The Info-Tech "Productivity Paradox" Dissected and Tested

Abstract

INVESTMENTS IN WILL SHOW ZERO PRODUCTIVITY WHEN THERE IS POOR USE OF ORGANIZATIONAL RESOURCES, ACCORDING TO A NEW STUDY. Researchers who have examined the effect of information technology (IT) on have found little or no relationship at the economy-wide, industry-wide, or firm level. In other words, there has been a productivity and this has been one of the most heavily researched information systems topics in the last 20 years. test a new explanation for the paradox at the firm level: Does implementing cause organizational slack? Our empirical evidence shows that increased organizational slack was an explanation for the paradox before 1991 but not after. WHY A PRODUCTIVITY PARADOX? Since the dawn of the revolution, significant investments in have often been justified in terms of their potential to increase productivity. This initial euphoria, however, was quickly replaced with skepticism because hard evidence of gains from failed to materialize. Economists generally were puzzled by the fact that, in spite of the significant increase in investments, the U.S. output was not growing any faster, and did not seem to have any effect on the post-1973 slowdown of labor productivity.1 Nothing captures this sentiment better than a statement by the Nobel laureate economist Robert Solow: We see the computer age everywhere except in the statistics.2 Firm-level evidence of the impact of was equally disappointing. While investments in the service sector had increased significantly, the of white collar workers decreased by more than 6% from the mid-1970s to the mid-1980s. The first empirical research of the paradox, completed in 1988, showed that companies were better off investing their marginal dollars in non-IT factors of production.3 Results from consultants were equally disappointing. They found no correlation between expenditures on and profitability, claiming that this relation has not changed in more than 20 years.4 The early literature that tried to explain the reasons for the paradox suggested numerous theories. These explanations were subsequently validated in the 1990s by a series of empirical studies. Academic scholars have proposed several explanations for the paradox.5 First are the explanations why there is no real gain in or performance from investments: mismanagement of information and technology and redistribution and dissipation of profits. At present there are two possible interpretations for mismanagement of information and technology. Managers may have a hard time bringing the benefits to the bottom line, especially if investment in is not accompanied by changes in business processes. Successful implementation processes must not simply overlay new technology on old processes.6 The result is that investments in lead to increases in organizational slack rather than and improved financial performance. Second, managing projects is inherently difficult, and a high percentage of projects encounter significant problems such as cost overruns, coordination problems, or failure during implementation.7 Several researchers suggest that another possible explanation is the redistribution or dissipation of profits.8 For example: IT rearranges the shares of the pie in favor of some companies without making it any bigger.9 The second set of reasons for the paradox involves a gain in or performance from that researchers have not properly identified or measured. The gains do not show up because of mismeasurement of inputs and outputs, delays in due to users learning about and adjusting to new technologies, and capital stock theory. Several authors have attributed the paradox to mismeasurement.10 For example, one researcher linked the potential mismeasurement of IT-related inputs and outputs to the difficulty of developing accurate, quality-adjusted price deflators that would determine the real cost of computers. …

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