The business value of information technology and inputs substitution: The productivity paradox revisited

The business value of information technology (IT) is an extremely important but highly controversial issue that has sparked a great deal of research during the past two decades. Closely related to the issue are the productivity paradox of information systems and the substitutability of IT stock for both traditional capital and labor. Numerous studies have been undertaken to either explain or dispel the paradox. This paper represents one significant extension to previous work and is a further effort to jointly investigate the business value issue, the paradox, and the potential of the substitution between IT capital and ordinary capital and labor, by estimating the IT business value in terms of the impact of IT on technical efficiency, based on the constant elasticity of substitution (known as CES) stochastic production frontier model, at three levels: firm, industry, and sector. The major findings include: the relationship between technical efficiency and IT investment is not robust with respect to the specifications of production frontiers; the productivity paradox is still existent, inconsistent with conventional wisdom, IT has substantial impacts on the five parameters associated with the CES production process; IT stock, traditional capital, and traditional labor are not pairwise substitutable; IT stock appears to be as important as capital, but it is not possible to use IT stock to replace the role of labor entirely; decreasing returns to scale are found irrespective of the levels of IT investments, and technical efficiency tends to decrease as IT investments increase; the industry-level analysis suggests that IT capital is more important for the services industries than for the manufacturing industries; and the sector analysis seems to indicate that the services sector is just slightly less technically efficient than the manufacturing sector.