Jason Dedrick
Abstract
For many years, there has been considerable debate about whether the IT revolution was paying off in higher productivity. Studies in the 1980s found no connection between IT investment and productivity in the U.S. economy, a situation referred to as the productivity paradox. Since then, a decade of studies at the firm and country level has consistently shown that the impact of IT investment on labor productivity and economic growth is significant and positive. This article critically reviews the published research, more than 50 articles, on computers and productivity. It develops a general framework for classifying the research, which facilitates identifying what we know, how well we know it, and what we do not know. The framework enables us to systematically organize, synthesize, and evaluate the empirical evidence and to identify both limitations in existing research and data and substantive areas for future research.The review concludes that the productivity paradox as first formulated has been effectively refuted. At both the firm and the country level, greater investment in IT is associated with greater productivity growth. At the firm level, the review further concludes that the wide range of performance of IT investments among different organizations can be explained by complementary investments in organizational capital such as decentralized decision-making systems, job training, and business process redesign. IT is not simply a tool for automating existing processes, but is more importantly an enabler of organizational changes that can lead to additional productivity gains.In mid-2000, IT capital investment began to fall sharply due to slowing economic growth, the collapse of many Internet-related firms, and reductions in IT spending by other firms facing fewer competitive pressures from Internet firms. This reduction in IT investment has had devastating effects on the IT-producing sector, and may lead to slower economic and productivity growth in the U.S. economy. While the turmoil in the technology sector has been unsettling to investors and executives alike, this review shows that it should not overshadow the fundamental changes that have occurred as a result of firms' investments in IT. Notwithstanding the demise of many Internet-related companies, the returns to IT investment are real, and innovative companies continue to lead the way.
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Reviews
Barrett Hazeltine
According to this paper, investment in information technology (IT) does in fact have a significant and positive influence on labor productivity and economic growth, despite earlier studies to the contrary. More than 50 research papers were reviewed for this study, relating, primarily, the amount of capital invested in IT (the input) and the resulting change in labor productivity (the output). A formal framework is used to consider productivity at the firm, industry, and country levels. Increase in productivity from an IT investment may result from either capital deepening (giving workers better tools), or from so-called multifactor productivity (related to enabling organizational change). While it is clear that productivity generally increases with increased IT investment, the gains are not equal for all firms or in all industries, and may not exist for developing countries. Decentralized decision making and related management practices increase the gains created by IT investment. Gains are particularly high in IT-producing industries. It was once believed that service industries did not share the gains in productivity from IT investments, but it appears now that they do. IT investments have actually been increasing productivity for over 30 years, despite the only recent attention to these improvements. This study suggests that major further research in measurements of inputs and, especially, outputs is needed. The paper concludes with a warning that the recent decrease in IT investment has not only devastated the IT producing industry, but may lead to slower economic growth in the US overall. Online Computing Reviews Service
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