1994) Investment under uncertainty. Princeton University Press, PrincetonGoogle Scholar
  8. Eisner R, Strotz R (1963) Determinants of business investment. In: Impacts of monetary policy. Prentice-Hall, Englewood CliffsGoogle Scholar
  9. Gould JP (1968) Adjustment costs in the theory of investment of the firm. Review of Economic Studies 35(1): 47–55CrossRefGoogle Scholar
  10. Helpman E (ed) (1998) General purpose technologies and economic growth. MIT Press, CambridgeGoogle Scholar
  11. ITU (2001) World telecommunication indicators ′01. CD-ROM, ITU, GenevaGoogle Scholar
  12. ITU (2002a) World telecommunication development report. ITU, GenevaGoogle Scholar
  13. ITU (2002b) Internet for a mobile generation. ITU, GenevaGoogle Scholar
  14. Jorgenson DW (1963) Capital theory and investment behavior. American Economic Review 53(2): 247–59Google Scholar
  15. Lucas RE (1967) Adjustment costs and the theory of supply. Journal of Political Economy 75(4): 321–34CrossRefGoogle Scholar
  16. McDonald RL, Siegel DR (1985) Investment and the valuation of firms where there is an option to shut down. International Economic Review 26(2): 331–49CrossRefGoogle Scholar
  17. McDonald RL, Siegel DR (1986) The value of waiting to invest. Quarterly Journal of Economics 101(4): 707–27CrossRefGoogle Scholar
  18. Merton RC (1971) Optimum consumption and portfolio rules in a continuous-time model. Journal of Economic Theory 3: 373–413CrossRefGoogle Scholar
  19. Nelson RR, Wright G (1992) The rise and fall of American technological leadership: The postwar era in historical perspective. Journal of Economic Literature 30: 1931–64Google Scholar
  20. OECD (2002) OECD information technology outlook. OECD, ParisGoogle Scholar
  21. OECD (2003) OECD communications outlook. OECD, ParisCrossRefGoogle Scholar
  22. Ramsey F (1928) A mathematical theory of saving. Economic Journal 38: 343–59CrossRefGoogle Scholar
  23. Romer P (1986) Increasing returns and long run growth. Journal of Political Economy 94(5): 1002–37CrossRefGoogle Scholar
  24. Rosenberg N (1996) Uncertainty and technological change. In: Landau R, Taylor T, Wright G (eds) The mosaic of economic growth. Stanford University Press, StanfordGoogle Scholar
  25. Shiller R (2000) Irrational exuberance. Princeton University Press, PrincetonGoogle Scholar
  26. Solow R (1956) A contribution to the theory of economic growth. Quarterly Journal of Economics 70: 65–94CrossRefGoogle Scholar
  27. Swan T (1956) Economic growth and capital accumulation. Economic Record 32: 334–61CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2004

Authors and Affiliations

  • Russel Cooper
    • 1
  • Gary Madden
    • 2
  1. 1.Australian Expert Group in Industry StudiesSchool of Economics and Finance University of Western SydneySydneyAustralia
  2. 2.Communication Economics and Electronic Markets Research CentreCurtin University of TechnologyPerth, WAAustralia

Personalised recommendations