Do ICT Investments Decrease Firm Size? A Firm-level Study on Manufacturing Sector

This paper examines the relationship between firm-level Information and Communication Technology (ICT) capital stocks and firm size with the dataset of Korean manufacturing companies from 1999 to 2018. Our research is focused on the interactions between the firm’s idiosyncratic characteristics and their investments in the ICT sector, with the endogeneity issue between firm size and the ICT capital stocks handled by the Hausman-Taylor Instrumental Variable regression analysis. The empirical results show that the aggregate manufacturing sector contracts firm size when there is one additional unit of ICT capital stocks accumulated, supporting the previous studies. Our findings imply that labor is substituted and that market transaction costs were reduced more than internal transaction costs by the increased amount of ICT capital stocks. Our empirical results support a negative relationship between ICT capital stocks of small and medium-sized enterprises (SME) and firm size. However, the degree of the negative relationship becomes weaker when it comes to larger businesses.