Does information technology provide banks with profit? Wesley Shu a, * , Paul A. Strassmann b a Department of Information and Decision Systems, San Diego State University, San Diego, CA 92182-8234, USA b Strassmann Inc., New Canaan, CT, USA Accepted 13 June 2003 Available online 19 February 2005 Abstract While many studies have affirmed the contributions of information technology (IT) to business value, people are not convinced. So far IT in the service industry has not yet been seen to be more productive. The data in most previous studies either focus on specific industries or exclude financial industry data. As such, the need to do an analysis on IT productivity in the service industry is imminent. We chose 12 banks covering 9 years for our analysis. To eliminate possible estimation errors, we applied an analysis for panel data—a random effect model. We found IT investment demonstrated the highest marginal product among the input factors we chose. # 2005 Elsevier B.V. All rights reserved. Keywords: Productivity; Panel data; Information technology; Banking 1. Introduction Information systems (IS) or information technol- ogy (IT) productivity has always been a concern in academia and industry. The Bureau of Labor Statistics and National Income and Product Account have shown that IT investment has increased to 25 times what it was 30 years ago. During the same period, labor productivity did not increase. The labor productivity growth rate declined from its high of 2.68%/year in 1960s to a low of 1.03% in the early 1990s. This phenomenon has been labeled the ‘‘IT productivity paradox.’’ Nobel Laureate Solow’s famous saying succinctly pictured this paradox: ‘‘you can see the computer age everywhere but not in the productivity statistics.’’ [24] Some studies [4,5,19–21] also reported non-significant or negative IT contributions to business value. The absence of any positive correlation between profitability of firms and IT spending has been demonstrated by Strassmann, based on his consulting practice for 40 corporate cases [25], as well as for 292 corporate cases [26] and again for 486 corporate cases [27]. On the other hand, some research [6–8,18,23,29] found very positive IT contributions. After observing many studies showing positive IT contributions to business value, Bakos raised another question, ‘‘how can computers be so productive?’’ [1] However, by www.elsevier.com/locate/dsw Information & Management 42 (2005) 781–787 * Corresponding author. Tel.: +1 619 594 0207; fax: +1 619 594 3675. E-mail address: wesley.shu@sdsu.edu (W. Shu). 0378-7206/$ – see front matter # 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.im.2003.06.007