THE INFORMATION TECHNOLOGY PRODUCTIVITY PARADOX REVISITED - A THEORETICAL AND EMPIRICAL-INVESTIGATION IN THE MANUFACTURING SECTOR

The lack of empirical support for the positive economic impact of info rmation technology (IT) has been called the IT productivity paradox. E ven though output measurement problems have often been held responsibl e for the paradox, we conjecture that modeling limitations in producti on-economics-based studies and input measurement also might have contr ibuted to the paucity of systematic evidence regarding the impact of I T, We take the position that output measurement is slightly less probl ematic in manufacturing than in the service sector and that there is s ound a priori rationale to expect substantial productivity gains from IT investments in manufacturing and production management. We revisit the IT productivity paradox to highlight some potential limitations of earlier research and obtain empirical support for these conjectures. We apply a theoretical framework involving explicit modeling of a stra tegic business unit's (SBU)(1) input choices to a secondary data set i n the manufacturing sector. A widely cited study by Loveman (1994) wit h the same dataset showed that the marginal contribution of IT to prod uctivity was negative. However, our analysis reveals a significant pos itive impact of IT investment on SBU output. We show that Loveman's ne gative results can be attributed to the deflator used for the IT capit al. Further, modeling issues such as a firm's choice of inputs like IT , non-IT, and labor lead to major differences in the IT productivity e stimates. The question as to whether firms actually achieved economic benefits from IT investments in the past decade has been raised in the literature, and our results provide evidence of sizable productivity gains by large successful corporations in the manufacturing sector dur ing the same time period.