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Research Note—Does Technological Progress Alter the Nature of Information Technology as a Production Input? New Evidence and New Results

Sauder School of Business, University of British Columbia, Vancouver, British Columbia V6T 1Z2, Canada
Business School, University of Colorado Denver, Denver, Colorado 80217
Personal Computing Industry Center, University of California, Irvine, Irvine, California 92697
Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
ronald.ramirez{at}ucdenver.edu
kkraemer{at}uci.edu
npmelv{at}umich.edu

Prior research at the firm level finds information technology (IT) to be a net substitute for both labor and non-IT capital inputs. However, it is unclear whether these results hold, given recent IT innovations and continued price declines. In this study we extend prior research to examine whether these input relationships have evolved over time. First, we introduce new price indexes to account for varying technological progress across different types of IT hardware. Second, we use the rental price methodology to measure capital in terms of the flow of services provided. Finally, we use hedonic methods to extend our IT measures to 1998, enabling analysis spanning the emergence of the Internet. Analyzing approximately 9,800 observations from over 800 Fortune 1,000 firms for the years 1987–1998, we find firm demand for IT to be elastic for decentralized IT and inelastic for centralized IT. Moreover, Allen Elasticity of Substitution estimates confirm that through labor substitution, the increasing factor share of IT comes at the expense of labor. Last, we identify a complementary relationship between IT and ordinary capital, suggesting an evolution in this relationship as firms have shifted to more decentralized organizational forms. We discuss these results in terms of prior research, suggest areas of future research, and discuss managerial implications.

This paper is dedicated to the memory of Paul Chwelos, respected colleague and dear friend.

Key Words: IT business value; productivity; substitute; complement; hedonic; capital services; technological change; rental price; price index; organizational decentralization
History: This paper was received on February 13, 2007.