Source:
Management Science, Volume 42, Issue 4, p.541-558 (1996)
Keywords:
(Information Technology;
Productivity;
Production Function;
Computers;
Software;
IS Budgets
Abstract:
The "productivity paradox" of information systems (IS)is that, despite enormous improvements
in the underlying technology, the benefits of IS spending have not been found in
aggregate output statistics.One explanation is that IS spending may lead to increasesin product
quality or variety which tend to be overlooked in the aggregate statistics, even if they increase
output at the firm-level. Furthermore, the restructuring and cost-cuttingthat are often necessary
to realize the potential benefits of IS have only recently been undertaken in many firms.
Our study uses new firm-level data on several components of IS spending for 1987-1991. The
dataset includes 367 large firms which generated approximately 1.8 trillion dollars in output in
1991.We supplemented the IS data with data on other inputs, output, and price deflators from
other sources. As a result, we could assess several econometricmodels of the contribution of IS
to firm-level productivity.
Our results indicate that IS spending has made a substantial and statistically significant contribution
to firm output. We find that the gross marginal product (MP) for computer capital
averaged 81%for the firms in our sample. We find that the MP for computer capital is at least
as large as the marginal product of other types of capital investment and that, dollar for dollar,
IS labor spending generates at least as much output as spending on non-IS labor and expenses.
Because the models we applied were similar to those that have been previously used to assess
the contribution of IS and other factors of production, we attribute the different results to the
fact that our data set is more current and larger than others explored. We conclude that the
productivity paradox disappeared by 1991, at least in our sample of firms.