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The Substitution of Information Technology



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The Substitution of Information Technology for Other Factors of Production A Firm Level Analysis Authors Sanjeev Dewan and C Min Working Paper ITR 127 1996 2 1 Introduction The phenomenal price and performance improvements in information technology IT that fuel the information revolution have also led to the overarching displacement of non IT inputs in the production of goods and services Over the past few decades IT has accounted for an increasing share of new investments by the U S business sector Based on the BEA asset category Office Computing and Accounting Machinery IT investment has increased at the average rate of 7 4 per annum 1990 dollar basis in the period from 1960 to 1994 By comparison the overall output of the economy GNP has increased at only about 3 per annum Figure 1 shows that the share of IT in nonresidential fixed investment has grown from 0 4 in 1960 to 15 5 in 1994 while the ratio of IT investments to labor costs has increased from 0 4 in 1980 to 4 7 in 1994 1 IT intensity as measured by both IT investment per employee and IT as a percentage of total fixed investments Figures 2 and 3 respectively has steadily increased in every sector of the economy 2 The fact that the financial sector appears to be a clear leader in the growth of IT intensity is not surprising It was among the first to incorporate electronic data processing in its operations through check handling bookkeeping credit analysis and automated teller machines Franke 1987 Across all industry sectors the earliest applications of IT were directed toward the reduction of personnel costs in such labor intensive operations as accounting purchasing and payroll Since then computing and communications technologies have affected all functions of the modern corporation gradually displacing traditional labor and capital inputs through such applications as electronic order entry electronic data interchange office automation telecommuting expert systems robotics object oriented programming and



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