Nainika Patnayakuni

Technology investment and business performance

relationships between measures of information technology (IT) investment and facets of corporate business performance. The results of our study suggest that IT investments have begun to show results in proving they can make a positive contribution to firm output and labor productivity. However, various measures of IT investment do not appear to have a positive relationship with administrative productivity, showing inconsistent results in terms of business performance. Our analysis suggests that while IT is likely to improve organizational efficiency, its effect on administrative productivity and business performance might depend on such other factors as the quality of a firm’s management processes and ITstrategy links, which can vary significantly across organizations. Measurement of the business value of IT investment has been the subject of considerable debate by academics and practitioners. The term productivity paradox is gaining increasing notoriety as several studies point toward falling productivity and rising IT expenditure in the service sector. Loveman [9] summarizes the research that provides evidence suggesting IT investment produces negligible benefits. Other studies [3] take the position that the “shortfall of evidence” is not “evidence of a shortfall” [3]. Brynjolfsson [3] argues that lack of positive evidence is due to mismeasurements of outputs and inputs, lags in learning and adjustment, redistribution and dissipation of profits, and mismanagement of IT. Our first objective was to reexamine the performance effects of IT investment in light of data collected up to 1994 (see the sidebar, “How the Study Was Done”). We are uncomfortable making such a statement as we have not conducted similar systematic scientific analysis with data later than 1994. We included three measures of IT investments: aggregate IT, client/server systems, including Internet-related systems, and IT infrastructure. We studied firm performance in terms of firm output, measured using value added by the organization and total sales; business results, assessed using return on assets (ROA) and return on equity (ROE) measures of financial performance; and intermediate performance, assessed using labor productivity and administrative productivity. Older studies examining the value of IT investment treat such investment as a monolithic entity. It is reasonable to argue that how investment dollars are differentially allocated among various elements of the IT infrastructure should be examined in tandem with how many dollars are spent cumulatively. Our second objective was to examine the relationships between investments in