Information technology investments and aggregate productivity

Abstract

Earlier studies have shown positive and large impacts of information technology (IT) investments on aggregate products in the nascent stage. However, this causal inference may not be applicable in the adult regime with a diminishing marginal productivity. We conduct a 52 cross-country analysis on a 15 year data of IT capital stocks, rather than flows as used in the literature. Controlling for country and time effects, the empirical implications of our study are as follows: First, the IT investment intensity positively affects aggregate productivity controlling for labor, assets, and financial markets. Second, the relative contribution has decreased as the law of diminishing returns predicts. Lastly, software and services have gained more capital allocation on relative terms in exchange for less on hardware. This finding contrasts with the existing argument that the hardware-software mix is time-constant due to substitution.