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The Production of Information Services: A Firm-Level Analysis of Information Systems Budgets

Author

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  • Vijay Gurbaxani

    (Center for Research on Information Technology and Organizations, Graduate School of Management, University of California, Irvine, Irvine, California 92697)

  • Nigel Melville

    (Center for Research on Information Technology and Organizations, Graduate School of Management, University of California, Irvine, Irvine, California 92697)

  • Kenneth Kraemer

    (Center for Research on Information Technology and Organizations, Graduate School of Management, University of California, Irvine, Irvine, California 92697)

Abstract

Previous research has demonstrated that the production of information services can be characterized at the aggregate economy-wide level by the Cobb-Douglas production function. However, the underlying production process at the firm level has not yet been ascertained. The objective of this paper is to determine the form of the production process for information systems services at the firm level by conducting an empirical analysis of IS budget data. The production of information services is modeled using a production function with two inputs, hardware and personnel. We estimate various econometric specifications to determine several characteristics of the provision of information services, including the allocation of the information systems budget to its two largest components—hardware and personnel—and its implications for the form of the production function. After controlling for industry sector, we find that the ratio of personnel to hardware is independent of scale, which indicates a homothetic production function. We also find that the ratio of factor shares is constant with time, consistent with the Cobb-Douglas production function.We conclude that the underlying form of the production function is the same at the level of both the firm and the economy. Our analysis demonstrates how the application of production theory to the production of information services can yield useful insights from both a theoretical and managerial perspective.

Suggested Citation

  • Vijay Gurbaxani & Nigel Melville & Kenneth Kraemer, 2000. "The Production of Information Services: A Firm-Level Analysis of Information Systems Budgets," Information Systems Research, INFORMS, vol. 11(2), pages 159-176, June.
    • Handle: RePEc:inm:orisre:v:11:y:2000:i:2:p:159-176
    DOI: 10.1287/isre.11.2.159.11779
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    References listed on IDEAS

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    1. Fisher, Franklin M, 1971. "Aggregate Production Functions and the Explanation of Wages: A Simulation Experiment," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 305-325, November.
    2. H. S. Houthakker, 1955. "The Pareto Distribution and the Cobb-Douglas Production Function in Activity Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 23(1), pages 27-31.
    3. Vijay Gurbaxani & Haim Mendelson, 1990. "An Integrative Model of Information Systems Spending Growth," Information Systems Research, INFORMS, vol. 1(1), pages 23-46, March.
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    Cited by:

    1. Dolfsma, Wilfred, 2005. "Towards a dynamic (Schumpeterian) welfare economics," Research Policy, Elsevier, vol. 34(1), pages 69-82, February.
    2. Dennis O. Kundisch & Neeraj Mittal & Barrie R. Nault, 2014. "Research Commentary —Using Income Accounting as the Theoretical Basis for Measuring IT Productivity," Information Systems Research, INFORMS, vol. 25(3), pages 449-467, September.
    3. Saggi Nevo & Michael Wade & Wade D. Cook, 2010. "An empirical study of IT as a factor of production: The case of Net-enabled IT assets," Information Systems Frontiers, Springer, vol. 12(3), pages 323-335, July.

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