Modelling the effects of ICT investments on technical efficiency and technological changes in South Africa’s service sector

Abstract

This study examines the impact of information and communication technology (ICT) investments on technical efficiency and frontier shifts in South Africa’s service sector, testing three hypotheses: that ICT reduces technical inefficiencies, facilitates frontier-shifting technical change, and increases frontier output through either labour substitution or labour augmentation. We use a panel dataset of 24 three-digit service industries observed between 1993 and 2024 and a stochastic frontier approach. Our results show that ICT investments are positively associated with improvements in technical efficiency and frontier-shifts. ICTs substituted labour and complemented non-ICT infrastructure during the sampling period. From the elasticities of substitution, a 1% increase in ICT investments was accompanied by a corresponding 0.23% reduction in the labour input and a 0.05% increase in the demand for non-ICT infrastructure. These findings are consistent with the view that ICTs enhance efficiency through improving coordination while facilitating innovation that may displace labour. The later result helps explain employment losses in some service industries, such as banking, where automation through ATMs and online banking has reduced the demand for tellers and in-branch personnel. We argue the need for policies that mitigate the employment losses given the labour-saving nature of ICTs observed in our analysis.