Paradox Lost? Firm-level evidence on the returns to information systems spending

The ‘productivity paradox’ of information systems (IS) is that, despite enormous improvements in the underlying technology, the benefits of IS spending have not been found in aggregate output statistics. One explanation is that IS spending may lead to increases in product quality or variety which tend to be overlooked in the aggregate statistics, even if they increase output at the firm-level. Furthermore, the restructuring and cost-cutting that are often necessary to realize the potential benefits of IS have only recently been undertaken in many firms. The present study uses new firm-level data on several components of IS spending for 1987-1991. The dataset includes 367 large firms which generated approximately 1.8 trillion dollars in output in 1991. The authors supplemented the IS data with data on other inputs, output, and price deflators from other sources. As a result, they could assess several econometric models of the contribution of IS to firm-level productivity. The present results indicate that IS spending has made a substantial and statistically significant contribution to firm output. The authors find that the gross marginal product (MP) for computer capital averaged 81% for the firms in our sample. They find that the MP for computer capital is at least as large as the marginal product of other types of capital investment and that, dollar for dollar, IS labor spending generates at least as much output as spending on non-IS labor and expenses. Because the models the authors applied were similar to those that have been previously used to assess the contribution of IS and other factors of production, they attribute the different results to the fact that the present data set is more current and larger than others explored. The authors conclude that the productivity paradox disappeared by 1991, at least in the sample of firms.