Relative Sizes of Information Technology Investments and Productive Efficiency: Their Linkage and Empirical Evidence

Abstract

The contribution of information technology (IT) to organizational performance has been investigated extensively in recent IS research. A number of economic and financial measures have been employed by researchers to gauge the impact of IT on organizational performance. The results of previous research can be described as inconclusive at best. This paper uses stochastic frontiers to examine the relationship between the relative size of IT investments by firms and their productive efficiency in the production process. Assuming different production frontiers (including the popular generalized Cobb-Douglas, the more general Box-Cox transformation, and the most general Box-Tidwell transformation for the production process), we find consistent empirical evidence that the relative level of IT investments has a positive effect on the firm's productive efficiency, implying that firms investing comparatively more in IT are likely to be more efficient in their production processes than those investing less. This study confirms the positive effect of IT on the firm's efficiency in the production process, provides a source to explain the disappearance of the productivity paradox, and suggests a direction for future research that may integrate both economic and financial aspects of previous research on IT benefits.

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