Technical efficiency analysis of information technology investments: a two-stage empirical investigation

One of the difficult challenges facing management and researchers today is how to justify costly investments in information technology (IT). This paper presents an approach to investigating the effects of IT on technical efficiency in a firm's production process through a two-stage analytical study with a firm-level data set. In the first stage, a nonparametric frontier method of data envelopment analysis (DEA) is employed to measure technical efficiency scores for the firms. The second stage then utilizes the Tobit model to regress the efficiency scores upon the corresponding IT investments of the firms. Strong statistical evidence is presented to confirm that IT exerts a significant favorable impact on technical efficiency and in turn, gives rise to the productivity growth that was claimed by recent studies of IT economic value. Practical implications are then drawn from the empirical evidence. (C) 2002 Elsevier Science B.V. All rights reserved.