Utilization Levels and Productivity Effects of Information Technology Investments

Explaining productivity effects of factor inputs is an important research topic since improving the general standard of living is highly dependent on the ability to grow businesses, industries and economies, thereby increasing output. While the productivity effects of labor and non-information technology capital and their interrelations in the transformation process to output have recently become better understood, researchers still struggle to explain the full productivity effects of investments in information technology (IT) capital. Explaining these full effects is critical because, increasingly, IT enable innovation, is the foundation for efficient intra- and inter-organizational processes, and determines how industries conduct business. In the last twenty years and especially with the advent of the information age, IS researchers have made good progress in laying the basis for an explanatory model that includes IT as a separate input factor to explain productivity effects of IT investments by extending standard production theoretical models using e.g. the Cobb-Douglas or Translog production functions. These standard models typically assume complete or at least constant factor utilization. Given fluctuations in the utilization of input factors - especially in severe economic downturns as we currently observe - and absent the opportunity to adjust the IT capital input in the short term, there are numerous measurement issues that have to be analyzed and dealt with in order to extend the models and derive more accurate productivity estimates of IT investments.