An integrated assessment of productivity and efficiency impacts of information technology investments: Old data, new analysis and evidence

Abstract

We reexamine the ``Information Technology (IT) productivity paradox'' from the standpoints of theoretical basis, measurement issues and potential inefficiency in IT management. Two key objectives are: (i) to develop an integrated microeconomic framework for IT productivity and efficiency assessment using developments in production economics, and (ii) to apply the framework to a dataset used in prior research with mixed results to obtain new evidence regarding IT contribution. Using a stochastic frontier with a production economics framework involving the behavioral assumptions of profit maximization and cost minimization, we obtain a unified basis to assess both productivity and efficiency impacts of IT investments. The integrated framework is applied to a manufacturing database spanning 1978-1984. While previous productivity research with this dataset found mixed results regarding the contribution from IT capital, we show the negative marginal contribution of IT found in an important prior study is attributable primarily to the choices of the IT deflator and modeling technique. Further, by ignoring the potential inefficiency in IT investment and management, studies that have reported positive results may have significantly underestimated the true contribution of IT. This positive impact of IT is consistent across multiple model specifications, estimation techniques and capitalization methods. The stochastic production frontier analysis shows that while there were significant technical, allocative and scale inefficiencies, the inefficiencies reduced with an increase in the IT intensity. Given that the organizational units in our sample increased their IT intensity during the time period covered by the study, management was taking a step in the right direction by increasing the IT share of capital inputs. Our results add to a small body of MIS literature which reports significant positive returns from IT investments.