An empirical study of IT as a factor of production: The case of Net-enabled IT assets

A great deal of research in the information systems field has focused on the link between IT and firm-level outputs, like productivity and performance. This paper critically examines the economic assumptions and methodological approaches that underlie much of this work. Three important issues and gaps are identified. First, the functional form of the relationship between IT and firm-level outputs has been inconsistently specified, or overlooked. Second, multiple input and output variables are often arbitrarily combined. Third, the characteristics of IT as a factor of production have not been tested in the era of Net-enabled IT assets. This paper sheds light on these issues by analyzing an appropriate dataset in a two-stage process. In the first stage, data envelopment analysis (DEA) is employed in order to derive a meaningful measure for IT productivity from a compilation of input and output variables. This measure is treated as a dependent variable in a multivariate regression analysis during the second stage. The paper confirms the diminishing marginal productivity and input substitutability of IT for the sub-category of Net-enabled IT assets.