Influence of information technology investment on firm productivity: a cross- sectional study

Impact of information technology on firm productivity has received significant attention in information systems literature. Although many studies were performed to investigate this effect, the results were not conclusive in supporting a systematic effect. This study investigates this phenomenon in both manufacturing and service industries by considering a sample of 85 manufacturing and 77 service firms. Our research methodology utilizes a combination of various data envelopment analysis models and non-parametric statistical techniques in testing for the influence of information technology investment on firm productivity. We investigate this effect under conditions of both constant and non-constant returns to scale assumptions. Our results provide some very interesting insights and recommendations. Brynjolffson (1993) aptly stated that the “shortfall of evidence is not necessarily evidence of shortfall”, attributing the absence of evidence to mismeasurements of inputs and outputs. A number of early studies did not document a significant impact of information technology spending and firm productivity or performance, giving credibility to the term: “productivity paradox.” Roach (1991) in a study of information workers from 1970 to 1986 found that computers had limited effect on the productivity of workers. In fact, some studies found a negative impact of information technology investment on productivity (Franke, 1987). Yet, more recent studies have found that information technology spending has a significant positive effect on intermediate measures of firm productivity and the return on investment (Hitt and Brynjolffson, 1994; Brynjolffson and Hitt, 1996). Information technology spending was also found to have a significant negative effect on the cost effectiveness of the firm (Alpar and Kim, 1990; Harris and Katz, 1991; Mitra and Chaya, 1996). Although most of these studies have investigated the effect of information system budgets in manufacturing firms, other studies that have considered service sector have not necessarily found similar results. Recent studies have tried to extend the findings of the “productivity paradox” theory. Brynjolfsson and Hitt (1998) modified the traditional measures of productivity of information systems and proposed that productivity should be determined using organizational “value of information technology (or IT value)”. They defined IT value to include the tangible as well as intangible assets created by information technology investment. Brynjolfsson and Hitt argued against the existence of the “productivity paradox” by noting that information technology investment may create intangible assets which have a positive impact on the productivity of the firm. Grover et al. (1998) also emphasized the organizational role in information technology investment, by identifying the factors influencing investment priorities in organizations. In a study which did not consider overall information technology investment, but spending only in end-user computing related functions, Guimaraes (1997) found that such spending can increase company efficiency and effectiveness. Dewan and Kraemer (1998) investigated productivity of information technology investment in 17 developed countries. Their study utilized a country-level of analysis and found that an increase in IT capital per worker is associated with an increase in GDP per worker, on average, but these results were not consistent among different countries. While recent studies have extended the productivity paradox theory, they have not addressed the basic issue of information systems spending and firm performance. Most studies on information systems spending have been restricted to manufacturing firms (Barua et al., 1991; Loveman, 1994; Morrison and Brendt, 1990). Moreover, of the studies that have examined the effect of information technology on firm productivity and output, only a few have investigated the effect on performance. Loveman (1994) in his research of 60 strategic business units found that the contribution of information technology capital to output was approximately zero for almost every sub-sample considered. Brynjolfsson and Hitt (1996) in their study of information systems spending from 1987 to 1991 indicate that spending has made a significant contribution to firm output, and that spending on information systems labor produces as much output as spending on noninformation systems labor and expenses. Studies have also investigated the effect of information technology on the cost the structure. Mitra and Chaya (1996) found that information technology investments reduce average production costs, lower average total costs, and increase average overhead costs in firms. They did not have any evidence that information technology reduces labor costs in organizations. Mitra and Chaya also reported that larger companies spend more on information technology than smaller manufacturing firms. Barua et al. (1991) investigated the effect of information technology spending on intermediate measures like capacity utilization, inventory turnover, quality, relative price and new product introduction. They found that spending was related to three out of the five measures, but these did not have a significant effect on overall performance measures for the firms. Morrison and Brendt (1990), using government reported data, found that information technology provided only marginal returns, and concluded that there was a general over-investment in information technology. In a study of technology investment and business performance, Rai et al. (1997) 121 Influence of information technology investment on firm productivity Subhasish Dasgupta, Joseph Sarkis and Srinivas Talluri Logistics Information Management Volume 12 · Numbers 1/2 · 1999 · 120–129