The impact of technology investments on a firm's production efficiency, product quality, and productivity

For over a decade, empirical studies in the information technology (IT) val ue literature have examined the impact of technology investments on various measures of performance. However, the results of these studies, especially those examining the contribution of IT to productivity, have been mixed. O ne reason for these mixed empirical findings may be that these studies have not effectively accounted for the impact of technology investments that in crease production efficiency and improve product quality on firm productivi ty. In particular, it is commonly assumed that such investments should lead to gains in both profits and productivity. However, using a closed-form an alytical model we challenge this underlying assumption and demonstrate that investments in certain efficiency-enhancing technologies may be expected t o decrease the productivity of profit-maximizing firms. More specifically, we demonstrate that investments in technologies that reduce the firm's fixe d overhead costs do not affect the firm's product quality and pricing decis ions but do increase profits and improve productivity. In addition, we demo nstrate that investments in technologies that reduce the variable costs of designing, developing, and manufacturing a product encourage the firm to im prove product quality and to charge a higher price. Although this adjustmen t helps the firm to capture higher profits, we show that it will also incre ase total production costs and will, under a range of conditions, decrease firm productivity. Finally, we show that the direction of firm productivity following such investments depends upon the relationship between the fixed costs of the firm and the size of the market.