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CHAPTER - II
REVIEW OF THEORY AND EMPIRICS
Technological changes and innovations are the major drivers of
economic growth and are at the very heart of the competitive process. Over the
last few decades, a large body of literature on economic growth has attempted to
account both theoretically and empirically for such major issues in economic
theory although from different perspective and with different approaches but the
literature explicitly or implicitly focuses on the manufacturing sector. Services for
a long time have been seen as technologically backward. It is not until quite
recently with the growth potentiality linked to the new information and
communication technology (ICT) that this attitude began to change. Although
more is known about ICT in services, investigation of its economic impact has
largely been ignored. Even then, some reviews of studies presented here are
intended to put together the empirical evidences relating to the effect of
information technology on the performance of services. The studies may be
categorized into four broad categories: productivity paradox related, firm level
studies; system-wide studies; and banking sector specific studies.
IProductivity Paradox Related Studies
One set of studies relates to the Baumol’s productivity paradox,
wherein the relation of technology input and productivity in the service sector has
been explored. Various explanations have been given to the dynamics of
productivity paradox. Following is a synoptic review of such studies.
Triplett (1997) has analyzed the role of computers in the Solow
productivity paradox. The paper lays out the seven productivity paradox
explanations in a purely non-technical way. The author has articulated the
connection between the treatment of computers in price indices and the modern
day challenges of measuring the productivity of a nation.
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To translate into productivity, technology inputs need a time lag.
Kelley (1997) performed a survey of production managers in 1989 and sampled
1612 different machinery jobs or projects. Of these, 823 used programmable
technology and 789 were conventional. The dependent variable is production
hours. Least square regression has been used in a natural log transformation of
cost of materials, number of cutting tools, volume usage and machinery
employment variables. Controlling for production attributes, and 11 other factors,
the use of programmable automation can cut unit production hours by 40 percent.
This suggests that time is needed to adapt the technology and gives credence to
the idea that information technology has to work its way into an organization.
Grover, Teng and Fiedler (1998) studied the productivity in a new
way. They examine the nature and magnitude of relationship between information
technology diffusion, perceived productivity improvement and process redesign.
The authors use non-economic firm level survey to determine the organizational
impact of the implementation of eleven specific technologies and their impact on
productivity. Study takes three variables for each technology, i.e., diffusion in
organization, perceived process change and perceived productivity change. The
findings suggest that process redesign and information technology have a complex
relation with productivity and these can be represented by a moderating model for
different technologies. The authors suggest that their more qualitative analysis
supports the positive effect of information technology as demonstrated by
Brynjolffsson and Hitt (1996) though they too can not explain the past
productivity paradox.
Diwert and Fox (1999) explore the main characterization and the
causes that have been advanced for the so-called productivity paradox. The work
has reviewed the wide-ranging evidence of the post-1973 productivity growth
downturn. Analyzing the data of 18 OECD countries, the authors have
documented that the total factor productivity growth dropped from an average
annual rate of 3.25 percent over the years 1961-1973 to 1.09 percent over the
period 1974-1992, and the labour productivity dropped from an average annual
rate of 4.41 percent over 1961-1973 to 1.81 percent over the period 1974-1992.
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The productivity has been under estimated due to some measurement and
conceptual problems related to new products and processes. The authors point out
that increasing proportions of business expenditures are actually consumption
expenditures and theses classification errors have reduced the measured
productivity growth. Study covers inflation related aspects of business accounting
and taxation that might have interacted with decision making in such a way as to
cause a serious downturn in productivity. The broad thrust of the argument is that
historical cost accounting; high-inflation and high rates of business income
taxation interact to produce chaos in the inter-temporal allocation of resources that
in turn can lead to productivity growth declines. The paper concludes that mis-
measurement of business expenses in periods of high inflation may reduce
productivity, and problems in accurately measuring relevant variables may mask
the productivity growth recovery when inflation falls.
Wolf (1999) explains the productivity paradox with the help of
evidences from indirect indicators of service sector growth. Wolf starts with the
basic proposition: how to measure productivity in an industry in which output is
difficult to measure but inputs are easily measurable. The author explains that
poor performance of services in the more recent years has been associated with
the problems in measurement of their output over time; not due to actual changes
in the productivity. The paper constructs some related measures of technological
activity to investigate this issue. Using the U.S. decennial data census and the
input-output data for the period of 1958-1987, the author provides the indirect
evidence at the industry level that the productivity growth is positively related to
research and development intensity and knowledge spillovers from other
industries, but negatively related to major restructuring of the technology as
reflected in changes in the occupational composition of industry employment. The
estimated coefficients for the service industries are significantly different from
those of all industries regression. The author uses this indirect evidence to infer
that there is a mis-measurement of service sector output.
Paslak Alan (2003) analyses productivity of the firm using both
market and financial based measures stratified by overall industry type. The
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objective of the study is to determine whether a Productivity Paradox is observed
after eliminating the overall industry impact. It attempts to address the issue by
separately analyzing the relationship between information technology expenditure
and productivity for each distinct industry sector. The overall results of the
analysis show that none of the factor has a majority of industries with significant
correlation and none of the industry shows a majority of factors with significant
correlation. The productivity paradox is significantly influenced by industry
stratification. In a number of industries information technology expenditure has
significant and positive impact on firm productivity based on common financial or
market based measures.
Ibragimov and Julian (2008) analyze the trends of productivity
paradox from 1995 to 2005, by using the statistical data from 21 developed
countries and employing three level methodological approaches to assess the
productivity. The first level analysis examines macroeconomic indicators (GDP
Per Capita), and the second level considers the internal structure of information
technology investments and third level analyses labour and multifactor
productivity. Study suggests that there is high positive correlation of information
technology investments and GDP growth. At the same time labour and multi
factor productivity do not significantly correlate with technology investments.
Study by Godfrey E. Ekata (2012), deals with an investigation to
determine whether or not a relationship exists between information technology
expenditure and the financial performance of the Nigerian banking industry. A
non experimental quantitative correlation method is used in the investigation. The
information technology expenditure data have been collected for the period 2005
through 2009 from the Nigerian banking industry using a survey instrument while
the financial performance data is collected from the bank’s annual reports for the
same period. The total information technology expenditure is analyzed against
certain financial performance indicators (ROA, ROI and net profit) using
Spearman’s correlation co-efficient. The results of the study are consistent with
the inconclusive results drawn in more than two decades of studies examining the
relationship between IT expenditure and organizational financial performance.
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The study showed evidence of the IT productivity paradox that has been widely
reported in literature. The results failed to show evidence of improved profitability
from increased IT spending. The results indicate a statistically significant
relationship between total IT expenditure and return on asset only, suggesting that
bank assets present the greatest opportunity of improving the industry’s
profitability.
Beccalli (2006) used data from 737 banks covering the period from
1993 through 2000 to study the impact of increased information technology
investment on the profitability performance of banks in France, Germany, Italy,
Spain and United Kingdom. The objectives of the study are: (a) to investigate
whether IT investments improve organizational capabilities of banks; and (b) to
find whether banks gain a competitive advantage from IT investment and
therefore achieve higher profits or stock value. The study uses balance sheet and
income statement data, giving a pooled total of 4414 observations. Study uses
ROA and ROE as performance variables and hardware cost, software costs and
services cost as the investment variables. It shows no significance relationship
between total information technology expenditure and improvement in
profitability. However, when the investigator segregated information technology
investment by type (hardware cost, software cost and service cost) the results
reflect a more varied association between information technology expenditure and
performance. Hardware and software purchases show negative relationship with
profitability, suggesting an information technology productivity paradox.
IIFirm Level Evidence Studies
To explore the relationship between information technology and
performance, several studies have been undertaken in the recent period using the
firm level approach. Following section is a brief review of some representative
studies.
Brynjolfsson and Hitt (1993) used the firm level data on several
components of information systems (IS) spending over the period 1987-91. The
dataset includes 367 large firms for a total of 1121 observations which generated
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1.8 trillion dollars in output in 1991. The IS data is supplemented with data on
other inputs, outputs and price deflators. The study uses econometric model for
the contribution of IS to the firm level productivity. The results indicate that IS
spending has made a substantial and statistically significant contribution to firm
output. The study finds that gross marginal product from computer capital
averaged 81 percent for the firms in the sample. It further finds that marginal
productivity for computer capital is at least as large as the marginal product of
other types of capital investment and that IS labor spending generates at least as
much output as spending on non-IS labour and expenses. The study finds that
contribution of IS to output does not vary across years, although there is weak
evidence of decrease over time. Another important result of the work is that
contribution of information technology to output is as high in the service sector as
compared to the manufacturing sector. Because, they use firm level data, this
result suggests that the productivity slowdown in the service sector may be due to
mis-measurement of output in aggregate data sets. On the whole, study concludes
that spending on information systems (IS) and in general and on information
technology (IT) capital in particular is regarded as having enormous potential for
reducing costs and enhancing the competitiveness of American firms.
Kwon and Stoneman (1995) have made an attempt to theoretically
and empirically explore the impact of technology adoption on firm’s output and
productivity. The study is based upon a modified Cobb-Douglas production
function with capital, labor and technology adoption as arguments. Three versions
of model with varying degrees of endogeniety are developed and then tested upon
a data set relating to adoption of five different process technologies by 217 firms
in the U.K, over the period 1981-90. The authors performed ordinary least squares
regression on the data. Results of the regression show that output gain does result
from technology investment but the output gain is different across technologies.
Overall the results indicate that technology adoption has a positive impact on
output and productivity.
Vijay and Melville (1999) represent one of the first attempts at
disaggregating the heterogeneous information technology capital category into its
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salient constituents and examine their relative contribution to the value of the
firm. Specifically, the study focuses on three hardware categories: mainframe
computers, mini computers and micro computers. It models the production
process using a standard production function framework. The objective of the
study is to understand the relative contribution of different classes of technology
to firm output. The study uses data on the capital stock of these categories of
systems as well as the level of computer networking at the firm level for a nearly
balanced panel of large firms spanning the eight year period 1987-94, representing
more than 3600 observations. It uses the computer intelligence technology
database, Constructed by ‘ZD market Intelligence’. The study uses ordinary least
squares to estimate a cross-sectional time series model with time dummies to
account for time-dependent intercepts. The results are consistent with previous
research finding of positive returns to investment in information technology
capital. Disaggregating information technology capital, the study finds that the
output elasticity of mainframes and personal computers is positive and significant
whereas that of minicomputers is not. The higher output elasticity of personal
computers suggests that its growing share in information technology capital stock
relative to mainframes is justifiable investment strategy for companies.
IIISystem-wide Evidence Studies
To explore the macro dynamics of the relation of information
technology and performance, several system wide studies have been done in the
recent past. This section covers such studies to delineate the underlying process.
Oliner and Sichel (1994) have critically reviewed the published
research on computers and productivity. Their study develops a general
framework for classifying the research, which facilitates identifying what we
know, how well we know it, and what we do not know. The review concludes that
the productivity paradox first formulated has been effectively refuted. At both the
firm and country level, greater investment in IT is associated with greater
productivity growth. At the firm level, the review further concludes that the wide
range of performance of IT investment among different organizations can be
explained by complementary investment in organizational capital such as
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decentralized decision-making systems, job training, and business process
redesign. IT is not simply a tool for automating existing process, but is more
importantly an enabler of organizational changes that can lead to additional
productivity gains, but in mid-2000, IT capital investment began to fall sharply
due to slowing economic growth, the collapse of many Internet-related firms, and
reductions in IT spending by other firms facing fewer competitive pressures from
internet firms. This reduction in IT investment has had devastating effect on the
IT-producing sector, and this led to slower economic and productivity growth in
the U.S economy. While the turmoil in the technology sector has been unsettling
to investors and executives alike, this review shows that it should not overshadow
the fundamental changes that have occurred as a result of firm’s investment in IT.
Notwithstanding the demise of many Internet-related companies, the returns to IT
investment are real, and innovative companies continue to lead the way.
Barua et al. (1995) propose and test a new process-oriented
methodology to audit IT impacts on a strategic business unit (SBU) or profit
centre’s performance. The IT impacts on a given SBU are measured relative to a
group of SBUs in the industry. The methodology involves a two-stage analysis of
intermediate and higher level output variables that also accounts for industry and
economy wide exogenous variables for tracing and measuring IT contributions.
The data for testing the model have been obtained from SBUs in the
manufacturing sector. The results show significant positive impacts of IT at the
intermediate level. The theoretical contribution of the study is a methodology that
attempts to circumvent some of the measurement problems in this domain. It also
provides a practical management tool to address the question of why (or why not)
certain IT impacts occur. Additionally, through its process orientation, the
suggested approach highlights key variables that may require managerial attention
and subsequent action. The study finds that information technology investment
affects intermediate measures such as inventory turnover but found no evidence of
the benefits extended to firm performance as measured by return on asset.
Licht and Moch (1999) measure the information technology impact
on productivity in Germany. Data set contains information on the different kinds
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of information technology capital used by firms. The study uses data for 317
establishments from the manufacturing sector and the 474 establishments from the
services sector. The data indicates that information technology has strong impact
on the quality aspect of service innovations. The study finds plausible correlations
between qualitative output indicators on the one hand and capital investment,
research & development and human capital on the other hand. Contrary to these
results, information technology seems to affect some quality aspects of service
sector products but not productivity. Although a high percentage of innovating
firms claim to have realized productivity gains, managers of services seem to be
less convinced about the productivity benefits of information technology
investment. In this respect, the results are consistent with pessimistic views on the
productivity effects of IT. However, the authors expect much more utility from
obliterating business functions. Firms have just started restructuring their IT. Most
firms move along traditional lines and continue revamping traditional business
functions with IT. This has prohibited the industry from reaping the benefits, or
might even have negative effects. Therefore, the authors expect that the real
impacts of IT on productivity and product quality are still to come.
Lehr and Lichtenberg (1999) examine the impact of information
technology on productivity in the public sector econometrically using data
spanning the period 1977 to 1993. The sources of data are: A private market
research firm; Census Bureau’s Enterprise & Auxiliary Establishment and the
Compustat. The study finds a strong positive growth and computer intensity
growth during the period 1987-92, controlling for growth in compensation and
other outlays per employer, and in the number of employees. The results are
consistent with the hypotheses that there are excess returns to information
technology capital. They find that computers in general and the personal
computers in particular have contributed to the productivity growth and have
yielded excess returns relative to non-computer capital investments. They further
observe that the excess return from computers first increased, touched the peak in
1986 and then declined. The thrust of this contention is that information
technology is complementary with skilled labour and the computers help to reduce
the inventory levels.
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Stiroh (1999) examines the link between information technology (IT)
and the U.S. productivity revival in the late 1990s. Industry-level data show broad
productivity resurgence that reflects both the production and the use of IT. The
most IT-intensive industries experienced significantly larger productivity gains
than other industries and a wide variety of econometric tests show a strong
correlation between IT capital accumulation and labor productivity. To quantify
the aggregate impact of IT-use and IT-production, a novel decomposition of
aggregate labor productivity is presented. Results show that virtually all of the
aggregate productivity acceleration can be traced to the industries that either
produce IT or use IT most intensively, with essentially no contribution from the
remaining industries that are less involved in the IT revolution.
Chih-Kai Chen (2003) made a study on social capital and national
system of innovation. The work, using the reports of World Bank and World
Value Survey, analyzes the linear structural relation model to consider this
relationship between the social capital and the national innovation system.
Overall, the results showed that the innovation ability of knowledge and
technology could explain the difference of cross-country economic performance.
However, the innovation activity is a collective achievement embedded with other
organizations and social activities. Put differently, the performance of various
innovation cooperation based on social capital are better than that of single
business. Thus, this work proposed that each country should not only improve the
research and development expenditure but also accumulate and enrich the social
capital, for example, improve social cooperation relationship, construct open
social network based on bridging and professional trust, in order to effectively
improve the performance of national innovation system. In the economic
competitiveness, although technological innovation significantly affects economic
development, lacking the social capital will inversely affect the innovation
proliferation and performance.
Zwick Thomas (2003) analyzes the lagged productivity effects of
information and communication technology (ICT) investments. It assesses the
effects of ICT after longer lags, because the short-run effects seem to be smaller
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than the long-run effects. The establishments participating in this survey are
selected from the parent sample of all German establishments employing at least
one employee with social security. The sample covered information about almost
9000 German establishments in 1997 and increased the size to almost 14,000
German establishments in the year 2000, of which 5500 are located in East
Germany. The Productivity effects of ICT investments are determined by
estimating Cobb-Douglas production functions. Study argues that the short term
returns represent the direct effects of ICT investment, while the long term returns
represent the effects of ICT when combined with related investments in
organizational change. Likewise, Lunardi, Guiherme and Becker, (2003)
evaluate the strategic impact of IT in Brazilian, American, Argentinean,
Uruguayan and Chilean bank. Study concludes that competition, products and
services and borrowers are the main strategic variables affecters by IT whereas
pricing and cost structure and capacity are the variables less affected by IT.
Surendra Gera and Wulong Gu (2004) examine the issue of whether
investments in information and communication technology (ICT) combined with
organizational changes such as the restructuring of production process, human
resource management (HRM) practices, product/service quality-related practices
and worker skills contribute to better firm performance among Canadian firms.
Study uses cross-sectional survey of 6351 business establishments across the
entire spectrum of the Canadian economy in 1999. Study finds strong and robust
evidence that the share of workers using computer is positively related to
productivity performance. The results show that a 10 percentage-point increase in
the share of workers using computer is associated with 1 percentage-point
increase in probability of productivity improvement. However contribution of ICT
to firm performance becomes quite large when combined with organizational
changes. The share of ICT is found to have little effect on productivity
performance in Canada. This may reflect the fact that productivity improvements
due to ICT investments occur only after a certain time lag or with initial
adjustment costs.
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Centeno (2004) classify Internet banking adoption factors in two
categories: (a) access technology and infrastructure related factors; and (b) sector
specific retail banking factors. The first category includes internet penetration
rates, skill of consumers in using internet and related technologies, attitude
towards technology, security and privacy concerns. The second category involves
trust in banking institution, banking culture, e-banking culture and Internet
banking push. Analyzing the Acceding and Candidate Countries’ (ACCs)
adoption of Internet banking, the study shows that lack of PC and internet
penetration is still an entry barrier for internet banking development both in EU-
15 and ACCs. The cost of access services is a main issue for the PC and Internet
penetration especially in Central and Eastern Europe countries. On the other hand,
there has been a lack of confidence in the banking sector in ACCs due to past
turbulent periods. These concerns are further aggravated with privacy concerns.
Degree of banking service usage and e-banking culture are also weaker in ACCs
compared to EU-15.
Dedrick and Kraemer (2005) employ production function analysis on
new data on information technology investment and productivity for 49 countries
from 1985-2004. The goal is to find out whether developing countries have been
able to achieve significant productivity gains from information technology
investment in the recent period as they increased their IT capital stocks and gained
experience with the use of information technology. The study also incorporates a
set of complementary factors including telecommunications investments and
prices, human resources, and foreign direct investment to determine whether these
factors have an impact on the relationship of information technology to
productivity. The study uses standard production function analysis to determine
the productivity impacts of information technology investments. The study finds
positive and significant relationship for developing countries for the years 1994-
2004 sample but there is no significant effect of information technology capital for
the 1985-93 sample, on the other hand, for developing countries, information
technology capital is significant across all time periods.
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Shu Wesley and Poon Simon (2005) analyze the information
technology productivity in Australia for the years 1981 to 2002. Study considers
annual time-series data for the period over 22 years (1981-2002) for 12 industries
covering the full spectrum of the Australian market sector. It considers
information technology capital consisting of only two classes: (a) computers under
the category of other machinery and equipment and (b) software (including pre-
packaged, own-account, and customized) because communication equipment is
not separated from other machinery. It shows that only input with statistically
significant contribution to output is computer hardware. Compared to information
technology hardware, software does not show positive contribution. Non-IT
capital and labor also does not show positive result. Using Australian data and
different methodology, this paper echoes the previous research that information
technology shows positive contribution to productivity.
Rodger Howell (2005) presents an analysis of the effects of increased
information technology spending on labour productivity. The analysis indicates
that increased purchase of information technology can increase the labour
productivity but it may not increase immediately because of required employee’s
training, information technology infrastructure changes and organizational
changes that may accompany the purchase of information technology. Study
further says that an increase in labour productivity and ultimately an increase in
business profit may not be recognized if the implementation of new information
technology is not properly planned and managed.
Emal Altinkemer and Yasin Ozeelik (2005) investigate the
reengineering efforts of companies to leverage potential benefits of using
information technology in their business processes to improve the productivity
and overall firm performance. Study analyses data that covers the time period
between the years 1984-2004, using a panel data model. It employs standard
variables for measuring firm’s productivity and performance including labour
productivity, ROA, ROE, inventory turnover, profit margin, asset utilization and
Tobin-q. The regression estimates show that firm’s performance remains
unaffected during the implementation period of reengineering projects and on an
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average returns to reengineering seem to accrue two to 3 years after the end of
implementation period. This result confirms the fact that the competitive
advantage provided by the IT-enabled BPR projects is indeed temporary.
Dautel Vincent (2005) shows how innovation in the manufacturing
and service sector impacts economic performance in Luxembourg. The study
further examines the impact of innovation on labour productivity. The study
considers the crucial role of the service sector in the European Economy. Time
period for the study is 1998-2003 and it takes a sample of 440 observations. Data
used refer to the whole of the firms surveyed in CIS3, i.e., firms operating with at
least ten employees in the service sector as well as the manufacturing sector. The
data includes four types of variables: (a) innovating or not; (b) innovation effort
(expenditures in innovation activities); (c) innovation output (percentage of
turnover from innovating products); and (d) Innovation performance (labour
productivity measured as sales per employee). Study applies a generalized Tobit
model, including the selection equation and the innovation input equation. It finds
that innovation in product is positively related with firm’s size. It is also observed
that as small firms invest more resources in innovation, therefore innovation input
decreases with firm size. The study finds that innovation is essential as sales per
heads are mainly determined by the innovation output and the investment effort.
Giulio, Cainelli et al.(2005) explore both conceptually and empirically
the two way relationship between innovation and economic performance in
services at the firm level. The authors identify three mechanisms: (a) innovation
as determinant of economic performance; (b) economic performance as
determinant of economic activity; and (c) two ways dynamic link between
innovation and economic performance. The objective of the study is to verify
‘what really boosts’ the productivity and economic growth of service firm. This
investigation is based on a new and original longitudinal firm level data set built
up by matching data drawn from two different statistical sources, The Italian
Community Innovation Survey (CIS II) and System of Enterprise Account (SEA).
The sample consists of 735 service firm with 20 or more employees. The authors
use econometric model for estimation of different dimensions of firm innovation
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and economic performance over the period 1993-98. The result shows that
innovation has a positive impact on performance of firm. Furthermore,
productivity in service is associated not only simply with presence of innovation
but also with level of financial commitment to innovation and type of innovation
activities performed. Productivity differential among firms and sectors emerge and
are being affected by innovation efforts of firms and by the amount of resources
devoted to internal generation and adoption of ICT’S (both hardware and
software). The reverse relationship also seems to be at work in services, better
performing firms are more likely to innovate and devote more of their resources to
innovation.
Wimble (2006) disaggregates industries and shows that industry
concentration has different effects on services compared with manufacturing. The
objective of the study is to provide insights into efficient use of information
technology and to examine industry-level factors that impact the efficient use of
purchase of information technology. The paper makes a novel contribution on two
fronts: (a) information technology capital efficiency is greater in service industries
than manufacturing industries, as well as competitive intensity at first appears to
increase information technology capital efficiency; and (b) competitive intensity
decreases information technology capital efficiency in manufacturing. The results
of this study represent a significant step toward understanding that under what
condition information technology (IT) expenditure has a positive effect.
Shirley and Sushanta Mallick (2006) develop and test a model to
examine the effects of information technology in the US banking industry. The
study aims at whether the presence of multiple networks brings determinative
benefits to each bank in the industry. The data consists of a panel of 68 U.S. banks
for the period 1986-2005. The cross section and time series nature of the available
data allows making use of a sufficiently broad sample dimension giving a pooled
total sample of 1293 observations. The study runs different methods of estimation
for checking robustness of the parameters. Two stages generalized least square
(GLS) and generalized method of moments (GMM), procedures have been used.
Study finds the strong relationship between dependent and independent variables
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in three different models, with t-values significant at level in each model. The
results of study show that there is a negative relation between information
technology investment and price level and further banks with higher level of
information technology have lower profitability due to network effect. If network
effect is low, information technology expenditure is likely to reduce payroll
expenses and increase market share, revenue and profit.
DeYoung et al. (2006) indicates that the typical internet-adopting bank
is significantly different from the typical brick-and-mortar bank in terms of
financial performance, production processes and product mix at the beginning of
the sample period in 1999. On an average, the internet-adopting banks invest a
larger portion of their assets in loans and a smaller portion in liquid assets (cash,
securities, funds). Their loan portfolios are weighted substantially towards real
estate loans and substantially away from business loans. Internet-adopting banks
also fund their assets with a different mix of deposits than the non-adopting banks,
with substantially more money market deposit accounts and substantially less core
deposits. The findings also suggest that internet adoption is associated with an
economically and statistically significant improvement in bank profitability (ROA
and ROE.
Ana Castel and Gorriz (2007) study the organizational impact of
information and communication technology (ICT) for 1225 Spanish firms. The
authors use the information originating from the survey on Business Strategies
(SBS) carried out yearly. They use a standard production function to model the
production process, considering ICT as a factor of production. The author further
says that in order to increase the benefits of ICT, it is necessary to align various
elements. Differences across countries may well be relevant in the determination
of organizational ICT impact, but the need to increase and improve education and
skills of the workers to guarantee that firms can take full advantage of the ICT
they have implemented is one of the questions that public authorities should take
into accounts. The results show the importance of organizational human capital in
order to increase the benefits of information and communication technology. It
shows that simply investing in information and communication technology does
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not generate improvements in performance; rather it is a simultaneous presence of
complementary resources and their use in close alignment with these
technologies- that can explain the difference.
Matassa, Neirotti and Paolucci (2007) analyze the ways in which
combined investment in information technology and organizational changes are
able to influence productivity. The purpose of the study is to investigate not only
if, but also how information technology affects productivity. The study uses data
available from the annual INAIC (Italian National Association of Insurance
Companies) Survey concerning staff composition, amount and nature of
information technology investments, premiums and cost performance. The
analysis refers to a sample of 44 companies which mainly operate in property and
casualty insurance and for which complete information is available for the period
from 1992 to 2000. The results obtained show that the increase in productivity is
bound not only to IT investments, but also to the implementation of important
evaluation skills. The overall picture indicates that productivity increase is in
direct proportion to the possibility for companies to implement new forms of
bureaucratic organization and administrative activities though the relevant costs
and time required for the changes must be taken into account.
Chen and Tsou, (2007) consider service innovation as critical
organizational capability through which information technology adoption
influences the competitive advantages of the firm. The main objectives of the
study are twofold: (a) to assess how information technology (IT) adoption should
be organized and managed to enhance the service innovation practices of a firm;
and (b) to evaluate how service innovation practices improve the competitive
advantage of a firm. Study uses the information technology adoption construct to
conceptualize the relationship among information and communication technology
infrastructure, strategic alignment, management processes, organizational
structure and individual learning and explains how such mechanism can sustain
and enhance service innovation practices in financial firms. Data have been
collected from a sample of 558 financial firms in Taiwan, drawn from the list
published by Taiwan joint credit information centre. The research model and
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empirical results provide strong overall validation and point to the important role
of information technology adoption that improves the service innovation practices.
The authors show that the continuous investment in information technology is a
desired approach in engaging service innovation practices and firms should follow
up by re-investigating other issues in strategy adjustment and individual learning.
The study implies that the value added role of information technology lies in
enabling a co-ordination mechanism that shapes a firm’s capacity to launch
frequent innovation practices.
A, Prasad (2008) examines the organizational performance impacts of
information technology. Information technology business value includes
productivity enhancement, profitability improvement, improved work relations
and competitive advantage. It is further observed that while most IT investment
decisions are strategic, developing countries see these investments affecting
mostly the operational activities. Since all the benefits at this level cannot be
quantified therefore the aim of the paper is to study the perceived intangible
benefits of operational level IT investments in business in a developing country to
understand how IT contributes to business value. The study which is based on the
extent of the use of information technology identifies five business representing
banking, insurance, tourism, telecommunication and government sectors. The
results indicate that the business in developing countries perceives that
information technology investments provide intangible benefits especially at the
process level and this contributes to business value and organizational value
creation. Therefore the study reflects the potential of information technology in
enhancing process efficiencies and improving the overall environment of service
delivery and ultimately sees their investment net benefits.
Muhammad Shaukat (2009), examines the impact of information
technology on organizational performance with respect to increase/decrease in
income and in number of employees verses IT expenses of Pakistani
manufacturing and banking sectors over period of 1994-2005. The primary data
has been collected through in-depth interviews and field surveys of 48 companies,
24 in manufacturing sector (12 local and 12 foreign) and 24 in banking sector (12
27
local and 12 foreign). The results of the research have led to the conclusion that
information technology has a positive impact on performance of all the
organizations but the banking sector performance outstrips the performance of
manufacturing sector. In the banking sector local companies are taking the lead,
while in manufacturing companies multinationals are at the top. The study also
detected that there is an increase in IT employees in both the sectors due to
increased work because of expansion of operations of the companies over the
years but decrease in total employees because of implementation of down/right
sizing policies in local banking sector since 1990s.
Philip Achimugu (2009) determines the level of diffusion of
information technologies, factors affecting the information technology diffusion,
and its impact on the efficiency of the organization. The study finds that these
technologies provide speedy, inexpensive and convenient means of
communication. It further shows that the diffusion of these technologies in many
countries by different sectors of the economy have been found to have direct
positive impact on the organization’s efficiency and have led to more rapid
acceleration of development in these countries.
Aduloju and Oghojafor (2011) explore the question of how IT could
enhance firm performance in the area of customer’s service and organization’s
profitability in the Nigerian insurance industry. Authors propose three hypotheses
which are tested with the aid of Kolmogorov-Smirnov test, a non-parametric tool
used to test the goodness fit of an ordinal data. The findings show that while most
companies have a comprehensive data base of their customers, not all make
provision for their customers to make major transactions online because they have
not fully integrated their customer relationship management with information
technology. The study also find out that effective combination of customer
relationship management with information technology leads to improve customer
service and organization’s profitability. Consistent with some previous studies,
this study supports the view that the use of IT can enhance service delivery.
28
IVBanking Sector Related Studies
Worldwide, in the last few years, a massive investment has been done
in the banking sector and its impact on performance is still a paradox. Numerous
studies, using alternative methodologies, have been done on different country
banking systems. Following section is a synoptic view of some representative
banking sector related studies.
Study by Parsons, Gotlieb and Denny (1993) analyzes the impact of
information technology on banking productivity per se. The research attempts to
measure the growth in productivity in Canadian banking industry. Study uses data
collected directly from banks to investigate the impact of these investments on
bank output and productivity. Using data from 1974-1988, a trans-log cost model
is estimated. Both capital and labour are divided into information and non-
information inputs. Work concludes from the estimation of results from five
Canadian banks that while there is a 17-23 percent increase in productivity with
the use of computers, the returns are very modest compared to the levels of
information technology investment. The results are generally consistent with
economic theory. Overall, there has been some productivity growth associated
with the changing computer technology. The study further finds that many of the
benefits seem to have accrued to the customers and have not directly lead to gains
for the banks.
Study by Cooke (1998) documents how changes in information
technology have affected the role of banks in financial markets and have
influenced changes in the structure and performance of the U.S. banking industry.
The analysis covers new fast growing financial innovations linked to IT
investment, e.g., assets securitization and derivatives. The study shows that
information technology effects on the banking industry have been positive.
Increased competition has caused banks to lose traditional customers but
information technology has enabled the banks to offer new products, expand into
nontraditional areas, operate more efficiently and minimize risks. Advances in
information technology and related financial innovations are directly and
indirectly responsible for much of the ongoing change in the structure of the
29
commercial banking industry. IT has spurred competition from non banks,
encouraged financial innovations that have allowed firms to directly access
financial markets, and empowered consumers and businesses with information
needed to make better investment decisions. Though these benefits are difficult to
quantify, their existence suggests that the benefits of technological and financial
innovations are being felt at the aggregate level as well.
Ken and Magdi (1999) consider the impact of investment on
information technology (IT) systems on bank’s profitability in the UK over the
period 1976-1996. The objective of the study is to find whether the new services
like introduction of ATMs are provided at a lower cost and to find whether these
help to improve bank’s profitability and generate revenue. The variable which
measures bank’s profitability is the percentage return on asset after tax. The study
uses the value of total assets as the size measure of the bank regarding investment
in information technology systems. The study uses annual data for the Major
British Banks Group (MBBG) over the period 1976 to 1996 during which IT
systems have become important and there have been major changes in the
structure of UK banking. The data are a panel of time series/cross-section
observations. The results support the view that ATMs does have a positive impact
on bank’s profitability through several factors such as reducing the labour costs
and transactions costs. There is no support for the effects of the existence of the
ATM network or membership of it but this may be a peculiarity of the data period,
since the network only became important in the 1990s. Other important variables
are the lagged ROA squared capital risk and bank size. The main conclusion is
that for banks, the number of ATMs increases the return on assets.
Haroldo Jayme and M.F. Cruz (2001) analyze how information
technology development has been impacting financial systems. The study explores
and identifies the changes which occurred due to technological innovations. The
authors observe that information technology has been positive for customers as
new products, services and delivery channels, such as internet banking, ATMs,
debit and credit cards has contributed to their convenience. The authors further
say that electronic revolution has dramatically expanded the access to abundant
30
and accurate information which increases the transparency of the financial
systems. The analysis shows that the increasing technological development has
produced an extraordinary effect on financial institutions particularly banks as
they have been able to use them as powerful tools to improve profits and growth
and to reduce risk in their operations by providing efficient management systems.
Avasthi, Sharma and Clifford (2001) have analyzed the impact of
information technology on the financial services. Study argues that dimensions of
banking business are changing in the new economy and information technology is
working as a catalytic agent. The authors further observe that advances in
technology are set to change the face of banking business. The technology is
changing the way the business is done and has opened new vistas for doing the
same work differently in most cost effective manner. Tele-banking and internet
banking are making forays such that branch banking may give rise to home
banking. Technology has transformed the delivery channels by banks in retail
banking. Their study also explores the challenges that banking industry and its
regulators face.
Study by Carlson (2001) investigates the issue in the US banking
market. The chief focus is to see if there is an association between offering
internet banking and a bank's profitability. The study regresses a bank's ROE
(return on equity) on a set of controlled variables, and includes as an explanatory
binary variable whether or not a bank offers internet banking. It also tests whether
this relationship differs for more experienced internet banks relative to new
internet banks. The finding indicates that internet banking does not have an
independent impact on bank’s profitability. However, the study speculates that it
is probably too soon to see a systematic impact of internet banking on banks'
profitability. In the same way,
Study by Idowu Alu and Adagunodo (2002) has dealt with the effects
of information technology as perceived by customers in selected commercial
banks in Nigeria which make use of information technology in their operation. A
questionnaire has been employed to collect data from customers at five major
banks in Nigeria. The result of the study clearly indicates that information
31
technology has contributed immensely to bank’s productivity, cashier’s work,
banking transactions; bank’s patronage, bank’s services delivery and customer’s
services. These have affected the growth of banking industry in Nigeria positively.
Anderson and Baker (2002) relate the market value of firms to
information technology spending. Since, companies cannot obtain competitive
advantage through investments in information technology alone because
information technology can be easily imitated. This suggests that the business
value of information technology increases with a firm’s investment in information
technology and decreases with investment by its industry peers. The study
considers that investment in new information technology by many firms in an
industry could lead to positive externalities that benefit the industry as a whole.
Likewise, Hasan et al. (2002), through an empirical examination of Italian banks
based on both univariate and multivariate regression models indicates that there is
a significant link between offering of internet banking activities and bank’s
profitability. The study further finds that the higher likelihood of adopting active
internet banking activities is by larger banks, banks with higher involvement in
off-balance sheet activities, and higher branching network.
Li-Fen-Chu (2003) explores the effects of information technology
spending on organizational performance by means of reducing costs, raising profit
margins, upgrading production levels, increasing service quality, advancing
consumer satisfaction and improving overall operations. The study considers
banking a crucial area for information technology to be implemented. Study
covering Taiwan during 1996-2000 is based on both from primary and secondary
sources. The study provides a framework for performance evaluation using not
only nonparametric DEA but also parametric stochastic frontier approach which
specifies a functional form for the cost, profit or production relationship among
inputs, outputs and environmental factors. The study finds that low operating
efficiencies exist in the banking industry during the study period. On an average,
the technical efficiencies by DEA and SFA are 40.9 percent and 39.5 percent
respectively. Operational inefficiencies are caused by a combination of both pure
technical inefficiency and scale inefficiency. The former arises from IT resources
32
while the latter results from not operating at an optimal scale. Difference of
ownership type has significant effect upon bank performance with respect to
contribution of IT investment to operating performance. The study suggests that
publicly owned banks are significantly superior to private owned bank due to their
(public banks) large scaled information technology investment and greater
economies of scale and scope. The Tobit regression reveals that the operational
efficiency of banks is positively affected by number of ATMs and diversification
of information technology services while negatively affected by number of
information technology staff.
Jalan, Arora and Janki (2003) analyze how technology is affecting
the employees’ productivity. There is no doubt that in India particularly public
sectors banks will need to use technology to improve operating efficiency and
customer service. The study considers that information technology revolution has
brought about a fundamental transformation in banking industry. Perhaps no other
sectors have been affected by advances in technology as much as banking and
finance. It is the most important factor for dealing with intensifying competition
and rapid proliferation. The focus on technology will add value to customer’s
service, develop new product and strengthen risk management. The study
concludes that technology is the tool to achieve the goals. It has a definite role in
facilitating transactions in the banking sector and the impact of technology
implementation has resulted in the introduction of new products and services by
various banks in India.
Study by Berger and Trivedi, (2003) examines the technological
programs and their effects on the banking industry. Banks are intensive users of
both information technology and financial technologies and have a wealth of data
available that may be helpful for the general understanding of the effects of
technological change. The research suggests improvements in costs and lending
capacity due to improvements in back office technologies as well as consumer’s
benefits from improved front office technologies. The authors have observed that
Indian banks have always proved beyond doubt their adaptability to change and it
would be possible for them to mould themselves into agile and resilient
33
organizations based on asset liability and risk management systems and the
required technological capabilities to meet the challenges of the paradigm shift.
Study also suggests significant overall productivity increases in terms of improved
quality and variety of banking service.
Betterymarch (2003) has analyzed the relation of banking efficiency
and information technology. The study uses a panel of 600 Italian banks over the
period 1989-2000. Stochastic cost and profit functions have been estimated
allowing for individual banks' displacements from the best practice frontier and
for non-neutral technological change. The results show that both cost and profit
frontier shifts are strongly correlated with information technology capital
accumulation. Banks adopting information technology capital intensive techniques
are also more efficient. On the whole, over the past decade information
technology capital deepening contribution to total factor productivity growth of
the Italian banking industry can be estimated in a range between 1.3 percent and
1.8 percent per year.
Nurwani Amaratunga and Mukrima (2003) examine whether Sri
Lankan banks use information technology to gain a competitive advantage over
each other. It shows that financial service industry has become virtually dependent
on information technology and is continuously investing in information
technology to gain a competitive advantage. The authors further say that
information technology is having a significant impact on an organization’s life. It
is an asset used as a competitive strategy. That strategic use of information
technology plays a vital role in retaining the existing customers and attracting new
customers. The authors conclude that superior relative economic performance can
be partially attributed to its larger information technology producing sector and
faster growth in information technology using service sectors such as wholesale
and retail trade and financial brokerage.
Kim and Davidson (2004) investigate the impact of information
technology expenditure on business performance in Korean banking using a BSC
model. The authors obtain data covering 1990-1998 from all the commercial
banks in Korea. Their results indicate an association between the levels of
34
information technology adoption and the financial performance of the banks.
Bank with high levels of information technology utilization has decreased pay roll
expenses, increased productivity, decreased operating cost, increased
administrative cost, increased market share, revenue and profit. The study also
suggests that an effective information technology strategy could reduce cost and
improve profitability.
Eyadat and Kozak (2005) investigate the role of information
technology in bank’s profitability. Their paper examines the impact of the
progress in information technology on the profit and cost efficiencies of the U.S.
banking sector during the period of 1992-2003. The authors test relationships
between the level of implemented technology and the banks efficiency. The
authors measure profit efficiency (represented by ROA) and cost efficiency
(represented by non-interest expenses) against information technology progress or
level of IT implementation. The research shows a positive correlation between the
levels of implemented IT and both, assets profitability and cost savings. Although
for all US banks the efficiency has increased, the improvements of the cost
efficiency are relatively much smaller than in the case of profit efficiency. These
results indicate that introduction of the new range of services at a bank, on one
hand, generate additional revenues, but, on the other hand, imply new, significant
cost changes. This means, broadening the range of the banking services may lead,
at some point, to a very strong increase of cost of their processing, what put in
question possibility to achieve economy of scale by banks conducting such type of
banking.. Information technology has tremendously stimulated expansion of the
banking networks and range of the offered services during recent years.
Albert Kagan and Acharya (2005) highlight the changes in the
banking sector like the internet banking which are affecting the performance of
banks. Study examines the impact of online banking application on community
bank performance. It evaluates banking products and service from a representative
sample of community banks across the upper Midwest. It analyses the individual
bank websites and evaluate for 97 different web features and services offered
online. These 97 variables are grouped together in 10 different groupings. Each
35
item within these groups is summed to create an aggregate index and these indices
are used in structural equation model as latent indicators for three latent constructs
identified as: (a) general information; (b) banking services; and (c) core-banking
services. Study uses structural equation model, online banking index and an
econometric model to evaluate bank’s performance. Study finds that online
banking index is positive in the return on equity equation and negative in the
overdue asset ratio equation. In particular, a one unit increase in online banking
index increases return on equity by 0.16 units. It shows that online banking helps
community banks to improve their earning ability as measured by return on equity
and improve assets quality by reducing the proportion of overdue or
underperforming assets. Overall study shows that the banks that provide extensive
online banking services tend to perform better than those who lag behind.
Hung Viet Ngugen (2005) focuses on the efficiency performance of
the Vietnamese commercial banks in terms of their efficiency change,
productivity growth and technological change during the period 2001-03. The
main purpose of the paper is to investigate the efficiency of banks. It also analyses
the changes in the productivity and technology of the Vietnamese commercial
banks. The study is confined to 13 Vietnamese commercial banks in the database
from the economic census for enterprises. Study uses three inputs (labour, capital
and deposits) and two outputs (interest income and noninterest income). The study
uses the Data Envelopment Analysis (DEA) and Malmquist Index. It shows that
total factor productivity increases by 5.7 percent in 2003 relative to 2001. This
total factor productivity improvement is achieved primarily by greater technical
efficiency than to technological changes or innovations in banking technology.
Kazuyuki Motobashi et al. (2005) analyze the strategic value of e-
banking for Iranian banks and examine the causal effect of perceiving e-banking
as a value and its adoption. The result of the study shows that bank manager’s
performance through e-commerce is very positive and effective in their adoption
trend. This perception helps them to accelerate the adoption process. Their study
further analyses the effect of information technology investments and network use
on firm level performance. Study finds that information technology stock
36
contributes to value added growth significantly and use of information network
shows positive impacts on TFP growth, which further pushes up firm’s output. It
is further found that a firm giving up using information technology performed
badly as compared to those who kept using it. This finding suggests that
information technology does not save all firms, but for those, which have a good
matching asset, positive impacts of information technology are observed.
Jun and Ram Mohan (2006)) use financial measures for comparing
operational performance of different categories of banks in the post liberalization
period. Work analyzes the data and financial statements for 26 banks from 1991
through 2001. Study uses ROA, ROE and net profit as performance variables, and
computer budget ratio and capital budget ratio as the information technology
investment variables. The proportion of information technology budget to the total
budget is defined as the computer budget ratio. The results show that the strongest
relationship exists between capital budget ratio and ROE, suggesting that capital
budget has the greatest chance of improving a bank’s profitability. The study
further emphasizes that the performance gap among Indian public banks, private
banks and foreign banks during the post reform period is narrowing and in the
wake of deregulation, public sector banks have improved their performance in
both absolute and relative terms.
Malhotra and Singh (2006) analyzed the implications of internet
banking for the Indian banking industry. The Study describes the current state of
internet banking in India and discusses its implications for the Indian banking
industry. Particularly, it seeks to examine the impact of Internet banking on banks’
performance and risk. Empirical analysis has been done for a panel of 88 banks
for the period 1998-2005 to see the impact of internet on bank’s performance. The
data set comes from the publicly available data source on bank’s financial
statements and income-expense reports sent to the regulators and Banking
Associations. Using information drawn from the survey of scheduled commercial
bank’s websites, the results show that nearly 57 percent of the Indian commercial
banks are providing transactional internet banking services. The univariate
analysis indicates that internet banks are larger banks and have better operating
37
efficiency ratios and profitability as compared to non-internet banks. Internet
banks rely more heavily on core deposits for funding than non-internet banks do.
However, the multiple regression results reveal that the profitability and offering
of internet banking does not have any significant association, on the other hand,
internet banking has a significant and negative association with risk profile of the
banks.
Casolaro and Gobbi (2007) analyze the relationship between
information technology investment and productivity in Italian banking industry
using unbalanced panel data from 618 banks collected for 1989 through 2000. The
authors collect the data including detailed balance sheet, income statement, and
information technology investments from the bank of Italy’s Supervisor Return
Database. With information technology use and total factor productivity as output,
the researcher employs stochastic cost and profit frontier techniques in their
analysis. The author use hardware capital stock, software capital stock,
information technology capital stock for an employee, and the number of ATMs
as the information technology investment measures. For the performance
measures, the authors use the ratio of services to gross income and capital, and the
ratio of reserves to total assets. The results indicate a positive association between
information technology capital and both cost and profit shifts. The results also
show that banks adopting techniques and policies that allowed higher information
technology investment were more efficient than banks that allowed lower
information technology investment practices.
R. K Mittal and Sanjay Dhingra (2007) evaluate the impact of
computerization on the performance of Indian banks in terms of their profitability
and productivity. This study takes into consideration the information technology
innovations in the last few years which have changed the landscape of banks in
India today. It considers IT to be the prime mover of all banking transactions. The
objective of the study is to analyze the impact of IT initiatives which are taken
more by private and foreign banks as compared to public sector banks. The study
uses data for public, private, new private and foreign banks. The data for analysis
have been used from PROWESS 2.5, a corporate data base developed by (CMIE)
38
and from the web sites of selected banks. The data are based on bank's
performance in the year 2003-04 and 2004-05.The study uses Data Envelopment
Analysis (DEA) a non-parametric method to evaluate the relative efficiency of
similar units known as Decision Making Units (DMU). The results of study are
that the benefit of the computerization in boosting productivity and performance
of banks is difficult to quantify as other factors are also responsible for outcome.
It further shows that private banks are the early adopter of technology and take
more information technology initiatives than public sector banks. The output of
DEA indicates that the private banks are much better than public sector banks in
productivity and profitability. Hence of many factors that can lead to improved
performance of banks, increased information technology investment is one of the
vital contributing factors for enhanced performance.
The study by Agboola (2007) is a comprehensive evaluation of the
response of Nigerian banks to the adoption of information and communication
technology (ICT). The objective of the study is to evaluate the application of ICT
concepts, techniques, policies and implementation strategies to banking services.
ICT products in the banking industry include; automated teller machine, smart
cards, telephone banking, MICR, electronic funds transfer, electronic data
interchange, electronic home and office banking. The study covers 36 out of the
89 banks in the country as at the end of 2005. The Likert-type ratings are used to
measure and analyze the degree of utilization of identified technologies and the
variations in their rate of adoption. The study reveals that the adoption of ICT in
banks has improved customer services, facilitated accurate records, provided for
home and office banking services and enhanced faster services. The adoption of
ICT improves the banks’ image and leads to wider, fast and more efficient market.
It has also made work easier and more interesting, improved the competitive edge
of banks, improved relationship with customers and assisted in solving basic
operational and planning problems. From all indications ICT presents great
potential for business process reengineering of Nigerian banks. Investment in
information and communication technology should form an important component
in the overall strategy of banking operators to ensure effective performance. It is
imperative for bank management to intensify investment in ICT products to
39
facilitate sped, convenience, and accurate services, or otherwise lose out to their
competitors.
Illyas-Ur Rahman (2007) examines the role of information
technology in the banks under consideration. The objectives of the study are to
assess the role of information technology in the public sector banks, private sector
banks and foreign banks and to assess the perception of the bank employees
towards the implementation of information technology in the banks. The study
considers different information technology variables like net banking, credit cards,
mobile banking, electronic funds transfer, phone banking, card to card funds
transfer. The study considers a sample of 300 consumers and 300 employees.
Simple random sampling technique has been used to select the employees and
customers of banks into sample size. For the purpose of the study, both primary
and secondary data have been collected. Study finds a positive relation between
implementation of information technology and delivery of services. In other
words, banks are moving towards implementing information technology enabled
services, improving competitive position and widening the geographical reach.
Majority of the customers perceive that technology in banking industry has a
positive impact on the way the services are rendered to the customers.
Sidikat Adeyemi (2008) considers the challenges that Nigerian banks
have to face like bank consolidation, slashing operating cost, outsourcing,
portfolio investment, payment and settlement system etc. The Study considers
information technology as a key factor in BPR. The objectives of paper are to
assess the impact of BPR on organizational performance, to uncover how BPR
can heap organization to effect innovative and strategic changes in the
organization and to determine how BPR can affect the services rendered by an
organization. Study finds that BPR process service quality and innovating and
strategic change majority determine the success of organizational performance. It
further adds that BPR is must to achieve breakthrough performance and long term
strategy for organizational growth.
Sonar (2008) examines the impact of information technology
investment on efficiency and total factor productivity of banks in India at group
40
level. The author groups the 29 existing banks in the country into public sector
banks, private banks, and new generation banks by entity. Applying, the
production concept, the researcher uses panel data from 2001 to 2005 and uses
data envelopment analysis (DEA) for the analysis. The results suggest that the
benefit level of information technology investment is dependent on the technical
efficiency of banks, with the private banks showing greater ability to produce
income generating resources.
Ahmad Shobani (2008) considers information technology as one of
the important resources for improving the economic performance of a firm.
Economic performance refers to economic growth, labor productivity growth and
consumer welfare. Study identifies and describes the impact of information
technology investment on productivity at Telecommunication Company of Tehran
which is one of the most powerful companies that serves the communication
services and infrastructure. It uses both primary and secondary data. The
economic and financial data of TCT in the specific period of time has been
analyzed to find out the contribution of IT investment. Study employs Cobb-
Douglas model which is one of the popular simplest and appropriate production
functions. It finds not only positive impact of information technology investment
on output but also proves its positive contribution after deductions for information
technology capital depreciation and information technology labour expenses.
Positive returns of information technology investment are found higher than non
IT capital and labor. Ultimately although information technology investment
shows its positive impact, combining the complementary investments in work
practices, human capital and company restructuring with information technology
investment is essential to stabilize and support positive contribution in future.
Baba Prasad and Harker (2008) consider the effects of information
technology on productivity in the retail banking industry in the United States.
Study also models banks as operating according to the Cobb-Douglas production
function. The data for this study has been obtained from an ongoing four-year
project at the Financial Institutions Centre at the Wharton School, which have
been studying efficiency drivers in the retail banking industry in the United States.
41
Study finds that information technology capital makes zero and even perhaps
slightly negative, contribution to output both when total loan and deposits is
considered as the measure of output and when net income of the bank or revenues
is the output measure, information technology labor presents a very different
picture. Both, with total loans and deposits and with net income as output
measures, information technology labor contributes significantly to output. Thus,
these results state that while the banks in the study may have over-invested in
information technology capital, there is significant benefit in hiring and retaining
information technology-focused employees.
Ahmad Mashnour (2009) investigates the investment in information
systems at Jordan banks. The study assesses the way in which information
technology investment creates value for the financial services organizations. The
impact of information technology on the value creation in any organization can
happen either through increasing revenues at marginal cost or through reducing
costs at marginal changes in revenue, and thus enhancing operating profits. The
study measures some variables which determine financial information system
performance, they are: (a) IT integrated in IS; (b) software quality; (c)
investment in training; (d) customer services; (e) productivity; (f) user
satisfaction; and (g) cost benefit analysis. Study concludes that information
system provides a competitive advantage to the banking industry and the
effectiveness of information systems has a positive impact on Jordan banks.
Yang and Ahmed (2009) investigates the recent trends and
development of the application of e-banking in Bangladesh. The data have been
collected through a comprehensive web based questionnaire survey as well as
some interviews with several bankers. The study focuses on effect of e-banking on
bank’s strategic and operational dimensions. In this study 18 commercial banks
have been randomly selected. Study shows that in Bangladesh, e-banking has
helped to provide a better and fast service to their customers. Further the study
also reveals a huge gap between those developed new emerging economic powers
like U.S.A, China and those least developed nations like Bangladesh in terms of
development and application of e-banking services. The author observes that still
42
there is a large shortage of high quality IT professional to design developed and
operate their e-banking systems. It further adds that reducing such a shortage of IT
professionals in IT through high quality training may be a short term answer but to
develop, up-to-date high quality higher education institutions and the foundation
to improve the educational level of population should be a long term solution.
M. Chandrasekhar (2010) deals with the impact of information
technology inputs on the business output of the banks in India. Panel data of 29
banks from the government and private sector has been analyzed. Results for the
study period of 2001 to 2007 indicate that information technology has a beneficial
impact on banks productivity. The study further observes that information
technology budget is fetching the envisaged benefits in the form of financial
returns, business advantages and enhanced capabilities. In so far as total factor
productivity change in concerned, new private sector, PSU and SBI group bank
appear to score in that order. Much of low growth recorded across sectors is
attributable to technological reasons, though managerial and scale inefficiencies
too exist. Further, the study adds that inputs need to be used in a much better
measure to produce a given level of output.
Ombati and Magutu (2010), observe in their study that technology-
based self-service has greatly changed the way that service firms and consumers
interact. The purpose of the study is to establish the relationship between
technology and service quality in the banking industry in Kenya. The research is
carried through a cross-sectional survey design which questioned respondents on
e-banking services. The population of study is mainly constituted of customers of
banks within the Central Business District (CBD), Nairobi. The respondents of the
study are customers of banks using e-banking services (internet banking, mobile
banking and ATM). The sample in this study consists of 120 respondents who are
users of the e-banking services. The findings reveal that, secure services is the
most important dimension, followed by convenient location of ATM, efficiency
(not need to wait), ability to set up accounts so that the customer can perform
transactions immediately, accuracy of records, user friendly, ease of use,
complaint satisfaction, accurate transactions and operation in 24 hours.
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Karim and Hamdan (2010), examine the level of using information
technology by 15 Jordanian banks for the period 2003-2007. The research
explores the impression on improving the performance of two forms of matrix.
The first is matrix of financial performance which comprises Market Value-Added
(MVA), Return on Investment (ROI) and Earning per Share (EPR) and the second
is matrix of operational performance, which includes the Net Profit Margin
(NPM), Operating Return on Assets (ORA) and Profitability of Employee (PE).
Utilizing IT by Jordanian banks is measured by testing the level of investment in
hardware, software, internet banking, phone banking, number of ATMs, use of
cyber branches and banking via SMS. The results show that there is an impact on
the use of IT in Jordanian banks in the Market Value Added (MVA), Earnings per
Share (EPS), Return on Assets (ROA), Net Profit Margin (NMP). However, the
test of hypothesis also show that there no impact of the use of IT in Jordanian
banks to improve the Return on Equity. This is probably due to the increased costs
of investment in information technology which might work to reduce the return on
the property. Overall the results indicate that information technology is now a
very dynamic business area for the bank.
Madume Stella (2010), tests empirically the impact of information
and communication technology on the productivity of the Nigerian banking
sector. Impact on productivity is conceptualized as ability to make positive
contributions to output after deduction for depreciation and labour expenses has
been made. The theoretical framework for the assessment of impact of
information communication technology on banking efficiency is the CAMEL and
the transcendental logarithmic production function also called the Translog.
Results show that bank output such as loans and other assets increase significantly
to changes in expenditure on information and communication technologies. The
study shows that increased productivity in many instances leads to improved
operational efficiency and profitability which are the laudable goals of any
banking establishment.
Leckson and Leckey (2011) seek to ascertain and document the extent
to which investment in information technology by bank in Ghana can impact on
44
their profitability. The objective of this study is to ascertain whether IT
investments are positively related to financial performance of banks using an
enhanced Balanced Scored Card (BSC) approach proposed by Kaplan and Norton.
The study uses the extensive panel data set of 15 banks sampled from Ghanaian
banking industry over a 10 year period (1998-2007). The authors investigate the
relationship between investment in IT and bank performance by using two
equations based on return on assets (ROA) and return on equity (ROE). The study
finds that banks which maintained high levels of investments in information
technology, increased return on asset and return on equity. The study shows that
though high IT level banks have the tendencies to use IT investments to increase
profitability in terms of ROA and ROE (financial perspective), the same can’t be
said of the entire industry. This is because of the negative results that the entire
banks under this study exhibited in terms of the impact of IT investments on bank
financial performance. This means that the strategic employment of IT would
probably have the desired effect in the long-run than in the short-run as the study
covered only 10-years observation.
Atiku, Genty and Akinlabi (2011) determine the effects of electronic
banking on employees’ job security in the Nigerian banking sector, with special
reference to four selected banks in Lagos, Nigeria. Four hundred respondents from
Guaranty Trust Bank, Equatorial Trust Bank, Eco Bank and Skye Bank have been
sampled. Two research questions and one hypothesis have been raised and
formulated to guide the study. Result show that adoption of e-banking directly
leads to loss of jobs and early retirement of employees in Nigerian banking sector.
Although, e-banking services enhance customers’ satisfaction and sustainable
competitive advantage, efforts should be made by the management of banks to
ensure that adoption of e-banking does not necessarily lead to direct loss of jobs
and early retirement of employees. Also, e-banking should be seen as an option to
enhance the service delivery of employees in Nigerian banking sector and not a
substitute to employees’ performance.
Yunus Dauda and Akingbade (2011), examine customer’s and
employee’s responses to technology innovation, and their effects on the
45
performance of the Nigerian banks. Fifteen major banks have been selected for the
research. Two null hypotheses based on two different sets of questionnaires
distributed to selected banks employees and customers are formulated to test
whether there is no significant relationship between technology innovation and
customer’s satisfaction; and between technological innovation and Nigerian banks
employee’s performance. Pearson correlation co-efficient has been used to
analyze the hypotheses. Findings reveal that technological innovations influence
banks employee’s performance, customer’s satisfaction and improvement in banks
profitability. The study recommends effective management of technological
innovation for improved employees performance, customer’s satisfaction,
sustainable profit, increased return on investment, returns on equity, and to
promote competitiveness in the Nigerian banking industry.
Daneshvar and Ramesh (2012) have analysed the panel data of two
public banks to examine impact of IT investments on profitability and
productivity of Indian public sector banks. It uses correlation analysis to measure
the strength of inter-relationships between the IT variables (amount of IT
investments and number of ATMs) and banks’ performance indictors. Further, the
study applies multiple regression analysis to evaluate the impact of strategic
variables on banks’ performances. Regression analysis used four independent
variables in terms of ‘number of ATMs’, ‘number of employees’, ‘number of
branches’ and ‘staff costs as percentage of total expenses’ and predicted three
dependent variables in terms of ‘deposits’, ‘ROA’ and ‘profit per employee’ as
banks’ performance variables. The results indicate that investments on IT
contributed to increased amount of deposits and return on assets (ROA) as
profitability, profit per employees as productivity indicator and decreased the net
NPA ratio and staff cost. Finally, the study shows that public banks tried to adopt
cost reduction and assets quality strategies to compete in the Indian bank market.
Conclusion
Review of studies is indicative of the fact that the relation of
information technology input and performance is a tricky one. It needs proper
metrics or quantification of the two prime variables, the IT and performance.
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