Information Technology and Economic Performance

A summary of a critical review on the empirical evidence

This study was carried out to explore the relationship between IT and economic performance. Initial surveys showed no connection between IT and economic performance at the three levels: firm, industry and the whole economy (Roach, 1991, p. 86).

Following those results, the research led to a productivity paradox that pushed many researchers to carry out further investigation on the relationship between the two aspects. The subsequent research indicated a positive relationship between the Information Technology and economic performance at level of firms and the whole economy (Jorgenson, 2001, p. 23).

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From an overview, the review of this literature is divided into three parts for easy conceptualization of the whole study. This is at firm, industry and aggregate economy levels. The three levels are further subdivided into subtopics in order to capture a wider area of the review (Dedrick, Vijay & Kraemer, 2003, p. 7). The review also indicated variance on the amount of payoffs resulting from IT investment among several firms. Firms that used their IT productively reported high returns in relation to IT investment.

It also indicated that management practices have an impact on the variance of payoffs among several companies. A company that effectively integrated IT with its business strategy, human resource management strategy and relocation of resources experienced high return.

Conversely, the research failed to provide a clear relationship between profitability and IT investment partly due to inability to quantify most of unobservable aspects that create value in a firm. The use of IT has substituted the use of labor. This particularly has led to decrease of low skilled labor while demanding high skilled labor in organizations (Dewan, 1997, p. 1666).

The review further depicted a positive relationship between economic growth and IT investment for developed countries (Dedrick, Vijay & Kraemer, 2003, p. 19). In spite of this achievement, the review calls for more accurate research that would enable to expand on the relationship between IT capital and financial performance.

The managerial implication of IT and economic performance

This article has a number of implications on the managerial performance as discussed below.

Efficiency of processes and quality of both services and products

Information Technology has today increased the efficiency of the processes of production. It has also led to significant reduction of the cost of production following the decrease in the large number of low skilled labor. This has enhanced the capacity of managers in making more profit due to low production costs.

The efficiency in production has enabled managers to produce high quality products. These products commonly meet customer’s requirements or otherwise perceived to be of higher value in relation to similar products offered at the market. This gives a firm competitive advantage over other similar firms and thus managers should be on the forefront to embrace the Information Technology (Pohjola, 2001, p. 253).

IT with communication and global transactions

The introduction of IT has also improved communication between the management, employees, customers, various organizations and other stakeholders. Emails and other electronic ways of sending information have raised the level of coordination among business stakeholders (Litan & Rivilin, 2001, p. 315). The existence of e-commerce has enabled managers to do transact business globally. This has further escalated profits for the business and enhanced managerial performance.

Database system for storage of organization data

The availability of a database system has helped management to keep all data related to business activities. This data will act as a benchmark in predicting future performance as they generate trend.

The past data is arranged on a monthly, quarterly, semiannually or annually basis depending on the type of business. This arrangement will help a manager to come up with a performance analysis through utilization of tools such as line graph and other types of measurements. This will give a deep insight of how the business has been performing for the past period.

Through this, the manager will be able to project the near future performance of the firm. In this regard, a manager who is keen on driving the firm towards achieving its mission would come up with better strategies to obtain already outlined targets such as profit maximization.

IT integration in an Organization Structure

However, for a firm to ensure it gains from the investment in IT, management should ensure that it effectively and efficiently matches IT with the firm’s business strategy, human resource management strategy and allocation of resources. A match of these aspects reflects good management practice that would enable the business to benefit from IT (Dedrick, Vijay & Kraemer, 2003, p. 9).

Before investing in IT, organizations are always advised to do reorganization or reengineering of their processes to ensure a match between IT tools and organization’s subcomponents. This not only improves efficiency of production processes but also its effectiveness that goes to an extent of improving quality of products and services as the firm will be utilizing its’ IT capital optimally.

References

Dedrick, J., Vijay, G. & Kraemer, L. (2003). Information Technology and Economic Performance: A Critical Review of the Empirical Evidence, University of California, Irvine, ACM Computing Surveys, 35(1), 1–28.

Dewan, S. & Min, C.K. (1997). Substitution of information technology for other factors of production: A firm level analysis. Manage. Sci. 43(12), 1660–1675.

Jorgenson, D.W. (2001). Information technology and the U.S. economy (Presidential address to the American Economic Association). American Econ. Rev. 91(1), 1–32.

Litan, R.E. & Rivlin, A.M. ( 2001). Projecting the economic impact of the Internet. Papers and Proceedings of the One Hundred Thirteenth Annual Meeting of the American Economic Association. American Econ. Rev. 91(2), 313–322.

Pohjola, M. (2001). Information technology and economic growth: A cross-country analysis. Information Technology and Economic Development. London: Oxford University Press, U.K. 242–256.

Roach, S.S. (1991). Services under siege: The restructuring imperative. Harvard Bus. Rev. 39(2), 82–92.