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Stiff competition leads to the employment of new technologies for productivity improvement level of firms’ resources. The most vital factor of evaluation concerning growth at the industry and organizational levels is productivity. According to Tabatabae (2000), productivity growth guides firms to raise their market share. Fundamentally, productivity has its base on the firms’ economics. Its measure is the input-output ratio. In recent as well as current studies, productivity has had a common definition as the ratio of the most important and limited input to output, holding all other inputs at constant. It is the most common measure of economic and organizational performance and which simply means an output per a unit of input.
Currently, long term productivity in organizations and nations at large has increased rapidly (Kohli and Sherer, 2002). Most of these increases in productivity are due to constant development, utilization, and embracing of new technological innovations among them information technology (IT). However, it is not crystal clear what section of productivity benefits could have a direct attribution to information technology. Most studies suggest that at best, information technology only results in only marginal gains. It is difficult to measure these gains since they are intangible in nature (Brynjolfsson and Hitt, 2001; Pohjola, 2003). Another group of authors attribute productivity benefits to information technology while others call for an end to the debate claiming that productivity in early days of manufacturing is not a good measure of organizational and economic performance labeling it a poor universal standard (Brynjolfsson, 1993; Jarvenpaa and Ives, 1990; Panko, 1991).
In line with much empirical and theoretical evidence, information technology offers gains for a variety of business and organizational processes and carries improvements in information and knowledge management within an economy or within an organization, resulting to better performance and increased productivity (Tachiki et al., 2004). Organizations may manage their own processes more proficiently and, as a result, they add to their operational competence. Furthermore, information technology reduces the costs of coordination within the firm due to lower procurement and reduced inventory costs and closer coordination with firm suppliers (OECD, 2004). Moreover, communication based on information technology and the internet may also result in improvements in an organization’s external communication, minimizing of the inefficiencies caused by poor or lack of proper co-ordination between firms, and escalating the rate and dependability of information processing and transfers. Generally, information technology minimizes costs of transactions and coordination thereby increasing the value of the transactions (OECD, 2004).
As the Neo-classical economic models suggest, productivity is among the most vital factors affecting economic growth. It results in firm’s increasing production through specific factors and also optimizing the employment of requirements of production. In an open competitive market, a firm’s survival depends heavily on the improvements of its productivity. The main focus of most productivity-linked attempts is come up with long term improvements in a firm’s performance. Matter of fact, Drucker (2001) mentions that productivity is among the best methods employed in quality of working life improvements, curbing inflation, profit enhancement, unemployment reduction, capital creation, wealth increment and cost reduction. Drucker also noted that lack of productivity objectives eventually kills off any business establishment.
According to Dirks (2005), present activities of a business are illustrated by concentrated global innovation of rapid products, automation increment in addition to important changes in the organization that respond to technologies in information technology and manufacturing. Measurement of productivity growth results in examination of firms in relation to the factors that impact on value added for instance, information technology, innovation among other factors. To maximize customer satisfaction and growth, a valuable resource such as information technology is required. IT has the capacity to make an impact on organizational structures and make significant improvements on the quality of performance of organizations. From the past three decades, information technology has been indicated to be a main factor to competitive advantage of a firm (Melville et al. 2004). The studies further make a conclusion that, information technology has stimulated competition in a number of ways: has caused a change in the competition amongst firms and industrial structures, has supported the emergence of fresh businesses, and most organizations employing information technology often outdo their competitors. A good number of firm managers and directors regard information technology as a main driver to a firm’s profitability and sustenance. Due to this matter, information technology poses a serious crisis for high ranking management. Innovations in information technology have the capacity to change the competitive chances for most firms. However, the information technology investment puts mounting pressure on firm executives to examine its business value. For quite a long time now, much debate has surfaced over the profitability of information technology and how it affects productivity. In the early 80s, research found that there was no positive relation between productivity and information technology. This is the productivity paradox. Later, immense efforts in study at the industrial and national level have continuously shown that the effects of information technology investments on economic growth and productivity are quite important and positive.
According to Crespi et al. (2007) in his examination of the connections between productivity increment, investments in information technology and organizational change in the United Kingdom organizations, and their outcomes support the idea that benefits from the information technology sector need a re-organization so as to produce quantified productivity growth. Other authors for example Gretton et al. (2004) obtains empirical evidence concerning the positive impacts of complementing attributes between the utilization of information technology and human resource, intensity of organizational change and innovative business practices on the productivity growth of economies and organizations at large. Other researchers Arvanitis and Loukis (2009), in a comparative study, come up with empirical evidence on the positive impacts of information technology capital, human capital and fresh organizational procedures on labor productivity, with the observation that the some firms portray more maturity and more efficiency when combining the new factors of production.
Many questions arise on how information technology may be utilized so as to increase productivity in any organization or how tasks can be performed in better ways using IT. A vital source of growth in productivity lies in the improvement of the procedures of administration in finance. According to the European Commission (2007) employing information technology in the administration of finance is recognized as among the most essential profitability sources for instance in Europe. It is projected that the transformation from paper to electronic invoicing could lead to a drastic reduction in cost (European Commission 2007).
Development of information technology is quite a new phenomenon which results to its share in the total capital stock of a country to remain small even when its proportionate share in the current investment products is growing fast (Brynjolfsson, Erik & Wu, D.J. (2006). As a result of this, at the average macro-economic level, information technology capital stock contribution as an input factor is statistically difficult to detect, even when the marginal return is significantly above other factors of input (Dehning & Richardson, 2002). Due to the lower investment of information technology in developing countries as compared to the developed nations, the statistical estimation problem is projected to worsen in future (Bresnahan, T.; Brynjolfsson, E. & Hitt, 2002). Nevertheless, in the case of newly industrialized nations, some countries for example Singapore have shown rapid adoption and diffusion of information technology to a level where IT usage has gone past the level in most advanced nations (Wong, 2000).
The effects of information technology (IT) on improving the productivity of information are quite tremendous and subject to scholarly review and scrutiny. Most institution have benefited from Information technology while others have not yet experienced the numerous gains. Most of the previous researches and literature works available major in Information Technology spending on performance on the firm level. To further the research on information technology, it is important to study the economical and organizational construct in productivity and business value and its impact on the performance of a firm. The next frontier for information technology applications and offers is the improvement of information and knowledge work productivity. Important and documented improvements in productivity in various sectors of the economy have been delivered through technology (Weill, 1992). In order to express a simple understanding and finer distinction of the business value of information technology, focus is put in improvements in performance and project work productivity.
Productivity eventually drives wealth of nations and their economic affluence. Currently, productive employees earn higher incomes and wages thereby experiencing raised standards of living as compared to the past generations. The study of all the forces driving productivity growth is a vital field for research especially to the policy makers in companies and most institutions. This study is particularly valuable in Europe since it has had a rather slower pace in keeping up with economic growth and welfare together with productivity. In the late 90’s the US underwent a rapid acceleration of growth in productivity which was not experienced in Europe and other regions owing to the United States’ active involvement in investment in Information Technology with other economic powers and regions.
The connection between investment in information technology and its outcome on economic and organizational performance increasingly interest practitioners, academics and researchers alike. Institutions view investment in Information technology as a means to curb competition by advancing productivity, quality and profitability in operations.
In any economy, whether strong or weak, organizations invest a mean of 37% of the capital budget every year in information technology, (Kirkpatrick 2002) with an aim of improving business profitability and/or productivity. To clarify the justification for the extensive expenditure, researchers on information technology carry out investigations for the accurate connections between an organization’s investment on information technology (IT) and all the overall business value it gets, specifically at business process levels and work group (Kohli and Devaraj 2003, Melville et al. 2004). Kluge and Schilling (2000) note that researches in organizational studies have effectively applied learning curve assessment to look into the nature of increases in firm performance with experience even though, the probable connection between the curves of learning and information technology has had poor reception resulting in little attention (Argote et al. 2003). Information technology theory puts forward that there is a positive relationship between firm performance and IT and it has the capability of contributing to the performance by making better an organization’s capacity to resolve issues, coordinate tasks, manage, administer, communicate and distribute awareness.