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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.

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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

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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

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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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There are very few studies that quantitatively index both the information

technology and the performance of a service organization and relate the two. This

work is a step ahead to fill this gap.