IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

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

  • 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)

Registered author(s):

    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.

    If 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.

    File URL: http://dx.doi.org/10.1287/mnsc.43.12.1660
    Download Restriction: no

    Article provided by INFORMS in its journal Management Science.

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

    as
    in new window

    Handle: RePEc:inm:ormnsc:v:43:y:1997:i:12:p:1660-1675
    Contact details of provider: Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA
    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Web page: http://www.informs.org/
    Email:


    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:43:y:1997:i:12:p:1660-1675. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.