Decreasing Returns to IT Investment? New Firm-Level Evidence from Post-Dot Com Boom 2003-2005 Period

Given the fundamental nature of the IT-productivity link in the IS discipline, the diversity of firm-level data in terms of sources and time periods analyzed in prior research has not been very encouraging. Further, although the IT productivity paradox has been laid to rest on the basis of prior firm-level and industry-level studies, the nature of the relationship in terms of how IT returns evolve over time needs continuous investigation. We present here the first econometric analysis of a large primary source firm-level dataset about IT investments that spans the 2003-2005 period, which is post dot-com boom and post-recession in the United States. In doing so we have extended previous firm-level work done by Brynjolfsson and Hitt (1995), Lichtenberg (1995), Hitt and Brynjolfsson (1996), and Kudyba and Diwan (2002). We not only confirm the positive and highly statistically significant relationship between IT and gross output or value-added and compute IT returns for the most recent time period, but in contrast to Kudyba and Diwan’s (2002) observation about increasing returns to IT based on their analysis of the 1995-1997 Internet boom era dataset, we present evidence of an inverted U-shaped returns curve, with returns now close to what they were in the pre-Internet era.