The Effect of Company Size on the Productivity Impact of Information Technology Investments

There is much discussion in popular literature about how small to medium sized firms (SME) drive the U.S. economy. This literature points to SMEs as a primary source of innovation and job growth. It is difficult to understand the role of IT in these positive contributions because published research tends to use aggregate data. This makes it difficult to understand the underlying economic dynamics, and therefore makes it difficult to develop sophisticated IT investment policies. In this paper, 1992 and 1997 manufacturing data for the Los Angeles Metropolitan Area are stratified according to company size to allow the examination of the impact of information technology investment. This examination is carried out in the context of a statistical physics model. The analysis of the stratified data maps organizational change parameters onto layers based on company size. A proxy operating temperature (T) and its normalized inverse bureaucratic factor (β) are assigned to each company size layer. It is demonstrated that a Boltzmann distribution approximately describes the number of companies as a function of the sales per company. Comparison of the theory with the consolidated Los Angeles metropolitan statistical areas shows that the temperature T of the distribution changes between the two years, and that the magnitude of the change is correlated with company size. The change in productivity between 1992 and 1997 is correlated with company size and with IT investments. Based on the results, an information technology index is proposed to help companies assess their IT investments. Ken Dozier and David Chang