Disaggregating the return on investment to IT capital
Several firm-level empirical studies have found positive and excess returns to investments in information technology (IT) capital. Using a production function framework that typically includes such inputs as IT capital, non-IT capital, and labor, these studies estimate the return on investment in IT. Taken together, this body of research provides evidence of a payoff to investments in IT contrary to the often-cited productivity paradox. However, while these studies have provided an empirical foundation supporting the assertion that IT spending at the firm level pays off, the distribution of returns across different forms of IT capital remains unclear. This study represents one of the first attempts at disaggregating the heterogeneous IT capital category into its salient constituents and examining their respective contributions to the value of the firm. Specifically, we focus on three hardware categories: mainframe computers, minicomputers, and microcomputers. Rather than simply reflecting different technological characteristics, these categories of computers also reflect the different kinds of applications that typically run on these systems. Moreover, we explicitly take into account the degree to which a company’s employees are networked, since connectivity is likely to affect the payoff. We use new data on the capital stock of these categories of systems as well as the level of computer networking at the firm level for a nearly balanced panel of large firms spanning the eight year period 1987 to 1984, representing more than 3,600 observations. We find strong evidence of positive returns to investments in mainframe computers and PCs, but mixed results in the case of minicomputers. The output elasticity of PC capital exceeds that of mainframes, and the degree to which a company’s employees are networked positively impacts the overall efficiency of the production process. The results of this study are important for both research and practice. From a research perspective, the disaggregation of IT capital into constituent categories represents a logical next step in the small but growing literature that examines the returns to information systems spending. Our results, and in particular the estimates of the output elasticities and marginal products, have significant implications for determining the optimal level of investment in different technologies.