Beyond the productivity paradox

Citation: Brynjolfsson, E., Hitt, L. M (1998) Beyond the productivity paradox. Communications of the ACM (Volume 41) (RSS)
Internet Archive Scholar (search for fulltext): Beyond the productivity paradox
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Tagged: Economics (RSS) Information Technology (RSS), productivity (RSS), Economics (RSS)

Summary

In this brief piece, Brynjolfsson and Hitt summarize the history of scholarly dialogue on the relationship between corporate Information Technology investment and productivity. They then offer their latest research on the topic.

They remind us that measuring inputs and outputs (the two components of productivity) have always been difficult to measure, and that this task has become increasingly difficult in a knowledge-based, digital economy. Despite this, they remind us that scholars generally agree that the lion's share of productivity increases have been associated with general purpose technologies (e.g. the steam engine, electricity).

In 1987, Steven Roach published an account that indicated that IT investment had grown dramatically in the 70s and 80s while productivity remained flat. The productivity paradox was born. In the early 90s (e.g. '94), Brynjolfsson, Hitt and others were able to secure firm-level data. Analysis of this data indicated the opposite - namely that firms that invested more in IT were more productive. Their data also indicated wide variation at given investment levels, however. Their more recent work investigates this question: how is it that two apparently-similar firms that make similar investments in IT could garner wildly different productivity results?

Their initial hypothesis: firms' readiness to adopt complementary (and necessary) organizational changes (e.g. flatter hierarchies) could reap the benefits of IT. Those that weren't, couldn't.

Their first investigation here yielded a striking finding: "...while short-term benefits were about what would be expected if they [firms] had "normal" returns, long-term benefits were substantially larger: from 2 to 8 times as much as short-term benefits."

Their second study indicated that "...firms that couple IT investments with decentralized work practices are about 5% more productive than firms that do neither. However, firms can actually be worse off if they invest in computers without the new work systems."

Given the ever-widening IT productivity gap between firms, Brynjolfsson & Hitt ask: Why do firms continue to make poor IT/Org Design investment choices? At the end of the day their answer is an indirect appeal to institutional theory: "...workers maintained the old ways of doing things, not in a conscious effort to sabotage the new manufacturing system, but simply because they had too many ingrained habits." As David (1990) indicates, workers in "old school" organizations try to use "new" technologies to replicate old ways of doing things.

In a final study, Brynjolfsson & Hitt show that $1 of computer hardware appears to be associated with about $10 of market value (in most other areas, $1 of investment is valued by the market at about $1). Based on their other recent work, they hypothesize that the bulk of this additional value lies in "hidden" complementary organizational assets (e.g. new processes).