An Updated View of the Productivity Paradox in the Early 21st Century

Information Technologies (ITs) are an inseparable part of modern life and one of the key drivers of economic activity. However, rapidly growing investments in IT, since the 1970s, coincided with poor productivity gains. This problem of the 'productivity paradox' has attracted much academic attention. Using statistical data from 21 developed countries, this paper analyses the trends of productivity paradox from 1995 to 2005 employing three-level methodological approach to assess the productivity. The first level analysis examines macroeconomic indicators (GDP per capita and IT investment growth), the second level considers the internal structure of IT investments, and the third level analyses labour and multi-factor productivity. The findings of the study suggest there is a high positive correlation of IT investments with GDP growth. At the same time labour and multi-factor productivity do not significantly correlate with technology investments. 1 INTRODUCTION Information and communication technology (ICT) is considered by some as the key factor driving economic growth in present-day industrial societies (Pohjola 2003). Investing in information technology (IT), is therefore regarded as having potential for reducing costs, enhancing productivity, and improving living standards (Murakami 1997). However, there is a body of evidence that IT has not consistently produced positive business results. Since the 1970s productivity growth in almost all of the world economies has slowed, while expenditures on ICT have risen (Rei, 2004). This phenomenon became a key management concern not only for businesses but also for economies as a whole and further became known as the 'productivity paradox'. During the last two decades, the topic of productivity paradox has been revisited periodically by many Extensive multi-dimensional (firm-level, industry-level, country-level and cross country) analysis found little evidence that IT significantly increased productivity in the 1970s and 1980s. This could have emerged due mainly to inaccurate productivity measurement, time lags related to technology diffusion, mismanagement issues, and insufficient use of technologies. However, some recent studies of Brynjolfsson and Hitt (1996), Dedrick and Kraemer (2001) and Pilat (2004) present strong evidence that ICT has consistently produced positive results implying that there was no paradox in productivity. Over the past thirty years the practice of ICT implementation has helped to build a relatively sound empirical base for study. Modern statistical methods have enabled more accurate data. New data processing and collection approaches are able to quantify previously immeasurable impacts of ICT, revealing new opportunities for research.