Information technology (IT) productivity paradox in the 21st century

Abstract

Information technology (IT) investment since the 1970s coincided with poor productivity gains: the 'IT productivity paradox'. This phenomenon is still poorly understood. This research replicates methods employed by previous studies for comparability but employs a two-level approach: First macroeconomic indicators; second labor and multi-factor productivity. The findings suggest IT investment has high positive correlation with gross domestic product (GDP) growth, but not labor or multi-factor productivity. This ambiguity suggests the paradox is still poorly understood. Studies reporting an end to the paradox are likely due to rapid IT industry growth in the run up to the Year 2000 phenomenon. -12-2012-0129 Page 1 of 27 Why revisit the IT Productivity Paradox?Information and communication technology (ICT) can be considered the key factor driving economic growth in industrial societies (Pohjola, 2000). Investing in information technology (IT) is widely regarded as having enormous potential for reducing costs, enhancing productivity, and improving living standards (Murakami, 1997). However, since the 1970s productivity growth in most world economies has slowed, while expenditures on ICT have risen (Rei, 2004). This phenomenon became known as the 'IT productivity paradox'. Some researchers have reporting an end to the paradox, but this paper brings the research up-to-date suggesting that reports of an end to the paradox is most likely due to rapid IT industry growth in the run up to the Year 2000 phenomenon.During recent decades, the IT productivity paradox has been revisited periodically by many researchers (Baily, 1986;Berndt & Malone, 1995; Brynjolfsson & Hitt, 1995; David, 1990; Dewan & Kraemer, 1998;Jorgenson & Stiroh, 1995;Kraemer & Dedrick, 1994;Lee & Khatri, 2003;Oliner & Sichel, 2000;Oliner, Sichel, & Stiroh, 2007;Pilat, 2004;Pohjola, 2000;Rei, 2004;Spithoven, 2003 This is not the case for CRM investment.Modern methods make it possible to capture more accurate data. New data processing and collection approaches are able to quantify previously difficult to measure impacts of ICT, revealing new opportunities for research. Many arguments relating to time lags (David, 1990), can now be tested by updating and extending the research to the current period.It is thus important to revisit the productivity paradox. Investment in ICT exceeds all other categories of investment yet evidence from firm level studies suggest returns are questionable, and evidence from aggregate studies suggest either poor productivity gains, or more recently, positive correlation between investment in ICT and productivity gains. This paper provides an update on the phenomena and tests these more recent findings.There is no up-to-date information related to aggregate productivity issues (previous studies cover the period up to 2000), this research extends coverage to the 1995 to 2005 period, avoiding the latter half of the first decade of the 21st century during which productivity data might be dominated by the effects of the s...

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