Assessing the input effect on productive efficiency in production systems: the value of information technology capital

Abstract

It is an imperative task for management to measure an organization's performance against its peers, competitors or itself. Among the performance measures frequently used, productive efficiency concerns the effective usage of input resources in producing output. Moreover, we are still unclear about how to identify the sources of such efficiencies so as to explain their causes. The issue becomes even more relevant and important but uncertain if the intended factor can also be treated as a non-traditional input in the production process. Treating information technology as a non-ordinary capital, this paper explores its effect on productive efficiency in a two-stage procedure. The first stage uses productive efficiency derived from parametric stochastic production frontiers models to measure the firm's performance, comparing the models with and without information technology investment as an independent input factor. The second stage then applies the non-parametric Wilcoxon signed-ranks method to test whether the information technology input has a positive impact on productive efficiency. The procedure is applied to a firm-level data set to corroborate the positive input effect of information technology on productive efficiency in the production system.

Keywords:

• Efficiency analysis
• Production factor
• Parametric frontiers
• Wilcoxon signed-ranks tests
• Information technology
• Productive efficiency

Acknowledgements

The authors thank the anonymous referees for their constructive suggestions and comments that led to many improvements in the paper. They also gratefully acknowledge the financial supports from the School of Management and the Robert F. Berner Management Science and Systems Excellence Fund, The State University of New York at Buffalo, Buffalo, New York, NY, as well as the financial support of the Dean's Award for Excellence Summer Grant funded by the Dean's Council of 100, The Economic Club of Phoenix, and the Alumni of the W. P. Carey School of Business at Arizona State University, Tempe, AZ.