The Substitution of Information Technology for Other Factors of Production: A Firm Level Analysis
AbstractFueled 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 43 (1997)
Issue (Month): 12 (December)
information technology; productivity; substitutability; computers; IT investments; productivity paradox;
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Meijers, Huub, 2007.
"ICT Externalities: Evidence from cross country data,"
MERIT Working Papers
021, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
- Meijers, Huub, 2007. "ICT Externalities: Evidence from cross country data," MERIT Working Papers 021, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
- 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.
- Elsadig Ahmed & Rahim Ridzuan, 2013. "The Impact of ICT on East Asian Economic Growth: Panel Estimation Approach," Journal of the Knowledge Economy, Springer, vol. 4(4), pages 540-555, December.
- 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.
- 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.
- Walczuch,Rita & Bielowski,Alexander, 2002. "From Measurement to Management: the Influence of IT on Service Operations," Research Memorandum 073, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
- 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.
- Irene Bertschek & Helmut Fryges & Ulrich Kaiser, 2006. "B2B or Not to Be: Does B2B E-Commerce Increase Labour Productivity?," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 13(3), pages 387-405.
- Martín-Oliver, Alfredo & Salas-Fumás, Vicente, 2008.
"The output and profit contribution of information technology and advertising investments in banks,"
Journal of Financial Intermediation,
Elsevier, vol. 17(2), pages 229-255, April.
- Alfredo Martín-Oliver & Vicente Salas-Fumas, 2007. "The output and profit contribution of information technology and advertising investments in banks," Banco de Espaï¿½a Working Papers 0740, Banco de Espa�a.
- Irene Bertschek & Ulrich Kaiser, 2004.
"Productivity Effects of Organizational Change: Microeconometric Evidence,"
INFORMS, vol. 50(3), pages 394-404, March.
- Bertschek, Irene & Kaiser, Ulrich, 2001. "Productivity effects of organizational change: microeconometric evidence," ZEW Discussion Papers 01-32, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Lin, Winston T. & Chuang, Chia-Hung, 2013. "Investigating and comparing the dynamic patterns of the business value of information technology over time," European Journal of Operational Research, Elsevier, vol. 228(1), pages 249-261.
- 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.
- 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.
- 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.
- Atreya Chakraborty & Mark Kazarosian, 1999.
"Product Differentiation and the Use of Information Technology: New Evidence from the Trucking Industry,"
NBER Working Papers
7222, National Bureau of Economic Research, Inc.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).
If references are entirely missing, you can add them using this form.