ICTs and Industrial Efficiency under Borrowing Constraints in South Africa

Abstract In theory, borrowing constraints improve long run industrial efficiency through driving out inefficient firms and retaining efficient ones. The short run explanation is unclear at best since the exiting of inefficient firms can be matched by the entrance of similarly inefficient ones. How do borrowing constraints relate with industrial efficiency under these circumstances? This paper proposes that borrowing constraints can enhance industrial efficiency in the short run through encouraging the use of ICTs to improve labour productivity. Results from 42 manufacturing industries observed between 2009 and 2022 in South Africa support this proposition. ICTs increase the efficiency of inefficient and credit constrained industries. The effect increases with labour productivity, underscoring the importance of intensifying the use of ICTs in credit constrained, labour intensive and low performing industries facing binding borrowing constraints. Credit-constrained industries that stand to benefit more from ICTs are mostly labour-intensive, and they include textiles, paper and paper products, plastic products, meat and grain mill products. These results not only inform industrial policy, given the currently small share of ICT stock, but also set the groundwork for future research exploring the underlying mechanisms through which ICTs affect industrial efficiency in the short run under credit market rigidities. JEL Codes: G14, G20, L16, L52, O3