The Productivity of Information Technology Investments: New Evidence from IT Labor Data

Abstract

This paper uses newly collected panel data that allow for significant improvements in the measurement and modeling of IT productivity to address some long-standing empirical limitations in the IT business value literature. First, we show that using GMM-based estimators to account for the endogeneity of IT spending produces coefficient estimates that are only about 10% lower than unadjusted estimates, suggesting that the effects of endogeneity on IT productivity estimates may be relatively small. Second, analysis of the expanded panel suggests that a) IT returns are substantially lower in small and mid-size firms than in Fortune 500 firms, b) that they materialize more slowly in large firms -- unlike in larger firms, the short-run contribution of IT to output in small and mid-size firms is similar to the long-run output contribution, and c) that the measured marginal product of IT spending is higher from 2000-2006 than in any previous period, suggesting that firms, and especially large firms, have been continuing to develop new, valuable IT-enabled business process innovations. Furthermore, we show that the productivity of IT investments is higher in manufacturing sectors, and that our productivity results are robust to controls for IT labor quality and outsourcing levels.

Keywords: Information Technologies, Production Function, IT Workers, Productivity