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Productivity Paradox

The empirical data concerning whether IT generates any return has been a challenge to analyze. Robert Solow, a winner of the Nobel Prize in economics who has made a specialty out of studying the relationships of inputs to outputs in national economies, humorously remarked in 1987 that “you can see the computer age everywhere except in the productivity statistics.”4 In other words, mainframes, minis, and even PCs were increasingly being deployed, but it wasn’t clear that they were having any impact on business results. In fact, some posited that IT was having a negative effect on productivity improvements, due to the time spent learning and transitioning over to new systems and applications. For example, Jeremy Greenwood and Boyan Jovanovic, professors of economics at the University of Rochester and NYU respectively, argued that “implementation is not free” and that IT projects require investment not only in capital equipment but human capital as well.5

In attempts to resolve the productivity paradox, studies were conducted on the impact of IT on economies, industries, and individual firms, and have looked at dozens of variables and metrics, IT capital, non-IT capital, sales growth, market share, labor costs, inventory holding costs, chief information officer (CIO) experience, percentage of IT budget spent on new products and services, and the like.6 Sometimes use of IT led to no benefits, sometimes it led to significant gains in productivity but not profitability, ...