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The Substitution of Information Technology for Other Factors of Production: A Firm Level Analysis

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Author Info

  • Sanjeev Dewan

    (Graduate School of Management, University of California, Irvine, California 92697)

  • Chung-ki Min

    (Department of Economics, Hankook University of Foreign Studies, Seoul, Korea)

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    Abstract

    Fueled by its constant technological and price improvements, information technology (IT) is displacing other inputs in the production of goods and services. By 1994, IT accounts for over 15% of fixed investments by the U.S. private sector, and the ratio of new IT investments to labor costs is approaching 5% (1990 dollar basis). The ability to take advantage of improvements in IT is determined in part by the substitutability of IT for other factors of production. This paper builds on the empirical framework of Brynjolfsson and Hitt (Brynjolfsson, E., L. Hitt. 1995. Information technology as a factor of production the role of differences among firms. Econom. Innovations and New Tech. 3 183--199.) and extends it to jointly estimate output and substitution elasticities using the CES-translog production function. Our primary source of IT-related data is the IDG/Computerworld annual survey data on IS spending by large U.S. firms, for the period 1988 to 1992, previously analyzed by Brynjolfsson and Hitt ([Brynjolfsson, E., L. Hitt. 1995. Information technology as a factor of production the role of differences among firms. Econom. Innovations and New Tech. 3 183--199.], [Brynjolfsson, E., L. Hitt. 1996. Paradox lost? Firm-level evidence on the returns to information systems spending. Management Sci. 42(4) 541--558.]) and Lichtenberg (Lichtenberg, F. R. 1995. The output contributions of computer equipment and personnel a firm level analysis. Econom. Innovations and New Tech. 3 201--217.). A key result is that IT capital is a net substitute for both ordinary capital and labor, suggesting that the factor share of IT in production will grow to more significant levels over time. We confirm earlier findings of positive returns to IT investment for this data set. Further, we find excess returns on IT investment relative to labor input and some evidence of excess returns relative to ordinary capital. Taken together, these results shed new light on the productivity paradox of IT and on the growth of information intensity across the economy as firms take advantage of the continuing improvements in IT.

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    File URL: http://dx.doi.org/10.1287/mnsc.43.12.1660
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 43 (1997)
    Issue (Month): 12 (December)
    Pages: 1660-1675

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    Handle: RePEc:inm:ormnsc:v:43:y:1997:i:12:p:1660-1675

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    Related research

    Keywords: information technology; productivity; substitutability; computers; IT investments; productivity paradox;

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    Citations

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    Cited by:
    1. Bertschek, Irene & Fryges, Helmut & Kaiser, Ulrich, 2004. "B2B or Not to Be: Does B2B E-Commerce Increase Labour Productivity?," ZEW Discussion Papers 04-45, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    2. Satya P. Das, 2011. "The political economy of revenue pressure and tax collection efficiency," Indian Growth and Development Review, Emerald Group Publishing, vol. 4(1), pages 38-52, April.
    3. Chen, Yueh H. & Lin, Winston T., 2009. "Analyzing the relationships between information technology, inputs substitution and national characteristics based on CES stochastic frontier production models," International Journal of Production Economics, Elsevier, vol. 120(2), pages 552-569, August.
    4. Jong-Il Kim, 2004. "Information Technology and Firm Performance in Korea," NBER Chapters, in: Growth and Productivity in East Asia, NBER-East Asia Seminar on Economics, Volume 13, pages 327-350 National Bureau of Economic Research, Inc.
    5. Atreya Chakraborty & Mark Kazarosian, 1999. "Product Differentiation and the Use of Information Technology: New Evidence from the Trucking Industry," Boston College Working Papers in Economics 433, Boston College Department of Economics.
    6. Zulima Fernández & María J. Nieto, 2005. "The Internet: Strategy And Boundaries Of The Firm," Business Economics Working Papers wb050101, Universidad Carlos III, Departamento de Economía de la Empresa.
    7. Martinez-Lorente, Angel R. & Sanchez-Rodriguez, Cristobal & Dewhurst, Frank W., 2004. "The effect of information technologies on TQM: An initial analysis," International Journal of Production Economics, Elsevier, vol. 89(1), pages 77-93, May.
    8. Mirko Draca & Raffaella Sadun & John Van Reenen, 2006. "Productivity and ICT: A Review of the Evidence," CEP Discussion Papers dp0749, Centre for Economic Performance, LSE.
    9. Sang-Yong Tom Lee & Xiao Jia Guo, 2004. "Information and Communications Technology (ICT) and Spillover: A Panel Analysis," Econometric Society 2004 Far Eastern Meetings 722, Econometric Society.
    10. Ulrich Kaiser, 2001. "The Impact of Foreign Competition and New Technologies on the Demand for Heterogeneous Labor," Review of Industrial Organization, Springer, vol. 19(1), pages 109-120, August.
    11. Irene Bertschek & Ulrich Kaiser, 2004. "Productivity Effects of Organizational Change: Microeconometric Evidence," Management Science, INFORMS, vol. 50(3), pages 394-404, March.
    12. Hunter, Starling David, III, 2003. "Information Technology, Organizational Learning, and the Market Value of the Firm," Working papers 4418-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    13. Lin, Winston T. & Chiang, Chung-Yean, 2011. "The impacts of country characteristics upon the value of information technology as measured by productive efficiency," International Journal of Production Economics, Elsevier, vol. 132(1), pages 13-33, July.
    14. Alfredo Martín-Oliver & Vicente Salas-Fumas, 2007. "The output and profit contribution of information technology and advertising investments in banks," Banco de España Working Papers 0740, Banco de España.
    15. Walczuch,Rita & Bielowski,Alexander, 2002. "From Measurement to Management: the Influence of IT on Service Operations," Research Memoranda 073, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
    16. Ngwenyama, Ojelanki & Guergachi, Aziz & McLaren, Tim, 2007. "Using the learning curve to maximize IT productivity: A decision analysis model for timing software upgrades," International Journal of Production Economics, Elsevier, vol. 105(2), pages 524-535, February.

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