A Study on the Better Deflation for the Measurement of IT Investments to Vitalize e-Business Industry at the National Level

In 2007, a study provided an empirical evidence that IT investment had positive effects on national productivity growth. They used the GDP deflator to derive the real IT expenditures from the nominal values for the period from 1992 to 2000. This paper discusses whether the use of the GDP deflator was appropriate. If an inappropriate deflator is used, a distortion may occur in calculating the return on IT investment. It can also cause an inefficient allocation of resources to the e-business industry at the national-level. In conclusion, we propose that the use of IT price index would be a more proper deflator to estimate accurate IT investment on a baseline year. Following the logical steps of calculating the real IT expenditure and resultant average IT capital stock (per worker) estimates, we show the differences between the results acquired from the use of GDP deflator and three categories of price index for IT as deflators. The result implies that the use of GDP deflator may cause the overestimation of positive impact of IT investment on national productivity growth by 10 to 50 percent. The implication of this analysis result is significant, because it may raise a concern again if the investment on IT really generates a positive return, as implied by many counter examples called the “IT productivity paradox.” Of course, this kind of national-level perspective cannot be revealing the difference in strategic competence of micro-level e-business organizations in harnessing the competitive potential of information technologies.