Information Technology Spending Association with Organizational Productivity and Performance

This chapter examines the relationship between IT expenditure and bank profitability, efficiency, productivity, and performance for Mexican banks. The principal research method is correlation analysis between IT expenditure and four bank performance indices: a profitability index that combines bank profits, income, operational cost, and financial cost; a performance index that includes credit and bank income market share; a productivity index consisting of the number of employees, branches, and managers; and an efficiency index that includes banks’ operational cost and income. The unit of analysis is the firm. The data are from the 18 banks comprising the Mexican banking industry from 1982–1992, when Mexico’s banks were owned by the federal government. The study’s interpretations are supported by interviews with four bank CIOs and a CEO, in office during the period. The main findings are that bank IT expenditure ratio is positively correlated to bank performance and productivity indices, whereas IT expenditure is not correlated with bank efficiency or profitability indices. There are fluctuations in the strength of correlation during the 11-year period, which are explained. The chapter results not only reject the productivity paradox but also provide insights to explain the paradox and IT contribution to the firm performance.