The productivity impact of information technology across competitive regimes: The role of industry concentration and dynamism

Empirical research has revealed differences in the economic impact of information technology (IT) across industries. However, the source of these differences is unclear. In this study we analyze the role of the competitive environment in moderating the productive impact of information technology and regular capital. We focus on two important features of an industry's competitive environment: industry concentration and industry dynamism. Industry concentration is the degree to which the output of an entire industry is produced by a few firms and is considered an inverse proxy for industry competitiveness. Industry dynamism denotes change that is difficult to predict, measured as the deviation of industry sales from a trend line. We analyze the moderating impact of concentration and dynamism on the output elasticity of information technology and regular capital by estimating a production function using 5211 firm-year observations spanning the years 1987 to 1994. We find that the marginal product of IT is lower in more concentrated industries, while the opposite is true for regular capital. There is limited evidence that the marginal product of IT is higher in more dynamic industries, and strong evidence that the marginal product of regular capital is lower in more dynamic industries. Taken together, our results suggest that IT provides enhanced productivity impacts to firms in more competitive industries without any productivity loss in dynamic industries, in contrast to regular capital. The findings underscore the salience of inclusion of the competitive environment in studies of the productive impacts of information technology. (c) 2006 Elsevier B.V. All rights reserved.