An Empirical Analysis of Technical Efficiency: The Role of IT Intensity and Competition

We analyze the impact of information technology (IT) on the technical efficiency of firms in the context of their observed competitive settings. Because competition can be a driver of efficiency and industries display varying degrees of competitiveness, firm‐level efficiency is likely to display considerable heterogeneity. To shed light on these questions, we analyze the economic impact of IT on technical efficiency, a key component of efficiency, in heterogeneous competitive settings. Our study employs a number of econometric techniques, including a stochastic frontier and a generalized method of moments approach, on data from firms in a wide cross‐section of industries. We find, after controlling for firm‐level heterogeneity and potential endogeneity, that IT is positively associated with gains in technical efficiency but its impact is moderated by the degree of competition. Firms display large variation in their levels of technical efficiency partly because of the heterogeneous market competitiveness conditions they face. In more competitive industries, firms tend to deploy IT more intensively and use it more efficiently. Our study makes a distinct contribution relative to prior studies that have focused on the productivity impacts of IT while assuming perfect competition and not allowing for potential heterogeneity in firm‐level efficiency. Overall, our results demonstrate that IT and competition are significant determinants of gains in technical efficiency and provide insight into how competition affects the returns to IT investment.