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Information technology productivity summary

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Information technology productivity: in search of a definite
observation Effy OZ
- Highlights challenges researchers faced, proposes a simple theory to explain what seems to
be a vanishing contribution of IT to productivity growth
Introduction
- Paradox for and against Carr correlation tested between IT expenditure and
productivity
o either no positive correlation or that the costs exceeded benefits
- many economists spoke of productivity more generally (profitability, revenue, market value
of the firm, return on investment on individual projects, and performance) as a mix or
combination
- economists distinguish between labor productivity (ratio of output of goods & services to
labor hours) and multifactor productivity (relates output to a combination of inputs used in
production e.g. labor, capital, energy, materials) greater interest in labor productivity
especially in developed countries where labor is an expensive resource
- focus on contribution of IT to labor productivity (IT productivity) an increase in the ratio of
units of products produced to the amount of labor spent on the production of those units
due to procurement of IT
what has been measured?
1. value of IT instead of productivity (definition of value varies, not always contributes to
productivity)
2. relationship between investment in IT and corporate earnings, yet it has not necessarily
to do with IT or productivity
3. linkage between IT expenditure and real output, but not conclusive (lack of data etc.)
what is IT?
- It is hardware, software, telecommunications, services of IT personnel (in-house or not)
- Few studies accounted for all these elements (only hardware)
- Bynjolfsson and Yang did include investment in software and worker training but assessed
firm value rather than labor productivity used production functions and marginal product
(proper) but used partial data (only IT capital and IT personnel as IT investment)
- IT services include installation of ERP systems (cost millions), implementation of
telecommunications (also not considered in study)
- Exception: study by Oliner and Sichel calculated contribution of software and
telecommunication to labor productivity but cautioned about the limitations
- Impossibility of capturing all IT spending data as reason why many researchers have focused
on individual firms rather than national economies
Where has profitability vanished?
- Economics of a new technology follows a simple cycle:
1. Profit thanks to its use
2. Spread of the new technology throughout the industry
3. Reaping of productivity gains (diminishing)
4. Continuous decrease in process of the products (by productivity gains)
5. Eventually a larger quantity of the products sold for a lower price at a low profit margin

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- At end: no productivity gains businesses must adopt new technology
- Mature technology: with which workers have become comfortable has no innovation
benefits
Research challenges
- Productivity = efficiency of input (most importantly labor)
- To measure the contribution of a certain technology to productivity, must examine the
relationship between units of investment in the technology and the increase of output units
(not dollar value of outputs)
- Time period is important productivity gains in first 3-4 years, then prices may have
increased, and revenue may not have changed or even decreased
- When output dollars used: better as a cross section study of a large sample of technology
users over a short period (smaller price changes) when longitudinal research is done, price
inflation must be included (difficult to not over/ under inflate)
- IT investments = capital expenditures that include items whose prices have not changed at
the same rate over the years
Challenges in measuring IT productivity
- IT has been adopted faster, has probably contributed more productivity in service yet
almost impossible to measure productivity gains in service sectors
Challenges in measuring output
- Quinn & Bailey: gains in measured productivity are biased because data were flawed
easier when products are physical
- Many businesses do not produce a single item but an array of items confounds task of
measuring overall productivity to avoid use of monetary values, productivity must be
measured separately for each item overall productivity as a weighted average
- Different levels of quality of products
Challenges in measuring input
- Input: IT resources
- Mostly used as input variable: computing machinery represents a shortcoming since the
financial value in the IT basket has consistently decreased over the years
- IT input figures must at least include computing hardware, telecommunications hardware
and software, purchased software, software development, consulting & personnel training
- Researchers must use aggregate monetary value of such services for each business/industry
(again problem of using monetary values)
- Many companies regard their investment as confidential difficult to obtain data
The issue of quality
- Measuring only productivity gains of new technologies not enough even if we do not gain
more output, the output of new technologies may be better than that of older technology
A simple theory by economic historians
- David compared seemingly insignificant productivity gains of computers to those of electric
electrical power in the US 1899-1920 slow incremental productivity gains of electricity
similar to the slow adoption of computers

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Information technology productivity: in search of a definite observation – Effy OZ - Highlights challenges researchers faced, proposes a simple theory to explain what seems to be a vanishing contribution of IT to productivity growth Introduction - - - - Paradox → for and against Carr → correlation tested between IT expenditure and productivity o either no positive correlation or that the costs exceeded benefits many economists spoke of productivity more generally (profitability, revenue, market value of the firm, return on investment on individual projects, and performance) as a mix or combination economists distinguish between labor productivity (ratio of output of goods & services to labor hours) and multifactor productivity (relates output to a combination of inputs used in production e.g. labor, capital, energy, materials) → greater interest in labor productivity especially in developed countries where labor is an expensive resource focus on contribution of IT to labor productivity (IT productivity) → an increase in the ratio of units of products produced to the amount of labor spent on the production of those units due to procurement of IT what has been measur ...
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