Is Information Systems Spending Productive? New Evidence and New Results

The "productivity paradox" of information systems (IS) is that despite enormous improvements in the underlying technology, the benefits of IS spending have not been found in aggregate output statistics. One explanation is that IS spending may lead to increases in product quality or variety which tend to be overlooked in aggregate output statistics, even if they increase sales at the firm level. Furthermore, Lhe restructuring and cost-cutting that are often necessary to realize these potential benefits have only recently been undertaken in many firms. Our study uses new firm-level data on several components of IS spending for the period 1987 to 1991. The dataset includes 380 large firms which generated approximately two trillion dollars in output annually. We supplemented the IS data with data on other inputs, output, and price deflators from several other sources. As a result, we could assess several econometric models of the contribution of IS to firm-level productivity. Our results indicate that IS have made a substantial and statistically significant contribution to firm output. We find that between 1987 and 1991, return on investment (ROD for computer capital averaged 54% in manufacturing and 68% for manufacturing and services combined in our sample. We am able to reject the null hypothesis that the ROI for computer capital is no greater than the return to other types of capital investment and also find that IS labor spending generates several times as much output as spending on non-IS labor and expenses. Because the models we applied were essentially the same as those that have been previously used to assess the contribution of IT and other factors of production, we attribute the different results to the recency and larger size of our dataset. We conclude that the "productivity paradox" disappeared by 1991, at least in our sample of firms.