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2008:037

M A S T E R ' S T H E S I S

Impact of Information Technologyon Productivity

Ahmad Sobhani

Lule University of Technology

Master Thesis, Continuation Courses

Marketing and e-commerceDepartment of Business Administration and Social Sciences

Division of Industrial marketing and e-commerce

2008:037 - ISSN: 1653-0187 - ISRN: LTU-PB-EX--08/037--SE

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MASTER'S THESIS

Impact of Information Technology on

Productivity

A case study in Telecommunication industry of Iran

Supervisors:Dr. Mohammad.T. Hamidi Beheshti

Dr. Deon Nel

Referee:

Dr. Abbas Asosheh

Dr. Anne Engstrom

Prepared by:

Ahmad Sobhani

Tarbiat Modares University

Department of Industrial Engineering

Lule University of Technology

Department of Business Administration and Social Sciences

Division of Industrial Marketing and E-Commerce

Joint MSc. program in Marketing and Electronic Commerce

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Abstract

Productivity is an important economic factor which has a key role in evaluating the

economic growth. It is identified as the foundation for economic prosperity, a

prerequisite for national development and also an important indicator of organizationalcompetitiveness (Dedrick et al., 2003).

Information Technology (IT) is one of the important resources for increasing the

economic growth. It causes companies to use their input resources as much as possible

in an effective way. As investment in IT capital accounts for an ever-increasing share

of capital investment, it is important to understand how these investments might pay

off (Gilchrist et al., 2001).There has been much debate on whether or not the

investment in IT provides improvements in productivity and business efficiencies.

IT investment may make little direct contribution to overall performance of companies

until they are combined with complementary investments in business activities, human

capital, and company restructuring. Therefore, according to role of IT in Business

Process Reengineering, as a facilitator and enabler, BPR is valuable for companies to

increase the impact of IT on overall performance of companies. On the other word,

both IT and BPR investments, together, are able to improve productivity drastically.

In this research Cobb-Douglas model was used to examine the impact of Information

Technology investment on productivity at Telecommunication Company of Tehran

(TCT).44 financial and economic data were collected since 1997 up to 2007 for

driving the corresponding model. Weighted Least Square (WLS) was run by SPSS 15

to test hypotheses. The results have indicated that IT investment not only makes the

positive contribution to output of Telecommunication Company of Tehran but also this

contribution is positive after deductions for depreciation and labor expenses. Further

productivity analysis exposed the positive correlations between IT, Total Factor

Productivity and Labor Productivity.

In order to reveal the importance of BPR approach as a complementary investment for

improving IT influences, the appropriate questionnaires distributed through Employees

and Experts of TCT in the second phase of this study. Evaluation of BPR factors

proved the necessity of employing this complementary investment atTelecommunication Company of Tehran.

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Acknowledgment

I would like to extend my sincerest thanks and regards to all those who supported and

encouraged me during my study.

First, I would like to express my Special gratitude to Dr. Amir Albadvi at theDepartment of Industrial engineering, Tarbiat Modares University, and Dr. Esmail

Salehi-Sangari at the Division of Industrial Marketing and E-Commerce, Lule

University of Technology, for their continuous efforts in conducting this joint program

of Marketing and e-Commerce.

Additionally, I would like to express my gratitude to Dr. Mohammad.T.Hamidi

Beheshti, Professor at the Faculty of Engineering, for his supervision and valuable

assistance. Without his continuous encouragement and support, it would not have been

possible for this thesiss completion. I would also like to express my special thanks to

my Lule University of Technology supervisor; Dr. Deon Nel, who has given me this

pleasure to use his valuable comments, feedbacks and suggestions during the time that

I have been working on this thesis.

Separate thanks to experts at Iran Telecommunication Research center who give me a

lot of their working and even personal times.

My deep gratitude is expressed to my family and friends whose love and support have

made years of study an enjoyable and unforgettable experience. My father and mother

deserve special and heartfelt thanks for their support and patience during my work on

this thesis.

Ahmad Sobhani

February 15th, 2008

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Table of content

Abstract 1

Table of content ... 3

Chapter One: Introduction and Problem statement... 9

1-1. Back ground.. 9

1-2. Problem Area and Discussion... 12

1-3. Purpose of the research. 14

1-3-1. Objective of the research. 15

1-4. Importance of the research 15

1-5. Research Questions... 16

1-6. Our contribution 17

1-7. Disposition of the thesis 17

Chapter Two: ICT in Iran. 19

2-1. Introduction... 19

2-2. ICT in Iran. 20

2-2-1. ICT indicators.. 21

2-3. Information Technology sector in Iran. 25

2-4. Telecommunication Company of Tehran. 26

2-4-1. ICT indicators . 26

Chapter Three: Literature Review.. 29

3-1. Productivity... 29

3-2. Common minus of the term.. 31

3-3. Basic types of productivity... 31

3-3-1. Partial productivity.. 313-3-2. Total Factor Productivity. 32

3-3-2-1. Source of TFP growth. 32

3-4. Benefits of productivity measurement of organizations... 33

3-5. Benefits of higher productivity in organizations.. 34

3-6. Economic performance......... 34

3-7. Information Technology and Productivity 35

3-8. The productivity paradox.. 37

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3-9. IT opportunities for development. 39

3-10. Role of IT in the production process.. 42

3-11. IT and Labor .. 43

3-12. IT, Coordination and Firm output... 44

3-13. Production Function Model 45

3-13-1. Cobb- Douglas function... 46

3-13-2. Translog function model.. 47

3-14. Decision tree technique... 47

3-15. Reengineering. 49

3-16. Business process. 50

3-17. Business Process Reengineering. 50

3-18. BPR approach. 52

3-18-1. Importance of BPR approach 53

3-18-2. Attributes of BPR approach.. 53

3-19. Radical changes, Top management, Strategic thinking.. 55

3-20. BPR characteristics. 56

3-21. Potential BPR impacts 56

3-22. Principles in BPR... 56

3-23. Impact of Information Technology on BPR... 57

3-24. Role of IT on BPR.. 58

3-25. Benefits of IT enabled BPR. 60

3-26. IT tools for BPR.. 62

3-26-1. Enterprise Resource Planning 63

3-26-2. Outsourcing... 63

3-26-3. Enterprise software 63

3-26-4. Internet... 64

3-26-5. Intranet... 64

3-26-6. Electronic data interchange... 65

3-26-7. Knowledge management. 65

3-26-8. Legacy system. 66

3-27. Digitized information effects on business process.. 66

3-28. Conceptual framework 67

3-28-1. IT and Productivity.. 68

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3-28-2. Production function model.. 69

3-28-3. BPR, IT and Productivity 69

3-28-4. Frame of reference... 70

Chapter Four: Research Methodology. 73

4-1.Research process.... 73

4-2. Research design 74

4-3. Type of research 74

45-3-1. Reporting research. 75

4-3-2. Descriptive research 75

4-3-3. Explanatory research... 75

4-3-4. Predictive research.. 75

4-4. Research approach 76

4-4-1. Deductive vs. Inductive... 76

4-4-2. Qualitative vs. Quantitative. 76

4-5. Research strategy.. 77

4-6. Sample selection... 78

4-7. Classification of data 79

4-8. Data collection.. 79

4-9. Reliability.. 81

4-10. Validity... 82

Chapter Five: Data analysis.. 84

5-1. Telecommunication Company of Tehran. 85

5-2. First phase analysis... 85

5-2-1. Data sources. 86

5-2-2. Hypotheses. 87

5-2-3. Methodology 88

5-2-3-1. Linear regression 88

5-2-3-2.Weight estimation 89

5-2-4. Data analysis. 90

5-2-5. Further Productivity analysis 93

5-2-5-1. Total Factor Productivity.. 93

5-2-5-1-1. Method of Kendrick.. 93

5-2-5-1-2. Method of Dujea... 94

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5-2-5-2-1-3. Method of Solow 94

5-2-5-2.Labor Productivity..... 95

5-2-5-3. Correlation 97

5-3. Second phase analysis... 98

5-3-1. Hypotheses... 100

5-3-2. Data sources. 100

5-3-3. Methodology. 101

5-3-3-1. 2-paired T-test.. 101

5-3-4.Data analysis. 103

5-3-5. Cross analysis... 106

5-3-5-1. Performance Quality. 106

5-3-5-2. Information Technology... 108

5-4. Summary of the results. 110

Chapter Six: Conclusions and Future Suggestions 111

6-1.Remarks on the first research question.. 112

6-2. Remarks on the second research question 113

6-3. Conclusion 115

6-4. Implications.. 116

6-5. Recommendations for future research.. 117

Reference. 118

Appendix A. 126

Appendix B. 130

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List of Tables

Table 2.1 Status of Telephone in Iran 21

Table 2.2 Status of Mobile phone in Iran 23Table 2.3 Computers diffusion among various user groups 23

Table 2.4 Number of Internet users 24

Table 2.5 Internet penetration in designated countries 24

Table 2.6 E-commerce indicators 2004-09 25

Table 2.7 Status of Telephone in Tehran province 26

Table 2.8 Number of online Mobile phones in Tehran province 27

Table 2.9 ICT indicators in Telecommunication Company of Tehran 27Table 2.10 Financial indicators of Telecommunication Company of Tehran 28

Table 3.1 Labor productivity growth by industries in US 1989-1999 36

Table 3.2 The annual percentage of GDP devote to expenditure on ICT 41

Table 3.3 Alternative estimates of the acceleration of productivity growth 42

Table 4.1 Reliability of the questionnaire 82

Table 5.1 Coefficients related to Cobb-Douglas model 90

Table 5.2 Strength analysis of Findings 90

Table 5.3 Calculated findings for relationship between IT and productivity

after deducting the ICT costs

91

Table 5.4 The Average of IT and non IT capital 92

Table 5.5 Correlation coefficient of IT capital and Labor productivity 97

Table 5.6 Correlation coefficient of IT capital and TFP 98

Table 5.7 Descriptive findings of second phase analysis 101

Table 5.8 2 paired t-test 102

Table 5.9 Parameters of 2 paired t-test 103

Table 5.10 Statistic findings for performance quality 103

Table 5.11 Paired test findings for performance quality 104

Table 5.12 Statistic findings for Information Technology 104

Table 5.13 Paired test findings for Information technology 105

Table 5.14 Paired test findings for performance quality indicators 107

Table 5.15 Paired test findings for IT indicators 109

Table 6.1 Summery of final results 114

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Figure 1.1 Thesis outline 18

Figure 3.1 Labor productivity of US 37

Figure 3.2 Contribution of IT and non IT capital in GDP 39

List of Figures

Figure 3.3 BPR schematic 52

Figure 3.4 Kobu conceptual model 62

Figure 3.5 Impact of using IT on business benefits 67

Figure 3.6 BPR indicators 71

Figure 4.1 Research process 74

Figure 5.1 TFP of Telecommunication Company of Tehran 95

Figure 5.2 Indicators of TFP 95Figure 5.3 Labor productivity of Telecommunication Company of Tehran 96

Figure 5.4 Indicators of Labor productivity 96

Figure 5.5 BPR main factors 99

Figure 5.6 Expected performance quality improvements 108

Figure 5.7 Expected Information Technology improvements 109

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Chapter One

Introduction and Problem Statement

This chapter begins with background in productivity as an economic factor and

Information technology. This will be followed by problem area discussion, the purpose

of the research and the main objectives and importance of the study. The main

questions which are investigated within scope of research will be introduced. Finally,

our contribution and overview of entire thesis are presented.

1-1. Background

Strong Competition causes the new technologies to be employed for improvingproductivity level of companies resources. Productivity is one of the important factors

to evaluate the economic growth both at the industry and firm level. Its growth directs

companies to increase their market share (Tabatabae, 2000).

At the most basic level, productivity is based on the economics of the firms. It is

measured as the ratio of output to input. Historically, productivity is often defined as

the ratio of output to the most limited or critical input, with all the other inputs held

constant.

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Based on Neo-classical economic model, productivity is one of the important factors

that impact on economic growth. It causes Companies to produce more products

through specified productions factors, and to optimize the employment of the

productions requirements (Solow, 1956).

Improving the productivity is fundamental to survival companies in a very competitive

market. The purpose of all productivity-related attempts is to make lasting

improvements in performance. Productivity is also the best methods we have to fight

inflation, reduce unemployment, enhance profits, reduce costs, create capital and

wealth and improve the quality of working life. (Drucker, 2001) clearly, indicated the

importance of productivity as an economic indicator when he stated Without

productivity objectives, a business does not have direction.

Investigation of the productivity achieves the following results:

The resources efficiency will be judged.

Evaluation of resources management will be facilitated (Kazemi, 2003).

Measuring the productivity growth causes companies to evaluate the factors that affect

on value added such as IT, Innovation ant etc (NPC productivity report, 2003).

Current business activity is characterized by intense international, rapid product

innovation, increased use of automation, and significant organizational changes in

response to new manufacturing and information technologies (Dirks, 2005).

Information technology (IT) is one of the valuable resources to increase the economic

growth and customer satisfaction. It has a potential to impact on the structure of

organizations and improve the quality of organizational performance significantly.

In the 1980s, IT was heralded as a key to competitive advantage (Porter and Millar,

1985). Porter and Millar (1985) concluded that IT has influenced competition in three

ways: it has led to changes in industry structure and competition, it was used to support

the creation of new businesses, and companies using IT outperformed their

competition. Although IT as a critical factor to competitive advantage became less

certain in the recent years, the high percentage of top executives considered IT as a key

to a company's profitability and survival. This issue causes IT to pose a serious

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dilemma for top management. On one hand, continuing IT innovations have the

potential of changing the competitive game for many organizations. On the other hand,

the size of the IT investment puts increasing pressure on managers to assess its

business value (Mukhopadhyay, et al., 1997).

For many years, there has been much discussion about whether the IT revolution was

paying off in higher productivity. Studies in the 1980s found no positive relationship

between IT investment and productivity, a situation referred to as the productivity

paradox (Dedrick et al., 2003). Since then, decades of studies at the firm and country

level has consistently shown that the impact of IT investment on productivity and

economic growth is significant and positive.

Albadvi and Keramati (2006) also provided the satisfactory evidences to show that IT

implementation increase productivity when supported by rational complementary

investment.

In the face of extreme competition and economic pressures, firms are changing their

fundamental unit of analysis from the business function to the business process. IT

investments may make little direct impact on the overall performance of the firms or

the economy until they are combined with complementary investments in business

activities, human capital, and companies redesigning. Therefore, according to the role

of IT in Business Process Reengineering (BPR), as an enabler, BPR is essential for

corporations to enhance the potential impacts of IT on their performances. On the other

word, both IT and BPR investments, together, are able to improve productivity

drastically.

Despite the fact that little more than 10 years ago Iran was backward technologicallyamong the Middle East countries, it has been considered as a successful example of

fast introduction of information technologies, recently.

The GDP growth of 6.9% in June 2005 places Iran among the fastest growing

economies in the region. The economy has grown by an average 5% every year since

1999. The continued growth of exports to Middle East and western markets,

integration with Asian countries, and institutional and regulatory reforms has thus laid

a strong foundation for sustainable economic growth. The economy is likely to grow

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by 5- 6 percent per year in near future (Central Bank of the Islamic Republic of Iran,

30thJune 2006; cited Pourmirza, 2006).

The Average of the annual economic growth has been calculated 8 percent in fourth

cultural, social and economic development plan of Iran (2005-09). 2.5% of the

mentioned growth should be obtained by productivity. Besides, in order to achieve the

above economic growth, all governmental sectors have to establish 31.3% of their

GDP growth via Total Factor Productivity (TFP). And labor productivity, capital

productivity and TFP would be at least 3.5%, 1% and 2.5% raised annually. Therefore,

all activities and investments cause to achieve the above goals and extract the

resources of organizations in the optimum ways are considered.

Telecommunication Company of Tehran (TCT) is one of the powerful companies

which have continued business activities independently since 1995. TCT serves

communication services and infrastructures. It is identified as a government company

which has positive balance of finance. Therefore, TCT has a key role in the economic

growth of Iran. The positive impact of IT investment on productivity causes TCT to

increase its capacity for stay in competitive telecommunication market.

This research identifies and describes the impact of IT investment on productivity at

Telecommunication Company of Tehran. Furthermore, the situation of BPR approach

in TCT, as a method to improve the IT influences, is evaluated.

1-2. Problem Area Discussion

More recently, the continuous movement towards globalization has made information

technology one of the most important factors in achieving success as well as in seeking

new markets, improving quality and providing better and faster customer service.Many of the recent studies have shed some light on the impact of IT on economic

growth, productivity, employment, work organization and competitiveness (Satti,

2002).

Productivity at the organizational level is affected by the level of competition, which

leads other organizations to step up the development of their productivity (Dedrick et

al., 2003). Increased productivity, however, does not necessarily imply increasedprofitability. Competition may result in lower prices, thus eroding improvement in

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margins. The beneficiaries will then be consumers, who get more value added for the

price paid (Dedrick et al., 2003).This phenomenon is defined as consumer surplus.

IT has made rationalization possible in organizations by minimizing human

involvement. These aspects of IT are labeled as automational (Zuboff, 1988).

Increased access to information and enhanced means of accessing, analyzing, storing

and communicating information can result in effects in addition to pure rationalization.

These aspects are defined as informational (Zuboff, 1988) informational aspects

empower employees and enrich quality of decisions and performances.

Transformational is the third type of effects which encompasses the changes observed

in process innovation and transformation. Another type of effects is identified by Hitt

& Brynjolfsson (1996), who discuss the importance of the increased value perceived

by consumers as a result of technological improvements. This phenomenon is defined

as consumer surplus (Mooney et al., 1996).

IT is known as the productive resource to increase the economic growth, productivity

and customer satisfaction. It has an effective role to enhance the quality of

communication services. IT can be gainful in the communication services when

appropriate successful BPR is implemented in the different parts of companies

(Limayem, 2006). Moreover telecommunications service providers survival depends

on its ability to prepare for changes in customer needs, as well as changes in regulation

and technology (Fornell and Wernerfelt, 1987; Reichheld and Sasser, 1990).

BPR begins with process redesigning which leads to fundamental changes in many

aspects of an organization, including organizational structure, job characteristics,

performance measures and the reward system. BPR relies heavily on the IT uses to

create radically different working methods to achieve improvements of the order of

magnitude required. Furthermore, BPR facilitates the change in corporate

managements perception of technology. It also confirms an alternative channel

through which IT solutions are being scrutinized and selected (Soliman, 1997).

Productivity growth arises from the development of new work methods based on new

technology and production techniques. Consequently, when the new technology of IT

was introduced in working life, productivity growth was expected. But, because

computers were initially used in a situation where productivity growth had been low

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and unemployment had been high since the mid-1970s, it was initially difficult to

prove positive effects of investments in IT (Lundgren and Wiberg, 2001). Solow

referred to this situation when he stated, You can see the computer age everywhere

but in the productivity statistics (Solow, 1987). This phenomenon was later defined as

theproductivity paradox(Horzella, 2005). Of late, however, firm-level studies, in the

manufacturing and service sectors, have shown that there are significant positive

contributions from IT investments toward productivity (Harker, 2000).

1-3. Purpose of the research

Nowadays, there are strong competitions among corporations which serve the

communication services. Therefore, they not only employ information technologies

through the organizational levels to improve the performance quality but also use the

newest technologies to cover customers needs.

There has been much discussion on whether or not the IT investment provides

improvements in productivity and business efficiency. Several studies at the industry-

level and at the firm-level have contributed differing understandings of this

phenomenon.

Telecommunication Company of Tehran is one of the powerful companies that serve

communication services and infrastructures.TCT has taken great steps in the

development of telecommunication networks and for this purpose, as the main

responsible organization in Iran, it has utilized the most advanced equipments and

services such as digital switching centers, mobile phones, data networks, satellite

services, Internet and special telephone services during the recent years. TCT has a key

role in economic growth of Iran. Acceptance of Iran in WTO provides superior

opportunities to penetrate in the Middle East and members markets. In addition

entrance the new competitors in communication market of Iran (Irancell and Taliya)

causes TCT to increase its services quality, productivity and customer satisfaction.

The purpose of this research is to investigate the impact of IT investment on

productivity at Telecommunication Company of Tehran. Besides, the status of BPR

approach in TCT, as a complementary investment for improving the IT influences, will

be evaluated.

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In this research the production function model is used to assess impact of IT capital

and labor in a government company and evaluate the BPR factors such as team

working, paperwork and etc in order to obtain clear view about future investments and

organizational change.

1-3-1. Object ive of the research

The main objectives of the research are introduced in below:

Investigating the productivity measurement models.

Calculating the productivity during the specific period of time at

Telecommunication Company of Tehran.

Calculating the variant subjects of Information Technology in TelecommunicationCompany of Tehran.

Measuring and analyzing the impact of IT investment on productivity at TCT.

Investigating BPR indicators at TCT to improve the productivity.

1-4. Importance of the research

Rapid process of information, producing low price IT equipments and employing

automation systems through the organizational levels in recent years causecorporations to access to the update information and knowledge easily and quickly.

Information Technologies are driving national development efforts worldwide. And a

number of countries in both developing and the developed world are exploring ways of

facilitating their development process through deployment and the exploitation of IT

within their economies (Pourmirza, 2006).

More than 80% of the national GDP of Iran is created by governmental sectors.Although economic stagnation impact on all companies in 1990s, IT investments have

been increased over the past years (Jahangard, 2004).Government companies, which

have the positive financial levels, are pioneers in this area. Besides, the organizational

levels of the most government companies in Iran are pyramidal. These kinds of levels

make a lot of waiting and wasting times so, heavy IT investment in the current

processes may fall down the positive IT influences.

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Therefore, bright view of IT capital makes companies to better manage their recourses

and future investments.

Rational complementary investments increase the positive impact of IT implantation

(Albadvi and Keramati, 2006). Companies have implemented BPR approach toshift

their fundamental unit of analysis from the business function to the business process,

achieve remarkable improvements in critical, contemporary measures of performance

and employ the real potential of IT investment through their organizations. BTN,

British company in telecommunication area, is pioneer in implementing BPR. Thus,

BPR approach can be an essential way for Telecommunication Company of Tehran to

streamline its business activities.

In order to prove the importance of BPR in Telecommunication Company of Tehran,

evaluation of its indicators is the first step.

Evaluating the impact of IT on productivity causes at least the following results:

Telecommunication Company of Tehran evaluates the factors that affect on value

added.

Future planning for the value level of Telecommunication Company of Tehran can

be facilitated.

The resources management of Telecommunication Company of Tehran will be

facilitated.

Telecommunication Company of Tehran finds clear view about its future

investments and organizational change.

1-5. Research Quest ions

The critical questions within the scope of this research are:

RQ1: What is the relationship between IT investment and productivity at

Telecommunication Company of Tehran?

RQ2: Is there a meaningful difference between the present situation and the desired

situation of Telecommunication Company of Tehran, with regard to BPR approach?

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1-6. Our Contribution

The study makes contribution to both theory and practice. Also, it has been conducted

in two phases. In the first phase, the research problem has been confined to explore and

describe the impact of IT investment on productivity. Production function model hasbeen used to assess the impact of IT capital and labor at Telecommunication Company

of Tehran. Hence, related financial and economic data were collected from

Management and planning Organization, Iran Telecommunication Research Center,

Telecommunication Company of Tehran and Telecommunication Company of Iran.

BPR factors have been evaluated in the second phase of the research. Several meetings

with experts of Iran Telecommunication Research Center assisted us to prepare and

localize the questionnaire. So, the practical information has been extracted through

questionnaire data collection from head offices of Telecommunication Company of

Tehran. Briefly in this study, the following theory and practical steps have been from

the beginning, in order to reach the final results:

Review the literature, in order to understand the relationship between IT and

productivity deeply and find out the BPR indicators.

Study of different methods to find an appropriate model for the first phase analysis.

Model selection and modification based on the context (governmental

telecommunication sector) characteristics in the second phase of the research.

Start field work with gathering financial and economic data for the first phase

analysis and distributing the questionnaires through the head offices of

Telecommunication Company of Tehran to evaluate BPR factors in the second one.

Data entry, analysis and data presentation.

1-7. Disposi tion of the thesis

The entire thesis is divided into seven chapters, as presented in figure 1.1.

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Chapter 1: Introduction

Chapter 3: Literature Review

Chapter 4: Methodology

Chapter 5: Data analysis

Chapter 6: Conclusion

Chapter 2: ICT in Iran

Figure 1.1: Thesis outline

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Chapter Two

ICT in Iran

This chapter presents the situation of Communication and Information Technology in

Iran. Also a brief introduction of Telecommunication Company of Tehran will bereview at the rest of this chapter.

2-1. Introduct ion

Information and communication Technologies (ICTs) causes economic variables to

improve. These influences are considerable in developing countries (Qabadi, 2006).

Developing digital networks, computers, Mobile communication, TV and etc have

created unique capacity to enrich the knowledge in ICT area.

In millennium, 80% of ICTs market was covered by the top ten countries of the world.

And the bottom ten underdevelopment countries just employed 1% of the market.

Digital Divide is defined as the difference between developed and underdevelopment

countries in using ICT to improve productivity and efficiency of processes and to make

appropriate infrastructures for creating Knowledge of ICT and consuming the digital

goods and services. China, Vietnam, Poland and some others are able to fill digital

divide. China has tried hard to change traditional economy and improve its national

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economy level by employing High Technologies. So, these investments let china had

27% annual economic grow in 1992 and more than 220 Billion dollar ICTs

expenditures in 2006 (Witsa, 2003).

Nations worldwide have recognized developmental opportunities and challenges of the

emerging information age characterized by ICT. These technologies are driving

national development efforts worldwide and a number of countries in both developing

and developed world are exploring ways of facilitating their development process

through development, deployment and the exploitation of ICT within their economies

and societies.

2-2. ICT in IranIn 1857, the first line of telegraph was started its activity between Tehran and Chaman

Soltanieh (near Zanjan).Two years later, this line was stretched to Zanjan, Tabriz, Jolfa

and connected to Russias Telegraph network. Iran was accepted as a member of

International Union of Telegraph in 1869.

The first company, which has produced communicational equipments, was established

in 1966. In recent years, government has invested in digital switches, Fiber cable,

Mobile phone, Information Networks, Satellite, Internet and telephones services(Iran

Telecommunication research center, 2003).

Government plays a key role to facilitate the use of ICT in Iran. All governmental

institutions in Iran were pooled into the portal www.salamiran.orgin 1998. Iran first

time introduces the e-government system in 2005 while using Internet for internal

public administration communication. Iran has been also a pioneer with discussions

about e-banking but currently the implementation has been delayed due to somefactors (Iran Daily 15thJune 2006).

49% of current revenues from Irans small and medium sized ICT and

telecommunications enterprises come from exports. Over the past five years, a key

focus of foreign investment in Iran has been on ICT (telecom) infrastructure,

accounting for about 20 percent of 130 major investments. In the last three years Iran

has established a thriving mobile telecommunications sector, winning the GSMA

global trade association's Government Leadership Award for 2006.

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The performance of Iranian ICT cluster is based largely on the developments of

telecom, as it provides substantial input to computer services and equipment

production (Iran Daily, December 2005). This has also been a prerequisite for Internet

usage growth because providing good quality Internet connections is vital for attracting

wider public to the Internet. Iran was one of the first countries in Asia to get private

investments into the telecommunications industry when Pars Telephone Kar (PTK),

Keresm Communications Research (KCR), and Hi Tel Kar (HTK) acquired a 57%

stake in Irans Telecommunication Industry (ITI) in 2002/2003. From 2005, ITI enjoys

the exclusive rights for providing basic services granted by the Concession Agreement.

Since 2003 the number of telecommunications companies increased remarkably (ITI

annual report 2005) which means higher competition, diversity of services and growth

of quality (Pourmirza, 2006).

2-2-1. ICT indicators

In this section the ICT Developing indicators, which were introduced as the

appropriate indicators to evaluate the situation of ICT by Consortium of national

union, are presented.

Number of telephones

Telephone is one of the important communication services, which is identified as the

basic service in ICT area. Nowadays, this basic service develops by focusing on fiber

cables. Table 2.1 demonstrates the status of Telephone indicators in Iran.

Source: www.tci.ir

Table 2.1: Status of Telephone in Iran

Content 2000 2001 2002 2003 2004 2005 2006 2007

unit Oct

Onlinephone

9486260 10896572 129344167 15340805 17798809 20340060 22626944 23681454

PenetrationCoefficient

14.9 16.78 19.73 23.06 26.32 29.71 32.57 33.15

PublicTelephone

86999 94311 100793 116776 128558 144145 168075 190017

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Number of mobile phones

Development of mobile phone is introduced through the economic, Cultural and social

plans.

First economic, cultural and social plan (1990-94): in this period of time, GSM

technologies were introduced in Europe. Without any scientific marketing research, the

small mobile network was established by government to Cover Tehran. Capacity of

this network was about 10000 mobile lines.

Second economic, cultural and social plan (1995-99): Iranian customers welcome this

new communication technology. Therefore, government presented mobile

communication for 450000 customers in Tehran and 220000 customers in other cities.

Third economic, cultural and social plan (2000-04): In 2000, 900000 online mobile

lines were established and about 337 cities were covered across Iran. Capacities of

mobile networks were augmented and about 3.5 million customers and 937 cities were

covered up to end of this period of time.

Fourth economic, cultural and social plan (2005-09): Capacity of mobile services have

increased in this period however, the quality of mobile communication has felt down.Government executes some projects to overcome the problem.

Irancell and Taliya are non government companies which have initiated mobile

services in recent years.

Table 2.2 introduces the status of mobile phone indicators in Iran since 2000 up to

2007.

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Content 2000 2001 2002 2003 2004 2005 2006 2007

unit Oct

Online Mobilephone

962595 2083353 2279143 3449876 5075678 8510513 15385289 21561954

PenetrationCoefficient

1.51 1.72 3.48 5.19 7.49 12.43 22.20 31.15

Cities covered 337 493 594 708 851 999 1016 1016

covered roads

(KM)

800 8500 9000 10000 25000 26000 32000 -

Countries haveinternational

rooming

- 3 5 7 30 58 80 80

*Coefficients were calculated as each 100 persons

Source: TCI website

Table 2.2: Status of mobile phone in Iran

Number of Computers

According to the last issued report, in 2001, about 4.5million computers were used byIranian people. These computers were increased up to 7 million in 2004(penetration

coefficient: 10.4%). Table 2.3 exhibits the situation of computers diffusion among

various user groups

BUSINESS USERS GOVERNMENTAL USERS DOMESTIC USERS19% 26% 55%

Table 2.3: Computers diffusion

Furthermore the annual computer sale is about 1.2 million in Iran (Tabesh, 2004).

Number of Internet users

In recent years, Government attempts hard to enhance internet access for the public

people. Cheap and easy access to the internet is the main goal of Iranian government.

Increasing the rate of internet from 9.74% to 30% indicates these kinds of endeavors.

Table 2.4 shows the number of internet users in Iran.

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Year Number of Internet users2000 200,000

2001 1,700,000

2002 3,200,000

2003 5,500,000

2004 6,600,000

2005 6,750,000

2006 7,350,000

2007 11,260,000

Source: High Council of Informatics

Table 2.4: Number of Internet users

Furthermore, based on the Information Technology report of Europe and official

website of Telecommunication company of Iran, table 2.5 demonstrates the situation of

Internet penetration in different countries.

Countries Internet penetrationcoefficient(2005)

Growth(2000-05)

China 7.9% 357.8%

Denmark 69.9% 92.9%Egypt 6% 833%France 42.2% 201.4%

Hong Kong 70.7% 113.7%India 3.6% 684%

Iran 10.8% 2900%Iraq 0.1% 188%

Israel 45.8% 152%Italy 49.3% 118.7%

Kuwait 23.7% 300%Japan 60.9% 65.8%

Pakistan 5.7% 5522%

Saudi Arabia 11% 1170%

South Africa 9.9% 99.9%South Korea 65.2% 71.1%

Spain 37.1% 199%Sweden 75.2% 68%Turkey 13.9% 411%

*Coefficients were calculated as each 100 persons

Table 2.5: Internet penetration in designated countries

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Key indicators of ICT used at firm level

Based on WSIS report (2003), the e-commerce indicators have shown that ICT

employment, at the firm level in Iran, is far from the desired situation. According to

table 2.6, just 3 percent of Companies in Iran employed website through their business

in 2005.

There is no accurate information about using internet in Iranian companies. However

Iran small industries and Industrial parks organization issued that lack of Internet

equipments is considerable in some industrial parks.

Indicators 2004

(base)

2005 2006 2007 2008 2009

Companies which employ website - 3% 9% 16% 23% 30%

Active companies in E-commerce - 1% 2% 3% 4% 5%

- 2% 4% 6% 8%Rate of business through electronic networksto Total business(based on GDP)

10%

Source: Forth economic, cultural and social plan, 2004

Table 2.6: E-commerce indicators 2004-09

2-3. Information Technology sector in Iran

IT is a term that encompasses all forms of technology used to create, store, exchange,

and use information in its various forms (business data, voice conversations, still

images, motion pictures, multimedia presentations, and other forms; including those

not yet conceived). It is a convenient term for including both telephony and computer

technology in the same word. With most of the global IT company presence in Iran,

and with revenues growth (35%) yearly, the IT industry is probably the most exciting

and dynamic sector in the country today. The industry is characterized with about

100000 professionals, major ongoing IT projects within the government and the

private sector to the tune of hundreds of millions of US dollars, and world-class

software product and services companies bears testimony to the vibrancy of the IT and

IT enabled services sector in Iran. The convergence of communications, computing,

and entertainment has resulted in the blurring of boundaries between disciplines and IT

companies now come in all shapes and sizes. IT has indeed been taken out of the closet

and has been mainstreamed into every aspect of industrial and economic activity

within the country (Pourmirza, 2006).

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2-4. Telecommunication Company of Tehran

Telecommunication Company of Tehran (TCT) has separated from

Telecommunication Company of Iran since 1995.Installation, development and

maintenance of the communication networks (Mobile and fixed) in different privateand governmental area through Tehran province are undertaken by TCT. Furthermore,

enhancing the quality level of communication networks, establishing and developing

different internet services (ISDN, ADSL and etc) and Intelligence system (VOT,

UPT, NP and etc) are pointed out as the other services.

80 communication centers, under control of 7 main communication zones, cover

Tehran. Besides, more than 390 communication centers undertake communication

activities of TCT in the other cities of Tehran province.

2-4-1. ICT indicators of Telecommunication Company of Tehran

In this part, some of ICT indicators of Telecommunication Company of Tehran are

presented. Telephone is the basic communication. According to table 2.7, TCT could

not increase or just stabilize the increase rate of its penetration coefficient in recent

years.

Operation coefficientPenetration coefficient

Year20.9 851998

861999 22.242000 - 882001 22.24 892002 - 86

34.88 842003862004 39.08

2005 44 83

8446.032006*Coefficients were calculated as each 100 persons

Table 2.7: Status of Telephone in Tehran province

Table 2.8 demonstrates the number of online mobile phones. According to the total

mobile phones in Iran, about 50% of them are served in Tehran province.

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Number of online mobile phonesYear1996 491991997 150185

1998 2177881999 2616882000 5037742001 11003212002 11861232003 17352982004 2539970

4173726200572310852006

Source: www.TCT.ir

Table 2.8: Number of online mobile phones in Tehran province

Table 2.9 is the last table which exhibits the main ICT indicators of TCT.

Indicators 2004 2005 2006Number of Set up telephones 5496886 6400765 6796552

Number of online telephones 4742703 5331262 5704273

Number of public telephones 34783 36595 35715

Number of villages that have communicationnetworks

1151 1181 1214

Number of special services clients 665704 733131 758081

Number of ADSL-clients - 6700 28691

Number of ISDN -Clients - 997 8283

Average of waiting time to engage telephone 6(month)

4.5 0.47

Source: Telecommunication Company of Tehran

Table 2.9: ICT indicators in TCT

Telecommunication Company of Tehran is one of the government companies, which

has favorable balance of finance. By considering the situation of above presented

services, TCT plays a key role in the economic growth of Iran.

Table 2.10 shows the financial situation of TCT over the past 11years.

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Thousand IR Rials

ProfitsTotal CostsRevenuesYear

3670501130334076633703977931997

44204705.44065886914507933971998

1999 000893509 000863459 00003050

2000 3821517021 035777635 3473740661

2001 0007907431 000531788 000259955

2002 9547123172 785960967 1697523491

2003 9385748492 0004151951 9381596541

2004 8523170025 2148243993 6384936021

2005 5939370835 8494639803 7444731031

2006 5570976415 7606107933 7974868471

9626540517 0993031915 86335186012007

Table 2.10: Financial indicators of TCT

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Chapter Three

Literature Review

During the last few decades, organizations have made immense investments in IT. The

implications of these investments for productivity have been widely discussed in

business and academic communities. Besides, according to the role of IT in Business

process reengineering, BPR is essential for companies to increase potential impact of

IT to overall performance of a company. This chapter will frame the study in the

theoretical context and provides an overview of relevant literature, relating to

productivity, to direct theoretical contexts toward research questions.

3-1. Productivity

Productivity growth is identified as the foundation for economic prosperity, a

prerequisite for national development and also an important indicator of organizational

competitiveness (Dedrick et al., 2003). Measured productivity therefore shapes the

political decisions of national governments and management decisions within

organizations.

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The word productivity has become such a buzz word these days. It is almost

mentioned in different fields such as commercial magazine, newspapers, political

speeches, TV news, business news, social magazine and etc

In a formal sense, probably, the first time the word productivity was mentioned in an

article by Quensay in the year 1766. In 1833 Littre defined productivity as the faculty

to produce , that is, the desire to produce. In 1950, the Organizational European

Economic cooperation (OEEC, 1950) offered the more precise definition of

productivity: Productivity is the quotient obtained by dividing output by one of the

factors of production. In this way it is possible to speak of the productivity of capital,

investment, or raw materials according to whether output is being considered in

relation to capital, investment or raw materials After this time many economic

specialists offered other definition from productivity. Sumanth offered that total

productivity is the ratio of tangible output to tangible input (Sumanth, 1984) and Siegel

said productivity is a family of ratios of output to input(Tabatabae, 2000).

Finally, productivity can be defined as the below formula:

(Output obtained) (Input expended)

Or

(Performance achieved) / (Resources consumed)

Traditional economic studies of productivity focused on labor and capital such as

plants and equipments. In order to measure capital, all component categories are

considered. This issue is also considering about measuring labor. In some cases the

number of the labors is used and in some other cases the person- hour for special

period of time is regarded.

Increasing the productivity growth causes that:

The life level in the investigated countries goes up.

Inflation is decreased.

The buying power of the people is increased.

The life quality is improved and etc

Some authors distinguish between productivity and efficiency. While productivity

applies to the transformation of input to output in a process, efficiency expresses the

relation between input and output in monetary terms. Thus measured, the results notonly indicate the improvement in output per man-hour or the change in the quantity of

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inputs, but also the importance of changes in costs of inputs such as human

resources(Rapp, 1999) .In this study, however, no difference is made between

productivity and efficiency and the term productivity will primarily be used.

3-2. Common misuse of the term

The term productivity is often confused with the term production . Many people

think that the grater the production, the greater the productivity. This is not always

true, the meaning of productivity and production are different. Production is concerned

with the activity of producing goods and / or services. But productivity is defined with

the efficient application of resources in producing goods and / or services.

3-3. Basic types of product ivity

At this part two basic types of productivity will be introduced.

3-3-1. Partial productivity

Partial productivity is the ratio of output to one of the consumed resources. For

example capital productivity is the ratio of output to capital input or Materials

productivity is the ratio of output to materials input and labor productivity is the ratio

of obtained output to labor input. Also Labor productivity can be defined as the

traditional, generally used indicator measuring output produced per a certain unit of

labor time, usually per man-hour (Janek and Zamrazilov, 2001).

Advantages:

1. Easy to attain the data

2. Easy to compute the productivity indices

3. Easy to understand

4.

Good diagnostic tools for productivity improvement. if used along with total

productivity indicators.

5. Easy to sale management because of the above first third advantages.

Limitations:

1. If used alone, can be very misleading and may lead to costly mistakes.

2. Tend to shift blame to the wrong areas of management control.

3.

Profit control through partial productivity measures can be a hit and miss approach.4. Do not have the ability to explain overall cost increases.

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3-3-2. Total Factor Productiv ity (TFP)

Total factor productivity is the ratio of the net output (pure output) to the sum of

associated labor and capital input. Net output means total output minus intermediate

goods and services purchased. Theoretically, TFP is a relevant measure for

technological change by measuring the real growth in production value, which cannot

be explained by changes in the input of labor, capital and intermediate input (Zhi et al.,

2001).

A series of articles that appeared in the recent World Bank Economic Review

highlights the important role of total factor productivity (TFP) in the process of

economic growth of countries (Cororaton, 2002).Total Factor Productivity measures

the synergy and efficiency of the utilization of both capital and human resources. It is

also regarded as a measure of the degree of technological advancement associated with

economic growth. Higher TFP growth indicates efficient utilization and management

of resources, materials and inputs necessary for the production of goods and services

(NPC report, 2003). TFP also refers to the additional output generated through

enhancements in efficiency arising from advancements in worker education, skills and

expertise, acquisition of efficient management techniques and know-how,

improvements in an organization, gains from specialization, introduction of newtechnology and innovation or upgrading of existing technology and enhancement in

Information Technology (IT) as well as the shift towards higher added value processes

and industries (Cororaton, 2002).

Generally, higher productivity growth is associated with growth in Capital Intensity

(CI) and the growth in TFP. Capital Intensity measures the physical capital expansion

(Fixed Assets) allocated to each employee. This measure indicates whether an

enterprise adopts a capital-intensive or labor intensive policy. Higher CI provides the

advantage of technology, quality, volumes and speed to increase productivity and

hence generate greater output.

3-3-2-1. Sources of Total Factor Productivity Growth

There are five major determinants of TFP growth. (a) Demand Intensity which

indicates the extent of productive capacity of the economy. A slow-down in demand

intensity would result in unused capacity, lowering the utilization of existing

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machinery and equipment. Demand intensity is reflected in sales performance. (b)

Education and training of the worker which aims to upgrade skills, and knowledge.

With higher level of skills, workers will be more efficient and produce better quality

products and services. (c) Economic restructuring which refers to the movement of

resources from less productive to the more productive sectors of the economy.

Experience of the developed countries indicates that resources in the more Productive

sectors of the economy were utilized at the more efficient level than resources in the

less productive sectors. (d) Capital structure which relates to the proportion of

investments in productive capital inputs. Investment in machinery and equipment

which are productive capital inputs yields immediate output as compared to

infrastructure, plant and buildings which have longer lag time. (e) Technical progress

which relates to the effective and efficient utilization of technology, innovation, work

attitudes and management and organizational effectiveness. With high technological

capabilities, a motivated workforce and as effective management, higher value-added

products and services will be produced at competitive costs (NPC report, 2003).

Advantages:

1. The data from company records are relatively easy to obtain.

2. This factor investigates the efficiency of resources convert and studying the value

added that made in the companies.

3. Planning and managing the resources will be facilitated by measuring TFP.

4. Measuring TFP causes that the company knows how to compete and recognize and

increase its ability for competing in target market.

Limitations:

1. The value added approach is not very appropriate in a company setting because it

is difficult for middle managers to relate the value added output to productionefficiency.

3-4. Benefits of productiv ity measurement in the organizations

Productivity measurement should be considered in order to organizations know in

which productivity level they are working now and in which corresponding level

should be operating productivity measurement also shows the direction for companies

within their industries. Productivity measurements in the organizations have thefollowing benefits:

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The organizations access to the conversion efficiency of their resources. Hence, more

goods and services are produced for a given amount of expended resources. Also

resource planning can be facilitated. The economic and none economic objectives of

the companies can be re organized by the priority in the light of the productivity

measurement efforts.

Measuring and investigating the productivity create the competition action among

companies. Strategies to improve productivity would be determined based on the

extended distance (gap) between the planned level and measured level of productivity

(Sumanth, 1981).

3-5. Benefits of the higher productivity in the organizationsHigher productivity in a company with the respect to physical and human resources

will mean higher profit because, Profit = revenue cost of goods and services

produced by the utilization of the material and labor resources( Bernolak, 1976 ).Also

higher productivity can be translated in to higher real earning for its employees.

Moreover, it causes the cost of manufacturing to be reducedand the customers to pay

relatively low price. This role increases the market share (Tabatabae, 2000).

3-6. Economic performance

Economic performance can be interpreted in a variety of ways at each level of analysis.

At the country level it usually refers to economic growth, labor productivity growth,

and consumer welfare .Economic growth is the rate of change in real output, or GDP,

and is measured at the country level. Labor productivity growth, is a measure of the

efficient use of (human) resources to create value. It allows the economy to provide

lower-cost goods and services relative to the income of domestic consumers and tocompete for customers in international markets (McKinsey Global Institute 2001,

cited by Dedrick .2003). Corresponding measures focusing on the output of an industry

sector and companies are utilized at the industry level and company level (kraemer et

al., 2003).

Clearly, labor productivity growth is also an indicator of the economic performance of

firms. A firm that is more productive than its competitors will generally enjoy higherprofitability, which is of course, also an important measure of economic performance

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for firms. A more productive firm will either produce the same output with fewer

inputs and thus experience a cost advantage, or produce higher quality output with the

same inputs, enabling a price premium. Sustaining higher profits through productivity

gains requires a firm to maintain productivity levels higher than its competitors.

Therefore, over time, profits might be competed away with result that consumers

benefit (Gurbaxani et al., 2003).

3-7. Information Technology and Productivity

Some recent studies have highlighted both the opportunities and the challenges that IT

has imposed on the world economy. For instance, Hitt and Brynjolfsson (1996) have

analyzed the implications of IT on productivity while studies by Stiroh (2001), Pohjola

(2001) have looked at growth and development (Satti and Nour, 2002).

Proving the business value of IT on organizational productivity has been a major

concern of information system (IS) research. It has been a matter of much debate

whether or not investment in IT provides improvements in productivity and business

efficiency. In 2002, Morgan Stanley reported that US companies wasted $130 billion

in the previous 2 years on technology. While organizations have increased investments

in IT in order to improve organizational performance, findings from earlier IT

productivity studies have been inconclusive despite the fact that several recent firm-

level empirical studies have found a positive relationship between IT investments and

organizational performance. For several years, scholars and policy makers lacked

conclusive evidence that the high levels of spending on IT by businesses improved

their productivity, leading to the coining of the term IT Productivity Paradox.

Morrison and Berndt (1990) concluded that additional IT investments contributed

negatively to productivity, arguing that estimated marginal benefits of investment inIT are less than the estimated marginal costs. Others, such as Loveman (1994) and

Barua et al. (1991), said that there is no conclusive evidence to refute the hypothesis

that IT investment in inconsequential to productivity. Of late, researchers working with

firm-level data have found significant contributions from IT toward productivity

(Brynjolfsson and Hitt 1996). Most of these firm-level studies have been restricted to

the manufacturing sector, in large part owing to lack of firm-level data from the service

sector.

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Kamil (2001) Declared that appropriate use of IT in the companies increase the

productivity by three ways: (a) Increasing the volume of capital used per worker

(capital deepening), when firms invest in IT (b) A speedup of growth of Total Factor

Productivity in industries producing information technologies, thanks to technological

progress (c) A speedup of growth of TFP in industries using information technologies.

Table 3.1 shows the labor productivity growth in different industries in US. Also at

this table intensity of IT use in us industry also compared between corresponding

periods of times.

Industry 19989-1995 1995-1999 Change

Private industry .88 2.31 1.43Agriculture,forestry,fisheries .34 1.18 .84

Mining 4.56 4.06 -.50Manufacturing -.10 -.89 -.79Durable Goods 3.18 4.34 1.16

Nondurable Goods 1.65 1.07 -.59Transportation 2.48 1.72 -.76

Trucking and Warehousing 2.09 -.78 -2.82Transportation by air 4.52 4.52 0.0Other Transportation 1.51 2.14 .63

Communications 5.07 2.66 -2.41Electric, gas and sanitary service 2.51 2.42 -.09

Wholesale trade 2.82 7.84 4.99Retail trade .68 4.93 4.25

Finance, insurance and real state 1.70 2.67 .97Finance 3.18 6.76 3.58

Insurance -.28 .44 .72Real state 1.38 2.87 1.49Services -1.12 -.19 .93

Personal Services -1.47 1.09 2.55Business Services -.16 1.69 1.85

Other services -3.03 -1.76 1.27Industry by intensity of IT use

Intense IT use 2.43 4.18 1.75Less intense IT use -1 1.05 1.15

Source: (Kenneth. Kramer et al., 2003)

Table 3.1: Labor productivity growth by industries in US 1989-1999

As shown on table 3.1, we understand that by increasing the rate of IT use in variety

industries, approximately labor productivity in the most of corresponding industries

increased too (Kamil, 2001).

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In the studies of IT and productivity, for successful measuring, it becomes necessary to

disaggregate capital into the component categories of investmentIT and the

traditional forms of capital, labeled non-IT. IT investment, broadly defined, includes

investments in both computers and telecommunications, and in related hardware,

software, and services (Dedrick et al., 2003).

At the end, the positive impact of IT capitals on the labor productivity growth at US

industry is shown in figure 3.1.

Sour

ce: (Triplett, 2000)

Figure 3.1: Labor productivity of US

3-8. The productivity paradox

During the last few decades, organizations have made immense investments in IT. Theimplications of these investments for productivity have been widely discussed in

business and academic communities since the American economist Solow questioned

their benefits (Horzella, 2005). In a now famous quote from 1987, he claims, You can

see the computer age everywhere but in the productivity statistics (Solow, 1987).

Growth in productivity is a central measure of national and organizational success and

is often considered in economic decision-making. This is because the amount that a

nation can consume is closely linked to what the nation produces. In a similar way, the

performance of a company is dependent on its ability to deliver more value for

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consumers based on the same resources. The inability to demonstrate a positive

correlation between IT investments and improved productivity and increase the IT

investments in the companies was later defined as theproductivity paradox and formed

a baseline for many studies and discussions in subsequent years. The results were

conflicting (Harker, 2000).

Many studies in the 1980s showed no correlation between IT investments and

productivity growth, whereas research based on subsequent data and new assumptions

mainly showed a positive and significant effect on productivity and economic growth

(Dedrick et al., 2003).

As various questions of measurement made it difficult to present distinct conclusionsbased on aggregate national or industry-level data, researchers turned to aggregate

firm-level data when seeking explanations for the productivity paradox. This research

indicates that organizations that have made IT investments of equal scale show

substantial differences in the development of their productivity (Brynjolfsson, 2003).

Explanation for this phenomenon is that the benefits gained from investments in IT are

dependent on firm-specific conditions. Idiosyncratic conditions (market position, cost

structures and etc.) and complementary investments in management practices,

organizational development and strategy are decisive for achieving planned effects. As

a example is sa Horzella (2005) concluded that there is a correlation between the

level of employee education and the productivity gains from investments in IT.

Another part of the explanation for the productivity paradox is the view of IT as a

General Purpose Technology(GPT) that makes extensive further development possible

and offers a wide range of potential applications. The implementation of other GPTs,

such as the electrical dynamo and the steam engine, has shown that it takes time before

full advantage of the technology can be taken and productivity improvements

achieved. Information structures and operating modes need to be developed and

organizations adjusted for the effects of a new technology to be realized. Another

explanation for productivity paradox includes:

Miss measurement of outputs and inputs.

Time lags due to learning and adjustment.

Redistribution of profits, and Mismanagement of IT.

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Inappropriateness of traditional productivity measures (Brynjolfsson, 1993;

Loveman, 1994).

Some experts claimed that inconsistent findings from IT productivity research were

due to interchanging terms between productivity and financial performance and also

lack of adequate data. However, recent studies have claimed that IT productivity

paradox no longer exists (sa Horzella, 2005) and there is a positive correlation

between appropriate use of IT and economic growth. To prove this issue, figure 3.2

presents the contribution of IT and non IT capital in GDP (from 1948 to 1999).

Source: (Kenneth. Kramer et.al, 2003)

Figure 3.2: Contribution of IT and non IT capital in GDP

3-9. IT opportuni ties for development

IT has the potential to accelerate economic development by:

Promoting economic growth by facilitating the generation or increase of another

sources of income and investment, thus enhancing sustainable development and

welfare economy.

Enhancing employment opportunities by creating and initiating new jobs and

increasing the employment rate of already existing jobs.

Improving the knowledge-based economy by (a) increasing the efficiency of the

educational system and learning to benefit from long-distance teaching in the near

future; (b) developing the communication system through the provision of cheaper,

easier, faster and more efficient services; (c) Upgrading skills and developing human

resources through improved educational and training systems and enhancing the

capability of people.

Promoting the degree and the efficiency of the work organization.

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Accelerating the catching-up effect. The diffusion of IT can be used to accelerate

and facilitate efforts to bridge the gap with the advanced countries.

Minimizing poverty in the region by creating additional employment opportunities.

Advancing R&D efforts by motivating and facilitating the collaboration betweenresearch institutes and organizations in the region, thus promoting research activities in

the region.

Insuring gender equality in the region by increasing both education and

employment opportunities for women.

Promoting e-commerce. Investments in IT have the potential to push/enhance e-

commerce. Both Internet and the recent growth in e-commerce can help facilitate the

fast delivery of products or services to large number of consumers (Satti and. Nour,

2002).

Table 3.2 shows the average of annual percentage of GDP devoted to expenditure on

ICT in different countries (from 1998- 2004). By considering the requested table,

importance of ICT opportunities for development is tangible as much as pervious.

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Country PercentageNew Zealand 10.3

Singapore 9.6Australia 8.7

UK 7.9

USA 7.8Japan 7.8Canada 7.7

Switzerland 7.6Sweden 7.5

Czech Republic 7.4Denmark 7.3

Hong Kong 7.3South Africa 7.1Netherland 7

Colombia 7

Malaysia 7Finland 7Korea 6.6

Hungary 6.2Germany 6

France 5.9Austria 5.8

Slovakia 5.6Norway 5.5Portugal 5.5Brazil 5.4

Ireland 5.3Vietnam 4.7Italy 4.6

China 4.3India 4.27Iran 2

Table 3.2:The annual percentage of GDP devoted to expenditure on ICT

Moreover some more important improvements of using IT in the firms are:

Better information about customers Retailers, wholesalers, service providers

and manufacturers can now use detailed real-time information about customer

purchases to make business decisions.

Faster information flow Information gathering and reporting is highly

automated and flows almost instantaneously between business units and companies.

Smaller and more accurate inventories At all stages of the value chain

participants boost efficiency by keeping lower inventories on hand.

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Sharp declines in operating margins and real consumer prices These are the

ultimate rewards of the investment, and many of the gains are passed on to the

consumer.

Increased firm and store size The technology rewards scale and scope, enabling

large centralized chains and big box stores to expand rapidly.

These achievements are substantial, but they have not been realized quickly or easily.

Rather, they are the product of decades of heavy investment, meaningful

organizational change, and effective managerial leadership. Indeed, the transformation

is far from complete (McGuckin et al., 2004).

Table 3.3 exhibits the acceleration of productivity growth from 1973 up to 1995 in USindustry. The estimations were introduced by different experts. The major factor that

affect on this Acceleration is IT investment.

Category Jorgensonand

Stiroh

Oliner and

SichelConcil

Economic

Advance

Robert

Gordon

Labor productivity 0.9 1.2 1.5 1.4Cycle n.a. n.a. n.a. 0.7Trend 0.9 1.2 1.5 0.7

Capital per worker 0.0 0.3 0.5 0.3IT capital 0.3 0.5 n.a. n.a

Other Capital 0.0 -0.2 n.a. n.a.Labor Quality 0.0 0.0 0.1 0.1

Multi factor productivity 0.7 0.8 0.9 0.3

Production of IT 0.3 0.3 0.2 0.3Other sectors 0.4 0.5 0.7 0.0

Source :( Bosworth, 2000)

Table 3.3: Alternative estimates of the acceleration of productivity growth

3-10. Role of IT in the Product ion Process

Production process is defined as the process of producing the products or presenting

the services. Many studies addressed and evaluated the role of IT on the production

process and its affection on productivity both in industry level and country level. Yet,

the decision makers who choose to invest in IT are managers who deploy IT for use in

their organizations and who use investment criteria that are related to the outcomes at

the level of the firm. labor productivity and total factor productivity is certainly one

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often-used criterion, managers also use measures such as profitability, market share,

margins, and product variety and quality as justifications for investment in IT systems.

In order to understand the overall impact of IT at the firm level, it is useful to begin by

thinking about the qualitative impacts of introducing IT into a firms production

processes. Past research has distinguished among using IT to automate processes, to

provide better information, and to transform entire processes. For example, a cashier at

a retail chain store using a computer-based information system such as a scanner can

process a transaction in less time.

Impact of improved information allows workers and managers to make decisions more

effectively. For instance, information provided by the store-based system allows themanagers to better manage inventory. Transformation impacts occur when a firm

redesigns a process to achieve significantly higher levels of productivity. One key

difference between IT capital band other forms of capital is the dual roles that IT can

play in a firm. First, like other types of capital, IT can be used directly as a production

technology to improve labor productivity, as in the case of a banks transaction

processing system. However, research suggests IT has its greatest impact in its second

role as a technology for coordination also it has important role on effective integration

of business process of the company for increasing the productivity of the firms

(Brenham 1997; and Whang 1991; cited by Vijay Gurbaxani et al., 2003).

3-11. IT and Labor

Firm-level studies in Us have shown that IT capital has been a net substitute for labor,

as the use of IT allows firms to reduce headcounts or to grow output faster than

employment (Dewan and Min, 1997). In addition, IT use is associated with a shift

toward workers with higher skill levels, and these workers earn higher wages on

average. Comparing industry sectors, found that the rate of skill upgrading has been

most rapid in industries that are the most intensive users of computers. By Looking at

the U.S. labor force, Krueger found that workers who used computers earned 10 to

15% more than nonusers. Also Reenen (1999) found similar results in studies of other

developed countries (Dinardo and Pischke, 1997). he has found the strong correlation

between wages and computer use in German data also Chennells and Van Reenen

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(1999) pointed out, there is much evidence that workers with the best skills are given

the best technology to use (Gurbaxani et al., 2003).

3-12. IT, Coordination and Firm OutputThe relationship between coordination and organizational performance has been

reviewed by organizational researchers. These researchers regard coordination as a

necessary condition for effective organizational performance. Viewing the

organization as an information processing system, Galbraith (1973, 1977) argued that

the primary function of an organization is to process the information for decision

making needed for a given level of performance. Egelhoff (1982) also considered

information processing as an important aspect of organizational performance.

Coordination refers to all of the information processing necessary to integrate various

economic activities. (Namchul Shin, 2000).

From an information processing perspective, Cheng (1984) argued that coordination is

associated with a given level of organizational output performance: the higher the level

of coordination, the better the organization can synthesize information into the

organizational knowledge needed for better organizational output performance.

According to Lawrence and Lorsch, coordination also aims to achieve unity of effort

among various subsystems in the accomplishment of the organizations task, which is a

complete input-transformation-output cycle involving at least the design, production,

and distribution of some goods and services. The above organizational research agrees

that a higher level of coordination can improve organizational output performance

since coordination is a necessary condition for a given level of firm output

performance. Since a higher level of coordination requires large coordination

expenses, and since coordination can be achieved efficiently if coordination costs are

reduced, IT can contribute to firm productivity by reducing coordination costs, thus

facilitating a higher level of coordination. Production enhancement can also be

achieved by IT applications that automate production processes and improve the

capabilities of existing machinery.

IT, however, is most often used to reduce coordination costs within and between

organizations. Organizations can produce more if they cooperate, each specializing in

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its own productive activities and then interacting with one another to acquire the actual

goods and services they desire (Milgrom and Roberts 1992). When organizations are

specialized producers that need to trade, their decisions and actions need to be

coordinated to achieve these gains. A key problem in achieving coordination is that the

information needed to determine the best use of resources is not freely available. By

providing better means of communication, information processing, and searching, IT

reduces coordination costs, improves the coordination cost efficiency, and contributes

to firm productivity. The microeconomic theory of production considers the firm as a

producer of goods and services. The production process requires a set of inputssuch

as capital, labor, materialsin order to produce output.

The theory of production assumes that a competitive firm will adopt the most

productive bundle of inputs by substituting more productive inputs for less productive

inputs. The most efficient economic output is produced by combining inputs in the

most efficient manner over time. From this perspective, IT can be regarded as an input

equivalent to capital, labor, or other production factors. As an input, IT contributes to

an increase in firm output by improving the cost efficiencies of labor and capital. As

mentioned above, productivity gains can be achieved by coordination cost efficiency,

as well as production cost efficiency. Thus, coordination (costs) will be consideredhere as an important factor in the analysis of the impact of IT on firm productivity

(Namchul Shin, 2000).

At the rest of this part the methods that used for investigating the impact of IT on

output of the companies and productivity will be introduced.

3-13. The Product ion Function Model

In order to better understand IT and productivity debate, it is useful to begin with a

discussion of the production process by which inputs are transformed into outputs in

firms and economies, and the specific role of IT as a factor of production. Economists

use two related approaches to modeling the production process by which inputs are

transformed into outputs. One approach to understanding the output of an economic

system is production economics, which uses specific functional forms, called

production functions, to model the production process. (Brynjolfsson and Hitt 2000).

This approach uses econometric techniques to relate the output of a firm, industry, or

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economy to the inputs based on estimation models derived from the production

function. Inputs typically accounted for in this approach include labor and capital,

including both IT and non-IT capital. Most of the studies at the firm level use this

approach. The primary approach used to model the production process inherent in an

economy (or industry) is growth accounting (Oliner and Sichel 2000; Jorgenson and

Stiroh 1999, 2000). This method also assumes specific properties of the production

process and, based on these assumptions, allocates shares of output to the various

inputs to production. Output growth in firms, industries, and the economy may arise

from increases in input levels, improvement in the quality of inputs, and growth in the

productivity of inputs (Gurbaxani et al., 2003).

The production functionframework has been the most widely used methodology in the

study of returns to IT investment (Loveman 1994; Lichtenberg 1995; Brynjolfsson

1996). In the absence of measures of actual benefits associated with IT, it is not

possible to perform cost-benefit analyses of IT investment and thus, production

functions which relate IT spending to overall productivity or output measures are seen

as the best alternative (Parsons et al., 1993).

Production function techniques have been shown to be valid and quite successful

through hundreds of empirical studies. The choice of the form of the production

function is constrained by economic theory which requires that conditions such as

monotonicity and quasi-concavity be satisfied. One of the simplest production

functions that satisfies such conditions and has been used for about a hundred years is

the Cobb-Douglas function (Berndt 1991). Most of the studies on IT-based

productivity have used this model (Lichtenberg 1995, Brynjolfsson and Hitt1996).

3-13-1. Cobb Douglas Funct ion

The Cobb-Douglas function has had a long and successful life and is still a popular

production function. The parameters estimated from this function have provided results

which seem to be meaningful from the point of view of economic theory. In a majority

of the cases the function fitted has been of the unrestricted type, in the sense that the

parameters were allowed to take any value whatsoever, positive or negative, high or

low.The Cobb Douglas Function is:

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Where:

Q = total production (the monetary value of all goods produced in a year)

L = labor input

K = capital input

A, and are constants determined by technology.

If + = 1, the production function has constant returns to scale. That is, if L and K

are each increased by 20%, Q increases by 20%.

If + < 1, Returns to scale are decreasing, and if + > 1 returns to scale are

increasing. Assuming perfect competition, and can be shown to be labor and

capital's share of output.

3-13-2. Translog Function model

This production function was introduced by Christenson & Jorgenson and Lauin 1973

The general equation of Translog is:

i , j = 1,2,.n

Where:

Y = Total production

Xi and Xj = inputs efficiency parameter

By increasing the number of inputs, the elastisities (ij) are increased dramatically .So

this issue is the important problem to use this model.

3-14. Decision Tree Technique (DT)

Using production function model is the basic method for investing the impact of IT

investment on productivity. Decision tree regression is the data mining technique that

extracts additional information through the results.

Data mining techniques allow organizations to explore and discover meaningful,

previously hidden information from huge organizational databases. An important

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knowledge structure in data mining activities is the decision tree (DT). A DT is a tree

structure representation of the given decision problem such that each non-leaf node is

associated with one of the decision variables, each branch from a non-leaf node is

associa