Information technology and economic performance: A critical review of the empirical evidence

Abstract

For many years, there has been considerable debate about whether the IT revolution was paying off in higher productivity. Studies in the 1980s found no connection between IT investment and productivity in the U.S. economy, a situation referred to as the productivity paradox . Since then, a decade of studies at the firm and country level has consistently shown that the impact of IT investment on labor productivity and economic growth is significant and positive. This article critically reviews the published research, more than 50 articles, on computers and productivity. It develops a general framework for classifying the research, which facilitates identifying what we know, how well we know it, and what we do not know. The framework enables us to systematically organize, synthesize, and evaluate the empirical evidence and to identify both limitations in existing research and data and substantive areas for future research.The review concludes that the productivity paradox as first formulated has been effectively refuted. At both the firm and the country level, greater investment in IT is associated with greater productivity growth. At the firm level, the review further concludes that the wide range of performance of IT investments among different organizations can be explained by complementary investments in organizational capital such as decentralized decision-making systems, job training, and business process redesign. IT is not simply a tool for automating existing processes, but is more importantly an enabler of organizational changes that can lead to additional productivity gains.In mid-2000, IT capital investment began to fall sharply due to slowing economic growth, the collapse of many Internet-related firms, and reductions in IT spending by other firms facing fewer competitive pressures from Internet firms. This reduction in IT investment has had devastating effects on the IT-producing sector, and may lead to slower economic and productivity growth in the U.S. economy. While the turmoil in the technology sector has been unsettling to investors and executives alike, this review shows that it should not overshadow the fundamental changes that have occurred as a result of firms' investments in IT. Notwithstanding the demise of many Internet-related companies, the returns to IT investment are real, and innovative companies continue to lead the way.