ICT investment, productivity and efficiency: evidence at firm level using a stochastic frontier approach

We analyse the determinants of ICT investment and the impact of information technology on productivity and efficiency on a representative sample of small and medium sized Italian firms. In order to test different theoretical predictions from the ICT literature we evaluate the impact of investment in software, hardware and telecommunications of these firms on a series of intermediate variables and on productivity. Among intermediate variables we consider the demand for skilled workers, the introduction of new products and processes and the rate of capacity utilisation. Among productivity measures we include total factor productivity, the productivity of labour, and the distance from the "best practice" by using a stochastic frontier approach. Our results help show that the positive effect of ICT investment on firm efficiency can be more clearly detected at firm level data by decomposing it into software and telecommunications investment. We find that software investment increases the demand for skilled workers, average labour productivity and proximity to the optimal production frontier. On the other hand, telecommunications investment positively affects the creation of new products and processes but negatively affects average labour productivity. We interpret these results by arguing that ICT investment modifies the trade-off between scale and scope economies. While software investment increases the scale of firm operations, telecommunications investment creates a “flexibility option” easing the switch from a Fordist to a flexible network productive model in which products and processes are more frequently adapted to satisfy consumers' taste for variety.