Total Factor Productivity Growth in Information Technology Services Industries: A Multi-Theoretical Perspective

Abstract

Information technology (IT) services refer to the delivery and support of IT operations and activities in order to satisfy business requirements and to manage IT infrastructure for organizations. Considered part of knowledge-intensive business services, IT services provide an output used by other sectors and play an increasingly important role in the services-based economy. Based on the theories of production, innovation and competition, we study total factor productivity growth of IT services industries in 25 Organization of Economic Cooperation and Development (OECD) countries over the period of 1995 to 2007 using Malmquist productivity index (MPI) as the performance metric and data envelopment analysis (DEA) as the measurement methodology. We then further decompose MPI into three components that provide a full analysis: technical change (for innovation), efficiency change (for catch-up), and scale change (for demand fluctuation). These IT services industries are found to show notable productivity growth when compared with other services industries, the services sector as a whole, and the economy at large. Through a multi-theoretical lens, our breakdown analysis reveals that the IT services industry is an innovator adept at making technological progress that becomes the key driver behind observed productivity growth; efficiency change exerts a relatively small negative impact; and scale change being mainly decided by client demands impairs productivity. Implications for IT services at both country and industry levels are drawn from our findings to provide suggestions for policymaking and strategy formulation.