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Int. J. Production Economics 120 (2009) 552569

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Int. J. Production Economics

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Analyzing the relationships between information technology, inputs substitution and national characteristics based on CES stochastic frontier production models
Yueh H. Chen a,, Winston T. Lin b,
a b

College of Management, National Sun Yat-sen University, Kaohsiung, Taiwan School of Management, The State University of New York at Buffalo, New York 14260, USA

a r t i c l e i n f o
Article history: Received 1 September 2006 Accepted 1 July 2008 Available online 19 April 2009 Keywords: Information technology Constant elasticity of substitution (CES) One- and two-equation models Productive (or technical) efciency Inputs substitution and complement The productivity paradox Two-factor and three-factor CES production functions

abstract
This research examines four interrelated issues at the country level: the value of information technology (IT), inputs substitution and complement, the complementarity phenomenon created by IT and national characteristics, and the productivity paradox, jointly and critically from a global perspective, using the so-called productive efciency as the performance measure. To that end, we develop the three-factor constant elasticity of substitution (CES) stochastic production frontier model and apply it to a set of panel data from 15 countries over the period 19932003, along with the traditional two-factor CES models, within the one- and two-equation frameworks. In the two-equation setting, six national characteristics are selected as the contributing factors of the productive efciency. The ndings include: (i) the value of IT as measured by the productive efciency is duly recognized: (ii) the productivity paradox is found to be absent from the production process in a majority of developed and developing countries considered, rejecting the existing argument that the paradox exists only in developing economies but does not exist in developed countries; however, the developed countries have used IT capital in their production systems more productively efciently than the developing nations; (iii) traditional capital (non-IT capital), traditional labor, and IT capital are not pairwise substitutable, contrary to the notion that they are pairwise substitutable at the rm level; (iv) constant returns to scale, as commonly assumed, are not supported by the data; (v) different national characteristics affect a countrys output (represented by gross domestic product or GDP) and its productive efciency differently; and (vi) the complementarity phenomenon is observed in most of the countries (developed and developing) under study. & 2009 Published by Elsevier B.V.

1. Introduction Using the same rm-level panel data set as used in a number of studies (e.g., Brynjolfsson and Hitt, 1996;
Corresponding authors. Tel.: +886 7 525 2000; fax: +886 7 525 4898 (Yueh H. Chen); tel.: +1716 645 3257; fax: +1716 645 5078 (Winston T. Lin). E-mail addresses: chenbuf@faculty.nsysu.edu.tw (Y.H. Chen), mgtfewtl@buffalo.edu (W.T. Lin).

Dewan and Min, 1997; Hitt and Brynjolfsson, 1996; Lin and Shao, 2000; Lin and Shao, 2006a, b; Shao and Lin, 2000, 2001, 2002), Lin and Shao (2006b) have reached contradictory conclusions concerning the three issues, namely, the value of information technology (IT), inputs substitution among IT capital and ordinary capital and labor, and the productivity paradox. One source of the conicting conclusions is that the three issues must be investigated simultaneously, yet virtually all previous research using the same set of rm-level data from the

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United States private sector treated them separately and individually. The study of Lin and Shao (2006b) is the only exception. Applying the traditional two-factor constant elasticity of substitution (known as CES) stochastic production frontier models, (Lin and Shao, 2006b) studied the above-mentioned issues simultaneously at the rm, industry, and sector levels, and suggested an immediate extension to it by putting the three issues in a global perspective (for external validity (Tam, 1998) via globalizational generalization Lin, 2009), thereby requiring a multinational comparison based on country-level panel data. In particular, we believe that inputs substitutability or complementarity in production processes is a complex matter which needs more research taking a global perspective. The present study is motivated by the need to study the country differences associated with the three important issues stated above as compared with the rmlevel results obtained by Lin and Shao (2006b). The study is further motivated by the fact that knowledge accumulation at the country level is poor (Lin, 2009; Melville et al., 2004). Therefore, we propose to address the three issues jointly at the country level and, simultaneously, examine the possibility of the complementarity phenomenon created by IT and national characteristics. The economic theory and the methodology on which the present study is based are the theory of production and the parametric time-varying stochastic frontier production approach underlying the theory (Lin, 2009), in conjunction with the CES production functions, using the so-called productive efciency (PE, also called technical efciency) as the performance measure that is a product automatically generated by the parametric stochastic frontier production approach (cf. Aigner et al., 1997; Debreu, 1851; Farrell, 1957; Lin and Shao, 2000, 2006a, b; Lovell, 1993 for the theories of the parametric frontier production approach and the PE; and Lin and Shao, 2000, 2006a, b; Lin, 2009; Murillo-Zamorano and Vega-Cervera, 2001; Park and Lesourd, 2000; Richie and Rowcroft, 1996 for the justications of the application of the frontier production approach and the PE in the production economics/research and information systems literatures). More specically, the primary objective of this research is to jointly investigate the four interrelated issues regarding the value of IT, the possibility of the substitution/complement among IT capital, traditional capital, and traditional labor, the phenomenon of complementarity promoted by IT and national characteristics, and the paradox of productivity, by estimating the IT value in terms of the effect of IT upon productive efciencies, based on the CES stochastic frontier production model. On the methodological front, we not only consider an oneequation-two-factor CES model as used in Lin and Shao (2006b), but also propose to apply the two-equation-twofactor CES frontier production model; and, in more importantly, we further develop the one-equation-threefactor and two-equation-three-factor CES models. Empirically, the numerous estimated results from different stochastic frontier models are carefully analyzed. The

whole sample of the 15 countries selected is constituted by two groups (subsamples). Group 1 consists of eight developed countries (the G7 countries plus Australia), while Group 2 is composed of seven emerging economies. The remainder of the paper is organized as follows. Section 2 conducts a literature review. Section 3 species the CES stochastic frontier production models. Section 4 explains the data and estimation method used. Then, Section 5 reports empirical estimates, and Section 6 discusses the results collectively and individually, compares them with others for the G7 countries, and offers additional discussion into the decision-making benets of this work for managers and rms. Finally, Section 7 concludes the paper with a summary and some remarks.

2. A literature review Nobel Laureate economist Robert (Solow, 1987) has questioned the value of IT investments and observed the existence of the IT productivity paradox in response to the fact that the massive investment in IT did not seem to have any positive effects on productivity growth. He has characterized the research results of the productivity paradox in this way (Brynjolfsson, 1993; Triplett, 1999): We can see computers everywhere but in the productivity statistics. The questions about the business value of IT and its by-product called the productivity paradox have perplexed managers and researchers for a number of years (Hitt and Brynjolfsson, 1996). This is because in recent years, abundant research has presented conicting evidence concerning whether vast investments in computers and related technologies have (e.g., Brynjolfsson and Hitt, 1996; Hitt and Brynjolfsson, 1996; Lin and Shao, 2000, 2006a) or have not (Berndt and Morrison, 1995; Brynjolfsson, 1993; Lin and Shao, 2006b; Loveman, 1988, among others) realized expected benets. The empirical results of the studies addressing the value of IT have indicated that the productivity paradox did exist in the 1980s but was found to disappear in the early 1990s (Brynjolfsson and Hitt, 1996; Hitt and Brynjolfsson, 1996; Lin and Shao, 2000, 2006a, b). A careful review of more current literature (post-2000) on IT value (e.g., Lee et al., 2005; Lin and Shao, 2006a; Melville et al., 2007; Ngwenyama et al., 2007; Peacock and Tanniru, 2005; Thatcher and Pingry, 2004; Tohidi and Tarokh, 2006; Zhu, 2004, among others) clearly suggests that the paradox has been essentially dispelled at the rm level. Most studies, however, have presented evidence at the rm level (e.g., Berndt and Morrison, 1995; Brynjolfsson and Hitt, 2000; Harris and Katz, 1991; Hitt and Brynjolfsson, 1996; Lin and Shao, 2000, 2006a, b; Loveman, 1988; Mukhopadhyay et al., 1997; Parsons et al., 1992; Shao and Lin, 2000, 2001, 2002). As a result, there has been too much emphasis on US rms and lack of cross-country studies on the value of IT and the inuence of national characteristics; and, as such, research at the country level is progressing comparatively slowly. As a second consequence, knowledge accumulation concerning national (macro-) characteristics and IT value at the country level

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has been inhibited and poor (Lin, 2009; Melville et al., 2004), and this is the source of a good deal of our concern. The number of country-level studies indeed is countable, consisting of (Dewan and Kraemer, 2000; Jorgenson, 2003; Kraemer and Dedrich, 1994; Lee et al., 2005; Lin and Chen, 2002; Lin, 2009; Shu and Lee, 2003; Tam, 1998). The Dewan and Kraemers (2000) work has used a CobbDouglas production regression model, while the Lins (2009) study has deployed the stochastic frontier production models specied by the CobbDouglas, translog production functions, and the BoxCox and BoxTidwell transformations. Interestingly enough, the empirical evidence given by these two studies with respect to the paradox of productivity is contradictory and inconsistent. The former has concluded that the productivity paradox is absent from the developed countries group but does exist in the developing countries subsample. In contrast, Lin (2009) has reached a quite different conclusion that the paradox is a global phenomenon and may exist in a country regardless of whether it is a developed country or a developing economy; and the conclusion is fairly robust with respect to the stochastic production frontier employed. Nonetheless, unlike the CES production functions, the widely used CobbDouglas and translog functions and the BoxCox and BoxTidwell transformation offer no routes to analyze the phenomenon of complementarity promoted by IT investments and national characteristics jointly with the issue of inputs substitution and complement, under the umbrella of the one-equation parametric stochastic frontier production approach. Kraemer and Dedrich (1994) have concluded that the Asian-Pacic countries show a signicantly positive correlation between the IT investment and the growth in both GDP and productivity, thereby refuting the productivity paradox. Lin and Chen (2002) have provided an indepth comprehensive analysis of the productive efciencies of major industries in Taiwan and China, using a twoequation stochastic frontier model tted into a panel sample covering the 19801988 period. They have concluded that the industries in China perform less productively efciently than their counterparts in Taiwan. In applying the two-equation model, they have identied the sources of productive (in)efciency from economic, nancial, political, educational, social, and geographic differences between Taiwan and China. Shu and Lee (2003) have done a research on the IT industries of 14 OECD countries and found that their productive efciencies are low among these countries in comparison with their counterparts in Lin (2009). Finally, Lee et al. (2005) have shown that IT contributes to economic growth in many developed and newly industrialized economies, but not in developing countries. There are different explanations for the lack of positive returns on IT investments and the existence of the productivity paradox, which typically include (Lin, 2009): (i) the time lags of the productivity-enhancing effects of a new technology (David, 1990); (ii) mismeasurement of outputs (Bessen, 2002; Brynjolfsson, 1993; Lee and Barua, 1999; Siegel, 1997); (iii) mismeasurement of inputs (Devaraj and Kohli, 2003); (iv) over investments in IT, particularly during the second half of the 1980s

(Morrison, 1997); (v) lack of organizational changes to accompany IT investments (Brynjolfsson and Hitt, 2000); (vi) neglect of the substitutability and complementarity among IT capital, traditional capital, and traditional labor (Lin and Shao, 2006b), which is an important issue to be addressed in this research; and (vii) improper use of econometric methods, which is another issue of special concern in the present study. Closely related to the issues of the IT value and the productivity paradox are the substitutability of IT capital for both traditional capital and labor and the occurrence of the complementarity phenomenon accounted for by IT investments and national characteristics. Even though the literature abounds in research dedicated to address the value issue and explain or dispel the paradox, the literature is virtually silent about the possibility of the substitution/complement among IT capital, non-IT capital, and labor. In other words, it is scarce of research that makes the substitutability/complementarity of IT capital for both ordinary capital and labor a subject for serious empirical inquiry, with the studies of Dewan and Min (1997), Lin and Shao (2006b), and Menon and Lee (2000) being the only three exceptions. The rst and second studies represent a rm level analysis using the same set of panel data, but have provided contradictory evidence. The third study is an analysis of the healthcare industry, using a set of panel data. Similarly, the literature is also totally silent about the impacts of national (or macro-) characteristics upon outputs and productive efciencies in production systems. In other words, the literature is totally silent about the potential of the complementarity phenomenon created by the interaction of IT investments and national characteristics. Zhu (2004) has sought to assess the complementarity of e-commerce capability and IT infrastructure at the rm level, but it has nothing to do with the complementarity between IT spending and national characteristics that concerns us here. Various performance measures (Lin and Shao, 2006b) have been employed in the studies of the business value of IT and the paradox, including: (i) protability (Bresnahan, 1986; Cron and Sobol, 1983; Dos Santos et al., 1993; Floyd and Wooldridge, 1990; Hitt and Brynjolfsson, 1996); (ii) productivity (Dewan and Min, 1997; Dewan and Kraemer, 2000; Hitt and Brynjolfsson, 1996; Loveman, 1988; Morrison, 1997; Mukhopadhyay and Cooper, 1993; Mukhopadhyay et al., 1997); (iii) quality (Mukhopadhyay et al., 1997); (iv) operative efciency (Banker et al., 1990); (v) Tobins q (Bharadwaj et al., 1999; Morrison, 1997); and (vi) consumer surplus (Bresnahan, 1986; Hitt and Brynjolfsson, 1996). As one can observe, the rst two measures are the most popular ones. The performance measure called productive (or technical) efciency (PE) is employed for the rst time in the production economics/research and IS literatures by Lin and Shao (2000) to investigate the business value of IT and the paradox of productivity. They have noted several compelling reasons why PE is used. Several different specications of the stochastic frontier production function have been applied in the literatures of IS and production economics/research; and these include: (i)

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the generalized CobbDouglas function (Dewan and Kraemer, 2000; Lin and Shao, 2000, 2006a; Lin, 2009; Shao and Lin, 2000, 2001; Shu and Lee, 2003); (ii) the BoxCox and BoxTidwell transformations (Lin and Shao, 2000; Lin and Shao, 2006a; Lin, 2009); (iii) the translog function (Lin, 2009; Shao and Lin, 2000; Shao and Lin, 2001); (iv) the data envelopment analysis and Tobit regression (Shao and Lin, 2002); and (v) the oneequation-two-factor CES function (Lin and Shao, 2006b). Using the set of rm-level data from the United States private sector, the positive impact of IT investments on PE and the disappearance of the productivity paradox have been recognized in (i)(iv), but conicting results have been obtained in (v) and (Lin, 2009). The present research represents a signicant extension to previous country-level work and is a major effort to jointly and critically investigate the four interrelated issues as mentioned earlier. These are the IT value issue, the productivity paradox, the relevance of national characteristics, and the potential of the substitution and complement among IT capital and ordinary capital and labor. It attempts to estimate the IT value measured by the impact of IT on PE, within the framework of the CES stochastic frontier production models. This research is featured by at least four striking aspects: (i) in addition to the rst of three one-equation-two-factor CES frontier production models used in Lin and Shao (2006b) that will be repeatedly considered in this study for purposes of comparison, the one-equation-three-factor CES model is developed theoretically and applied empirically; (ii) we expand the one-equation CES model into a two-equation model, enabling us to analyze the effect of IT upon PE and assess the contributions of national characteristics to the observed output and, hence, the phenomenon of complementarity; and (iii) the present study promotes knowledge accumulation concerning IT value and national characteristics at the country level, which is viewed as urgently needed by Lin (2009), Melville et al. (2004); and (iv) this study is engaged in a multinational analysis which differs signicantly from previous research (Dewan and Min, 1997; Kaynak and Pagan, 2003; Lin and Shao, 2006b; at the rm level; and Dewan and Kraemer, 2000; Jorgenson, 2003; Lin, 2009; Lin et al., 2009; Shu and Lee, 2003 at the country level) in objectives, research methods and statistical samples.

described by Y jt f Xjt ; b vjt ujt ; j 1; . . . ; N and t 1; . . . ; M (1) where Y jt the observed output for the j-th rm (plant), industry, sector, region, or country, at time t; f Xjt ; bis the ideal, desired, or maximum output produced by a set of inputs, Xjt , such as ordinary capital, ordinary labor, and IT capital, with a vector of unknown coefcients, b, to be estimated; vjt is the traditional random error representing the effects of countless uncontrollable factors; and uit is a one-sided normally distributed random error representing productive inefciency that may be inuenced by numerous factors controllable by management at the rm level and a government at the country level. Thus, in the stochastic production frontier approach, the observed output is decomposed into three elements: the theoretical maximum output, the traditional random shock, and the random indicator of productive inefciency inuenced by factors under the control of the rm, industry or country, and the ideal (desired) output requires ujt X0 or ujt p0 (see Lin and Chen, 2002; Lin and Shao, 2000, 2006a, b; Lin, 2009; Lin et al., 2009; Lovell, 1993 for more details). In fact, according to Lin and Chen (2002), Eq. (1), the stochastic frontier model with a time-varying inefciency for panel data (Ahn and Schmidt, 1977; Lin and Chen, 2002; Pitt and Lee, 1981) is evolved from the deterministic frontier model with a time-invariant inefciency (ujt uj ) in the absence of vjt appropriate for cross-sectional data (Aigner and Chu, 1968; Farrell, 1957), the stochastic frontier model with ujt uj in the presence of vjt vj for cross-sectional data (Aigner et al., 1997; Chen and Tang, 1987; Meeusen and van den Broeck, 1977), and the stochastic frontier model with a time-invariant inefciency (ujt uj ) and vjt for panel data (Beeson and Hnsted, 1989; Kumbhakar et al., 1991; Pitt and Lee, 1981; Schmidt and Sickles, 1984). We strongly feel that to pool a panel data sample, a time-invariant stochastic frontier model in which ujt uj is certainly inappropriate. Several studies (Ahn et al., 2007; Battese and Coelli, 1992; Cornwell et al., 1990; Cuesta, 2000; Kumbhakar, 1990; Lee, 2006; Lee and Schmidt, 1993) have suggested different specications to make the one-sided stochastic component ujt in the one-equation model (1) change systematically over time and noticeably as time goes by. The notable examples include: (i) Kumbhakar (1990): ujt 1 expa1 t a2 t 2 1 uj , where ujt is assumed to be a product of a function of t and a timeinvariant inefciency; (ii) Cornwell et al. (1990): ujt b0t b1j b2j t b3j t 2 , a quadratic t function with a dynamic intercept; (iii) Battese and Coelli (1992): ujt expbt muj , where, like (i), ujt is specied to be a product of a function of t and a time-invariant inefciency); (iv) Lee and Schmidt (1993): ujt yt aj , a product of a time-varying and a time-invariant element; (v) Cuesta (2000): ujt expbj t muj , a generalization of (iii); and (vi) Ahn et al. (2007): ujt y1t a1j y2t a2j ypt apj , a generalization of (ii) and (iv).

3. Methods 3.1. The stochastic production frontier approach: a oneequation model The stochastic production frontier model for crosssectional data was proposed and applied by Aigner et al. (1997) and Meeusen and van den Broeck (1977). Subsequently, Pitt and Lee (1981), Schmidt and Sickles (1984), and Ahn and Schmidt (1977) have extended the crosssectional stochastic frontier model to accommodate panel data (cross-sectional and time-series data). The form of the stochastic production frontier model with a time-varying productive (in)efciency model can be

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We would expect that different specications imposed on ujt lead to quite distinct time-varying stochastic frontier models. Thus, it is not surprising that empirical results are very sensitive to different specications; and if there are no principles to follow, arbitrary choice of specications might bias the results. For instance, the Battese-Coelli model tted into our panel data has produced the productive efciencies of individual countries that are systematically and noticeably increasing over time-a kind of results that is neither acceptable nor justiable. Fortunately, the LIMDEP program is capable of estimating productive inefciencies ujt , for all j and t, without imposing any specication on it, when the oneequation model (1) is applied. The specications on ujt mentioned above are not appropriate for the twoequation model which we now turn to. 3.2. The generalized stochastic production frontier model: a two-equation model The productive inefciency ujt in the one-equation model (1) may be affected by various controllable factors. To account for this or to identify the sources of the productive inefciency, a generalized two-equation stochastic frontier model (cf. Lin and Chen, 2002; Lin and Shao, 2006b is used): Y jt f Xjt ; b vjt ujt ujt gZjt ; a wjt ; j 1; . . . N and t 1; . . . ; M (2) (3)

where the stochastic productive inefciency ujt is constituted by two components, namely, the deterministic component, gZjt ; a, subject to (determined by) the inuence of Zjt and the one-sided distributed random component, wjt , where Zjt is a vector which represents a broad set of country-specic characteristics or rm- or industry-specic factors and macroeconomic factors common to all rms (or industries) or countries considered, observable and/or unobservable, that cause or explain the differences in productive (in)efciencies across rms, industries, or countries (Lin and Chen, 2002). The vector may include the time variable (t) to serve as the proxy of general economic conditions or technological progresses. Again, a is a vector of unknown coefcients. The two-equation model constituted by (2) and (3 is referred to as the generalized stochastic frontier model with a stochastic and dynamic inefciency (Lin and Chen, 2002) and represents a signicant departure from the frontier models, including model (1), that were mentioned in the preceding Section 3.1. In the rst Eq. (2) of the two-equation model, just like in the one-equation model (1), the observed (actual) output (Y jt ) is again decomposed into three components, namely, the maximum (ideal, desired) output represented by f , the random inefciency (ujt ), and the traditional random shock (vjt ). The half-normally distributed random inefciency ujt is actually equal to the difference between the maximum output and the observed output (Y jt ), i.e., ujt f  Y jt , which must be non-negative. Therefore, there are only two ways to changeujt . One is technological, determined by f  which in turn is determined by its

functional form and the inputs entering intof . This means that the determinants of ujt in the technological aspect are the functional form (e.g., CES) and inputs substitution and complement. The other way to shift ujt is to identify the factors that inuence observed output Y jt . To state alternatively or equivalently, an increase (a decrease) in Y jt means to reduce (increase) ujt . These two ways represent two major sources of productive (in)efciency or two main routes to change productive (in)efciency. On the technological side in this study, the functional form is the CES production function and the inputs are ordinary (non-IT) capital (K), ordinary labor (L), and IT capital (I). The other side of the coin lies the factors that can change Y jt . The factors are called national characteristics which are largely policy-oriented at the country level (e.g., the interest rate, foreign reserves, the unemployment rate, the ination rate, etc.). Therefore, the elements of the Z jt vector entering into Eq. (3) must be country-specic national (macroeconomic) characteristics. These are: (i) T jt the time variable or the indicator of general economic conditions of country j at time t; (ii) capita consumer expenditure; (iii) PCC jt per Rjt government bond yields; (iv) TRIM jt the ratio of foreign-exchange reserves to imports; (v) UERjt the unemployment rate; and (vi) FLAjt the ination rate. Having understood the two major sources of productive (in)efciency, we are in a better position to explain why these factors are selected. First, T jt is a time variable which denotes the trend and is usually treated as the proxy of general economic conditions (Lin, 1986, 2005; Lin et al., 1992, 2002; Lin and Chen, 1998; Lin and Lin, 2000). Good (bad) economic conditions have favorable (unfavorable) impacts on Y jt , thereby reducing (worsening) the productive inefciency of a country. In addition to the time variable, the stochastically varying inefciency could be attributed to various macroeconomic variables from different sectors of an economy that affect Y jt represented by GDPjt (Lin, 1999; Lin and Lin, 2000; Lin et al., 2002), including interest rates (proxyed by government bond yields) from the nancial sector (Lin, 1988, 1992, 2005; Lin and Chen, 1998; Lin et al., 2002; Phelps, 1969), per capita consumer expenditure from the real sector (Lin, 1992), and TRIM from the external sector (Kaminsky and Reinhart, 1999; Lin, 1999; Lin and Chen, 1998; Lin and Lin, 2000; Lin et al., 2002; Miller, 1998). For example, normally, consumer expenditure generates effective demand, according to the Keynesian theory, and effective demand stimulates more production that will be accompanied by the increase in actual (observed) output, leading to the decrease in productive inefciency (ujt ). Furthermore, there are two policy objectives (Fisher and Tanner, 1978; Lin, 2005; Lin and Chen, 1998; Phelps, 1969; Zarnowitz, 1985) to be fullled at the national level: internal equilibrium to be achieved by UER and FLA and external equilibrium to be achieved by the exercise of TRIM. Whether or not the two policy objectives is achieved would directly or indirectly affect the level (e.g., boom or recession) of the economic activity of a country as measured by GDP in the country and GDP is the dependent variable representing the observed output Y jt

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in the stochastically varying frontier models (one-equation or two-equation). For these reasons, we consider that the instruments (UER, FLA, and TRIM) used to reach internal and external equilibria should have impacts on GDP and, hence, on ujt . In particular, TRIM is regarded as one of the causes of the balance of payments disequilibrium (referred to as a currency crisis Kaminsky and Reinhart, 1999; Miller, 1998). To sum up, the choice of the six national characteristics is based on a number of criteria: their importance, signicance, and inuence; suggestions from many previous studies in the literature; and more importantly, data availability. The two-equation model composed of Eqs. (2) and (3) enables us to analyze the effects of the chosen national characteristics on the value of IT, GDPs (i.e., Y 0jt s) and productive (in)efciencies. Thus, the presence of Eq. (3) indicates that the productive inefciency concerned is both dynamic and stochastic and provides a channel to identify the sources of productive (in)efciency. Moreover, the two-equation model also represents a two-stage analysis of productive inefciency; and it not only measures the productive inefciency but also examines the causes that explain the differences in productive inefciencies across different rms, industries, or countries and over time. Therefore, as stated earlier, from the methodological point of view, the proposed application of the two-equation model (2)(3) departs substantially from all previous research based on the one-equation model (1) (e.g., Ahn and Schmidt, 1977; Ahn et al., 2007; Aigner and Chu, 1968; Aigner et al., 1997; Battese and Coelli, 1992; Beeson and Hnsted, 1989; Cornwell et al., 1990; Cuesta, 2000; Farrell, 1957; Kaynak and Pagan, 2003; Kumbhakar, 1990; Kumbhakar et al., 1991; Lee, 2006; Lee and Schmidt, 1993; Lin and Shao, 2000, 2006a, b; Meeusen and van den Broeck, 1977; Murillo-Zamorano and Vega-Cervera, 2001; Pitt and Lee, 1981; Schmidt and Sickles, 1984; Shao and Lin, 2000; Shao and Lin, 2001, 2002 among others). 3.3. Treating IT in two ways: choice between one- and twoequation models As stated above, the time-varying stochastic frontier production approach indicates that there are two major sources of productive (technical) (in)efciency and, therefore, there are two ways to treat IT in the production system (Lin et al., 2009). One way is to treat IT as an observed output-inuencing factor. In this way, the twoequation-two-factor model is required; and IT enters into the second equation as one of the factors, without or with national characteristics. The other way is to treat IT as a production factor, i.e., a desired (ideal or maximum) output-impacting factor. In this way, IT appears in the production function, f ; and the one-equation-threefactor model is needed if the Z jt vector is absent.1 The
1 The presence and absence of IT is related to the classical issues of the omission of relevant variables from, and the inclusion of irrelevant variables in, a regression model (Pindyck and Rubinfeld, 1998). If IT is a relevant variable (which is the case in this study), then the oneequation-three-factor model is the correct regression model and the

empirical evidence provided by both (Lin et al., 2009) and the present study suggests that these two ways lead to virtually the same conclusions. Nevertheless, to avoid or at least alleviate the omitted variable problem which may arise from the estimation without IT while analyzing the effects of IT on productive efciency, we adopt the rst way by applying the two equations model with IT as one of the factors (with or without the selected six national characteristics) in the second equation; and the results are reported in Tables 68.2 3.4. Specications of the production function Both the one- and two-equation efciency frontier models require the specication of the functional forms of the production functionf Xjt ; b. This research is built on the specication of the two-factor CES production function (as used in Lin and Shao, 2006b) and the development of the three-factor CES production function. First, in the two-factor case, we simply follow the footstep of Lin and Shao (2006b) by using the three stochastic frontier production models proposed by them as follows: Model I: ln Y jt b0 b1 ln K jt b2 ln Ljt b3 ln K jt ln Ljt 2 vjt ujt Model II:
ln Y jt b0 b1 ln K jt b2 ln Ijt b3 ln K jt ln Ijt 2 vjt ujt

Model III:
ln Y jt b0 b1 ln Ljt b2 ln Ijt b3 ln Ljt ln Ijt 2 vjt ujt

where Y jt is the observed output as dened above, K jt is the traditional (non-IT) capital, Ijt is the IT capital, Ljt is the traditional labor, and vjt and ujt are the traditional random error and the random productive inefciency , distributed according to N0; s2 and jN0; s2 j, respectively (see, e.g., v u
(footnote continued) one-equation-two-factor model is the incorrect one. Under this situation, the OLS estimators of the incorrect model are biased and inconsistent, unless CovK it ; Iit CovLit ; Iit 0 (i.e., only when the omitted variable Iit is uncorrelated with all the included regressors do the bias and inconsistency disappear; but, in general, the incorrect model has some merit of more efciency. On the other hand, if IT is an irrelevant variable (which is not the case for this study), then the one-equation-three-factor regression is the incorrect model and the one-equation-two-factor model is the correct model. Under this situation, the inclusion of the irrelevant variable does not bias the OLS estimators of the coefcients of the relevant variables, the expected value of the estimator of the coefcient of the irrelevant variable is zero, and the inclusion of irrelevant variables does affect the efciency of the OLS estimators (Pindyck and Rubinfeld, 1998). Nevertheless, the OLS method is not valid for the time-varying stochastic frontier models of one equation and two equations, regardless of whether IT is relevant or irrelevant. Instead, a two-step nonlinear maximum-likelihood (NML) method is used (Lin and Shao, 2000) (see Section 4.2), in which the OLS estimates are used as initial values in the second step. The two-step NML estimates of the unknown coefcients involved are biased but consistent. 2 Another way to analyze the effects of IT on productive efciency is to compare the efciency estimates of a country (rm) with different sizes (large, medium, and small) of IT stocks. This method of analysis has been considered in, e.g., Lin and Shao (2000, 2006b).

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Lovell, 1993). Here, input vector Xjt is equal to (K jt ; Ljt ), (K jt ; Ijt ), (Ljt ; Ijt ) in Model I, Model II, and Model III, respectively. Model I is the CES stochastic frontier production model when ordinary capital (K jt ) and ordinary labor (Ljt ) are employed; Model II is obtained from Model I when IT capital Ijt is used to substitute for Ljt ; and Model III follows from Model I when K jt is substituted by Ijt . Model I uses no IT capital (Ijt ) but traditional capital K jt and labor Ljt in the production process and is frequently seen in the literature. These three models are based on the two-factor CES production function proposed by Arrow et al. (1961) to allow for the observed variation in the degree of substitutability (or complementarity) between K jt and Ljt , which can be described as (also cf. Kmenta, 1986; Usawa, 1962): Y jt gdK p 1 dLp a=p evjt ujt ; jt jt g40; 14d40; a40; pX 1, where g is called the efciency parameter, d and 1d are the distribution parameters for traditional capital and labor, respectively, a is the returns-to-scale parameter, and p is the substitution parameter. The nonlinear CES function corresponds to the following stochastic production efciency frontier approximation given by (cf. Kmenta, 1986; Lin and Shao, 2006b): ln Y jt ln g ad ln K jt a1 d ln Ljt 1=2pad1 d ln K jt ln Ljt 2 vjt ujt which is the same as the following unrestricted version with nonlinear restrictions under exact identication: ln Y jt b0 b1 ln K jt b2 ln Ljt b3 ln K jt ln Ljt 2 vjt ujt Thus, the parameters of the restricted approximation correspond to the coefcients of the unrestricted model as follows:

function can be written as Y jt gd1 K p d2 Lp 1 d1 d2 Ip a=p evjt ujt it jt jt

g40; 14d1 ; d2 40; a40; pX 1

j 1; . . . ; N and t 1; . . . ; M (6) where d1, d2, and 1dd2 are the distribution parameters for capital, labor and IT capital, respectively, and the denitions of other parameters in the nonlinear CES function (6) remain the same as given above. By means of the Taylors series expansion, we obtain the stochastic approximation given by ln Y jt ln g ad1 ln K jt ad2 ln Ljt a1 d1 d2 ln Ijt 1pad1 d2 ln K jt ln Ljt 2 2 1pad2 l d1 d2 ln Ljt ln Ijt 2 2 1pad1 1 d1 d2 ln K jt ln Ijt 2 vjt ujt 2 (7) As in the two-factor CES case, the right-hand side of Eq. (7) is constituted by two parts: one part corresponding to the CobbDouglas production function (represented by the rst four terms on the right-hand side of Eq. (7)) and the other part being a correction (or an adjustment) factor (represented by the 5th, 6th, and 7th terms on the righthand side of Eq. (7)) due to the departure of p from zero so that, as p tends to 0, the adjustment factor would disappear and the CES function would approach to the three-factor CobbDouglas function. The estimation of the restricted Eq. (7) corresponds to that of the following unrestricted model with nonlinear restrictions under exact identication: ln Y jt b0 b1 ln K jt b2 ln Ljt b3 ln Ijt b4 ln K jt ln Ljt 2 b5 ln Ljt ln Ijt 2 b6 ln K jt ln Ijt 2 vjt ujt (8)

g anti ln b0 expb0 ; d b1 =b1 b2 1 d b2 =b1 b2 ; a b1 b2

and p 2b3 b1 b2 =b1 b2

(4)

and, as a result, the coefcients of the restricted Eq. (7) relate to those of the unrestricted version (8) as follows:

g anti ln b0 expb0 ;
(5)

d2 b2 =b1 b2 b3 ; a b1 b2 b3

d1 b1 =b1 b2 b3 1 d1 d2 b3 =b1 b2 b3
(9)

Relation (5), coupled with Models IIII, is particularly relative to the inputs substitution issue which in turn relates to the IT value (measured by productive efciency) and the paradox of productivity, that is, it measures the possibilities of the substitution or complement between K jt and Ljt based on Model I, between K jt and Ijt based on Model II, and between Ljt and Ijt when Model III is used (see Lin and Shao, 2006b for more details). However, to facilitate a meaningful comparison between the twofactor (K, L) and the three-factor (K, L, I) results and to avoid potential bias and inconsistency arising from the two-factor models when there are three input variables available, we consider Model I only and ignore Model II and Model III even though these two two-factor models are highly relevant to the issues of IT value, inputs substitution or complement, and the productivity paradox (Lin and Shao, 2006b). Next, we develop the model for the three-factor case. The three-factor CES counterpart of the two-factor CES

Table 1 Some general and limiting cases of correspondences between p or pi and s in the CES production models. Parameter of substitution: p and pi i 1; 2; 3 Range: 1; 1 0 Elasticity of Economic meaning substitution:

s
Range: 1; 1 1

The CES reduces to the CobbDouglas function with constant returns to scale The CES reduces to xed proportions (a straight line) Inputs substitutability Inputs complementarity

40 40 1pp; pi o0 (i 1, 2, o0 3)

Note: p is the substitution parameter in the one-equation two-factor model considered in Lin and Shao (2006b).

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and p1 2b4 b1 b2 b3 =b1 b2 p2 2b5 b1 b2 b3 =b2 b3 p3 2b6 b1 b2 b3 =b1 b3 (10)

the stochastic production efciency frontier approach in cooperation with the CES production function provides an appropriate methodology to analyze the four contemplated issues of IT value, inputs substitution and complement, productivity paradox, and complementarity phenomenon jointly and critically. 4. Country-level data and estimation method 4.1. Data A set of country-level panel data covering the period from 1993 to 2003 was collected from a number of sources for each of the 15 countries included in our sample. The countries selected consist of eight developed countries (Group 1) and seven emerging (developing) economies (Group 2). The countries in Group 1 are Australia (AU), Canada (CN), France (FR), Germany (GM), Italy (IL), Japan (JP), the United Kingdom (UK), and the United States (US), while the seven economies in Group 2 are China (CH), Hong Kong (HK), Malaysia (MA), Singapore (SG), South Korea (SK), Taiwan (TW), and Thailand (TL). Y jt is set equal to GDPjt , K jt is dened as non-IT (ordinary) capital, and Ljt as non-IS (ordinary) labor. Sources of the data on these variables and the six national characteristics include the Yearbook of each country, the United Nation Common Database, the Statistics Department of each country, OECD Database, International Financial Statistics, International Marketing Data and Statistics, and European Marketing Data and Statistics. The data on IT capital (Ijt ) were collected from Digital Planet 2004The Global Information Economy. All data are transformed into millions of the 1995 constant US dollars. 4.2. Estimation The task of estimation was accomplished by using the Limit Dependent (LIMDEP) statistical package applied to the one-equation-two-factor model (Model I), the oneequation-three-factor model, the two-equation-two-factor model, and the two-equation-three-factor model. The estimation of these models was carried out in a two-step nonlinear maximum-likelihood (NML) procedure as explained in Lin and Shao (2000). If the exception condition, i.e., wrong skewness (w.s.) exists, the estimation process would stop and no results are available (Waldman, 1982). If the estimation process succeeds, LIMDEP can provide

where p1 can be used to measure (estimate) the substitutability (or complementarity) between ordinary capital and labor when IT capital is held constant, p2 between labor and IT capital when ordinary capital is held constant, and p3 between ordinary capital and IT capital when labor is held constant. Lin and Shao (2006b) have set up a table to summarize some general and limiting cases of the correspondence between the substitution parameter (p in the two-factor case) and the elasticity of substitution (s, Allen, 1962). We regard this table useful and expand it to include the substitution parameters pi ; i 1; 2; 3, for the new (threefactor) model. The expanded table is designated as Table 1. Lin and Shao (2006b) have provided a detailed discussion in relation to Table 1, which is not repeated here to save space. In sum, methodologically, the new model (7) or its unrestricted form (8) is an important addition. Besides the one-equation-two-factor CES stochastic production efciency frontier model ( Models I), we now have developed the one-equation-three-factor CES stochastic production efciency frontier model. Incorporating the single equation model into the two-equation framework of Eqs. (2) and (3), we then have a two-equation-two-factor model and a two-equation-three-factor model. Finally, the measure of productive (or technical) efciency is dened as (Lovell, 1993 and Lin and Shao, 2000, 2006a, b) PEjt expujt for country j at time t which must lie between 0 and 1, and the higher the value, the higher the productive efciency is. The average productive efciency of country j is denoted by APEj P t expujt =M and the overall average productive efP ciency by APE j;t expujt =MN. Like (Lin and Shao, 2006b), we emphasize the importance of inputs substitution or complement because the substitution (or complement) between a pair of inputs inuences the maximum (desired or ideal) output f  and, hence, ujt (i.e., the difference between the maximum output and the actual output or the so-called productive inefciency) and expujt (i.e., the so-called productive efciency). Thus,
Table 2 Estimated results of the one-equation-two-factor model (Model I). Model Model I

b0

b1

b2
0.8901 0.2023 0.3784

b3
00.3247 0.3327 0.0740

APE

R2

1d

Group 1 (w/o GM) 1.2263 0.1165 Group 2 0.6612 2.7253 Combination 0.6866 0.6356

0.8677 0.8260 0.7866

0.9696 0.9690 0.9815

3.4086 15.261 1.8882

0.1157 0.7657 0.6447

0.8843 0.2343 0.3553

1.0066 0.8635 1.0650

4.9944 0.1758 0.0869

Note: GM stands for Germany, IL for Italy, and CH for China; and w/o means without. Signicant at the 1% or 5% level. Signicant at the 10% level.

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Table 3 Estimated results of the one-equation-three-factor model (the new model). Parameter Group 1 (w/o GM) 2.6553 0.9276 1.0460 1.1153 0.2601 0.6732 0.5634 0.9508 0.9978 14.2290 0.9305 1.0494 1.1188 0.9968 0.5345 1.0000 1.0000 Group 2 1.8200 0.5225 1.3238 1.0103 0.4020 0.0194 0.2340 0.8596 0.9736 6.1719 0.6251 1.5838 1.2089 0.8359 0.9716 0.0243 0.7410 Combination (w/o GM) 1.9112 0.7567 0.2029 0.4532 0.1316 0.0079 0.0756 0.8519 0.9909 6.7609 0.7514 0.2015 0.4501 1.0070 1.7263 0.1730 0.4440

Table 5 Estimated results of the two-equation-three-factor model (based on the new model). Parameter Group 1 (w/o GM) 0.1552 0.1969 0.4999** 0.7285* 0.3677* 0.0530 0.1617* 0.0295* 0.0954 0.0359** 0.0298** 0.1356* 0.0112* 0.9823 0.9996 1.1679 0.1909 0.4846 0.7063 1.0315 1.0006 0.3002 2.3256 Group 2 1.4388 0.3057** 0.4776** 0.0068 0.5651* 0.1086* 0.0933** 0.0691* 0.1589* 0.0980* 0.0612** 0.0604 0.0004 0.9125 0.9865 4.2156 0.3869 0.6045 0.0086 0.7901 0.9395 0.0038 70.9254
*

Combination w/o GM 1.7510* 0.8850* 1.0496* 1.1523* 0.2461* 0.0020 0.2321* 0.0452* 0.0696* 0.0464** 0.0236 0.0940* 0.0031 0.9095 0.9929 5.7601 0.8961 1.0628 1.1667 0.9877 0.5767 0.0033 0.4496

b0 b1 b2 b3 b4 b5 b6
APE R2

b0 b1 b2 b3 b4 b5 b6

g
d1 d2
1d1d2

a1 a2 a3 a4 a5 a6
APE R2

a
p1 p2 p3

g
d1 d2
1d1d2

Note: GM stands for Germany and w/o for without. Signicant at the 1% or 5% level. Signicant at the 10% level.

a
p1 p2 p3

Table 4 Estimated results of the two-equation-two-factor model (based on Model I). Parameter Group 1 (w/o GM) 1.2341* 0.7680* 0.2710 0.0281 0.0280 0.0501 0.0724 0.2163* 0.1891* 0.0095 0.9441 0.9973 3.4354 0.7392 0.2608 1.0390 0.2806 Group 2 1.2387* 0.8713* 0.0453 0.5933* 0.0588* 0.1530* 0.0916* 0.0494* 0.0057 0.0037 0.8909 0.9822 3.4512 1.0549 0.0549 0.8260 24.8324 Combination 1.5317* 0.7503* 0.2789* 0.0410 0.0181 0.0097 0.0144 0.0777* 0.0494 0.0070 0.8317 0.9873 4.6262 0.7290 0.2710 1.0292 0.4033

Note: The Note given just below Table 3 applies.

b0 b1 b2 b3

a1 a2 a3 a4 a5 a6
APE R2

g
d
1d

estimates is caused by wrong skewness which is related to the distribution and pattern of the data involved as well as by the fact that the stepwise NML estimation procedure used in LIMDEP is sensitive to the choice of the initial values. Moreover, separating the sample countries into two groups and comparing empirical results from each group sample are reasonable. However, comparing average efciency estimates from Groups 1 and 2 does not include valuable information For this reason, we base the comparisons of average efciency measures on the results estimated from the whole sample (see Tables 68).

a
p

5. Results Tables 25 report estimated results of the oneequation-two-factor model (Model I), the one-equationthree-factor model (the new model), the two-equationtwo-factor model (the expanded model based on Model I), and the two-equation-three-factor model (the expanded model based on the new model), respectively. Included in these tables are the coefcient of determination (R2 ), the overall average technical efciency (APE), the estimates of the coefcients and ve parameters associated with the one-equation-two-factor model, the estimates of the coefcients and eight parameters in the one-equationthree-factor model, and the estimates of the coefcients of the six national characteristics appearing in the second equation of the two-equation models. Note that the estimates of the one-equation-two-factor (K, L) model presented in Table 2 are needed to compare them with those of the one-equation-three factor (K, L, I)

Note: The note given just below Table 3 applies.

the estimates of the productive inefciencies ujt for all j and t; and then productive efciencies expujt , APEj , and APE are obtained. Then, using the estimated coefcients, the ve parameters in (4) and (5 for the two-factor model (Model I) and the eight parameters in (9) and (10) for the three-factor model are calculated. In estimating each of the proposed models, we consider two groups and the whole sample. Group 1 (N 8) and Group 2 (N 7) are subsamples, while the whole sample deals with the combination (N 15) of Groups 1 and 2. Due to the presence of the so-called exception condition (wrong skewness), we are forced to drop GM in order to get empirical results when IT is treated as a production factor. The failure to obtain

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Table 6 Comparison of average technical efciencies APEjs from the two-equation-two-factor with IT as one of the factors in Eq. (2) (obtained from the whole sample). Country Two-equation-two-factor model w/o six characteristics Group 1 (Developed) With IT CN FR GM IL JP UK US AU CH HK SK MA SG TL TW AVG 0.9408 0.9011 0.8710 0.9789 0.7314 0.8522 0.9875 0.8307 0..8867 RK 3 4 5 2 8 6 1 7 w/o IT 0.9613 0.9588 0.5979 0.8055 0.6152 0.7803 0.9159 0.7926 0.8034 RK 1 2 8 4 7 6 3 5 Group 2 (Developing) With IT 0.9178 0.9203 0.6951 0.7510 0.7242 0.8007 0.9483 0.8225 RK 3 2 7 5 6 4 1 w/o IT 0.9169 0.8904 0.5510 0.7180 0.7674 0.7115 0.8158 0.7673 RK 1 2 7 5 4 6 3 Two-equation-two-factor model with six characteristics Group 1 (Developed) With IT 0.9278 0.9100 0.9133 0.9441 0.8829 0.8974 0.9563 0.8814 0.9142 RK 3 5 4. 2 7 6 1 8 w/o IT 0.9463 0.9485 0.6709 0.8660 0.7275 0.8873 0.9803 0.8002 0.8534 RK 3 2 8 5 7 4 1 6 Group 2 (Developing) With IT 0.9295 0.9413 0.8165 0.9163 0.8834 0.8972 0.9640 0.9069 RK 3 2 7 4 6 5 1 w/o IT 0.9516 0.8955 0.6090 0.7106 0.7475 0.7792 0.9557 0.8070 RK 2 3 7 6 5 4 1

Note: AVG stands for the average, w/o for without, and RK for ranking.

Table 7 Comparison of average technical efciencies APEjs with/without IT from the whole sample. Country Two-equation-two-factor model w/o six characteristics With IT CN FR GM IL JP UK US AU CH HK SK MA SG TL TW AVG 0.9408 0.9011 0.8710 0.9789 0.7314 0.8522 0.9875 0.8307 0.9178 0.9203 0.6951 0.7510 0.7242 0.8007 0.9483 0.8627 Ranking 4 7 8 2 13 9 1 10 6 5 15 12 14 11 3 w/o IT 0.9613 0.9588 0.5979 0.8055 0.6152 0.7803 0.9159 0.7926 0.9169 0.8904 0.5510 0.7180 0.7674 0.7115 0.8158 0.7866 Ranking 1 2 14 7 13 9 4 8 3 5 15 11 10 12 6 Two-equation-two-factor model with six characteristics With IT 0.9278 0.9100 0.9133 0.9441 0.8829 0.8974 0.9563 0.8814 0.9295 0.9413 0.8165 0.9163 0.8834 0.8972 0.9640 0.9108 Ranking 6 9 8 3 13 10 2 14 5 4 15 7 12 11 1 w/o IT 0.9463 0.9485 0.6709 0.8660 0.7275 0.8873 0.9803 0.8002 0.9516 0.8955 0.6090 0.7106 0.7475 0.7792 0.9557 0.8317 Ranking 5 4 14 8 12 7 1 9 3 6 15 13 11 10 2

Note: AVG stands for the average and w/o for without.

model given in Table 3. For a similar reason, the estimates of the two-equation-two-factor model shown in Table 4 are required in order to compare them with those of the two-equation-three-factor model as reported in Table 5. As mentioned above, there are several cases in which GM was dropped out of a group in order to correct w.s.. Such cases include Group 1 w/o GM in Model I (Table 2) and Group 1 w/o GM and Combination w/o GM in the two-equation-three-factor model (Table 5), where w/o stands for without. Moreover, to analyze the effects of IT on productive efciency, we have used the estimates obtained from the two equations model with IT as one of the factors in the

second equation. Tables 68 present estimates of the APEj for countries j 1; . . . ; 15 and their rankings. The estimates and rankings provide the important information needed for a comprehensive comparison of the IT value of individual countries and, for determining whether the productivity paradox still exists or actually disappears in an individual country (developed or developing). Finally, Table 9 shows a summary comparison of the CES-based IT-efciency (from the one-equation-threefactor model) and IT/characteristics-efciency (from the two-equation-three-factor model) with Lins (2009) ITefciency, Shu and Lees (2003) IT-efciency, and Jorgensons (2003) IT-productivity for the G7 countries.

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Table 8 Does the IT investment alone enhance (E) or reduce (R). Country Two-equation-two-factor model w/o six characteristics E or R CN FR GM IL JP UK US AU CH HK SK MA SG TL TW R R E E E E E E E E E E R E E %() (2.13) (6.02) 45.68 21.53 18.89 9.21 7.81 4.81 0.10 3.36 26.15 4.60 (5.63) 12.54 16.24 Two-equation-two-factor model with six characteristics E or R R R E E E E R E R E E E E E E %() (1.96) (4.06) 36.13 9.02 21.36 1.14 (2.45) 10.15 (2.32) 5.11 34.07 28.95 18.18 15.14 0.87

Table 9 Comparison of this study with others for the G7 countries. Study, measure, period, etc. G7 Countries CN This study IT-APEja Ranking IT/Characteristics-APEja Ranking Model: CES Period: 19932003 Lin (2009) IT-APEjb Ranking Model: CD Period: 19931999 Shu and Lee (2003) IT-APEjc Ranking Model: CD Periods: starting years vary, with the same ending year of 1997 Jorgenson (2003) IT-productivityd Ranking Model: None Period: 19892001 FR GM IL JP UK US

0.9408 3 0.9278 3

0.9011 4 0.9100 5

0.8710 5 0.9133 4

0.9789 2 0.9441 2

0.7314 7 0.8829 7

0.8522 6 0.8974 6

0.9875 1 0.9563 1

0.9466 4

0.9468 3

0.7440 6

0.9477 2

0.6658 7

0.9180 5

0.9856 1

0.5410 7

0.5774 5

0.5958 3

0.5105 6

0.6229 2

0.5870 4

0.6268 1

0.1550 7

0.4250 4

0.5400 2

0.5300 3

0.3150 6

0.5700 1

0.3550 5

A countrys APEj and do national characteristics strengthen IT value? a The average technical efciency of country j (APEj) was based on the whole sample. b The APEjs were obtained based on the CobbDouglas (CD) production efciency frontier. c The estimates were obtained by means of the full information maximum likelihood method applied to the CD function. d The values of productivity are the average of the results of the two subperiods, 19891995 and 19952001 from Jorgensons (2003) Table 14.

6. Discussions The strategy taken to analyze the empirical results consists of two methods. One is collective in nature, meaning to analyze the results collectively based on the expected signs of the coefcient estimates and their statistical signicance provided by the whole sample or

subsamples (groups). This is the commonly practiced method which essentially fails to compare countries individually. To correct such a weakness associated with the collective analytical method, a second method is taken to analyze the value of IT, the paradox of productivity, and the impacts of the six national characteristics by comparing the APE j of individual nations. The applications of the

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time-varying stochastic production frontier approach and the so-called productive efciency as the performance measure make it wholly possible to undertake individual comparisons. The second method is a considerable departure from previous country- or rm-level studies as far as analytical methods are concerned. The collective analysis is based on Tables 25, whereas the individual analytical method is relative to Tables 69.

6.1. Analyzing the estimated results collectively First, we consider the estimated results of the oneequation-two-factor model (Model I) as reported in Table 2. The results of Model I indicate: (i) that all the coefcient estimates are statistically signicant; (ii) that the coefcients of determination are high (ranging from 0.97 to 0.98); (iii) that the APE for from the entire sample is acceptably high (0.7866); (iv) that the estimates of the substitution parameter (p) for the group of developed countries and for the group of developing economies are 4.9944 (positive) and 0.1758 (negative), respectively, implying that K and L are substitutable in the rst group but are complementary in the second group and that the notion of unity elasticity (as observed by, e.g., Devaraj and Kohli, 2003 corresponding to p 0 is rejected; (v) that the one-equation-two-factor CES frontier model does not show constant returns to scale as observed by conventional wisdom (e.g., Berndt, 1991; Dewan and Min, 1997) and , actually, it shows increasing returns to scale (a 1.006) and decreasing returns to scale (a 0.8635) for Groups 1 and 2, respectively; and (vi) that the distribution parameters from the CES frontier model tell different tales for the developed nations (the output shares distributed to K and L are 11.57% and 88.43%, respectively) and the developing economies (76.57% and 23.43%, respectively). Second, we discuss the results (Table 3) of the new one-equation-three-factor CES frontier model. Certainly, it would become more meaningful if this model compares with Model I in Table 2. We notice that the estimate of the coefcient of IT stock (I) is positively signicant (1.1153) for Group 1, negatively (wrongly) signicant (1.0103) for Group 2, and positively signicant (0.4532) for Combination, all at the 1% level of signicance, and that the APE for Combination has increased considerably from 0.7866 to 0.8519 (8.30%), so does R2 (from 0.9696 to 0.9978 for Group 1, from 0.9690 to 0.9736 for Group 2, and from 0.9815 to 0.9909 for Combination). Thus, there is no doubt that IT capital is a source of productive efciencies, suggesting the absence of the productivity paradox provided that technological changes are constant or increasing (Lin and Shao, 2000; Lin, 2009; Shao and Lin, 2001). Furthermore, based on the estimates of the substitution parameters (p1, p2, and p3), (K, L, and I) are pairwise complementary for the developed countries subsample because p1 0.5345, p2 1.0000, and p3 1.0000 are all negative; but for the developing economies subsample, (L and I) are substitutable since p2 0.0243 is positive, while (K and L) with p1 0.9716 and (K and I) having p3 0.7410 are complimentary.

Accordingly, the empirical evidence does reject the notion that (K, L, and I) are pairwise substitutable (Dewan and Min, 1997). Also, both the group of developed countries and the group of developing economies face decreasing (rather than constant Dewan and Min, 1997) returns to scale, although for the group of developed countries the returns-to-scale parameter a 0.9968 is very close to one. These ndings at the country level are consistent with those of Lin and Shao (2006b) at the rm level. Third, we now turn to an analysis of the results of the two-equation-two-factor model (incorporating Model I) as shown in Table 4. Recall that in the second equation of the two-equation-two-factor setting, the Zjt vector contains six national characteristics (i.e., Tjt, PCCjt, Rjt, TRIMjt, UERjt, and FLAjt). The second equation serves to identify the sources of the productive (in)efciency and their impacts on the actual output (GDP), the value of IT, and inputs substitution or complement. A careful review of Table 4 in comparison with Table 2 reveals some points of particular interest: (i) In Model I without IT, the APE gains led by the six characteristics for Combination is considerable, increasing from 0.7866 without the six characteristics to 0.8317 in the presence of the six characteristics. (ii) The impacts of the national characteristics upon inputs substitution and complement are mixed: for example, the pair (K, L) is complementary for Group 1 since p 0.2806 (negative) and is substitutable for Group 2 since p 24.8324 (positive), in the presence of the six characteristics. (iii) Not all the six characteristic variables are uniformly signicant across different groups; there is only one characteristic, namely, TRIM (the ratio of reserves to imports), which is uniformly signicant across three different groups (Group 1, Group 2, and Combination) and there is also only one characteristic, that is, FLA (the ination rate), which is uniformly insignicant across three different groups. (iv) T (the indicator of general economic conditions), PCC (per capita consumption expenditure) and R (the interest rate) appear to be signicant for Group 2. (v) TRIM and UER (the unemployment rate) are signicant for Group 1. (vi) Consequently, the effects of the six characteristic variables on observed outputs and, hence, on productive (in)efciencies differ from Group 1 to 2 and to Combination, and are a complex matter. Finally, our attention is directed to the estimates of the two-equation-three-factor model as reported in Table 5. Again, it is instructive to compare the results with their counterparts as presented in Table 4. We highlight the ndings as follows. (i) All R2 s are very high, as high as 0.9996 for Group 1, 0.9865 for Group 2, and 0.9929 for Combination. (ii) The estimated coefcients (0.7285 and 1.1523) of the IT capital are positive and signicant for both Group 1 and Combination, but that (0.0068) of the IT capital is insignicant for Group 2, implying that the productivity paradox is absent from the developed countries group but is present in the developing countries subsample, supporting the argument of Dewan and Kraemer (2000). (iii) The impacts of the six national characteristics on the productive (in)efciencies differ from Group 1 to Group 2; for example, UER and FLA are important for Group 1 (because a5 0.1356 and

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a6 0.112 are signicant) but are not for Group 2 (because a5 0.0604 and a6 0.004 are both insignificant) and, in contrast, PCC is signicant for Group 2 but insignicant for Group 1. (iv) In the presence of the six national characteristics variables, (K and L) are complementary for both Groups 1 and 2. (v) Comparing Table 5 with Table 4, we nd that the APE gain led by the IT investment and the six national characteristics are substantial for the whole set of countries (Combination): 0.8317 without IT vs. 0.9095 with IT, which means a 9.35% increase in the APE that is contributed by IT in the presence of the six national characteristics, implying that national characteristics can be used to strengthen the value of IT in the developed and developing countries. It is of special interest to point out that nding (v) clearly indicates the existence of the phenomenon of complementarity (Zhu, 2004). Here, the complementarity (substitutability) phenomenon means that an enhancement (a reduction) of IT value arises when IT investment produces greater (smaller) gains in the presence of national characteristics than by itself. In other words, the presence of national characteristics strengthens (weakens) the IT value and, therefore, IT and national characteristics are complementary (substitutable) in the value-creation process of production or transformation from inputs into outputs. These phenomena have important bearings on government policies concerning the investment of IT and the execution of national policies via national characteristics. The phenomenon of complementarity is also observed from the APE estimates given in Tables 68, based on the two-equation-two-factor models in which IT is treated as an observed output-generating factor rather than a production input, thereby IT appears in the second equation rather than in the f  function in the rst equation. For example, in the presence of the six national characteristics, the APE is 0.8317 without IT vs. 0.9108 with IT (see Table 7), meaning a 9.51% gain in the APE because of the presence of the national characteristics along with IT. The empirical evidence again indicates that the joint appearance of IT and national characteristics has strengthened IT valuethe phenomenon of complementarity.

6.2. Analyzing the empirical results individually The collective analytical method, though commonly and popularly practiced, cannot be used to address the issues of the value of IT and the productivity paradox for individual countries. Equipped with the CES stochastic frontier production models and the productive efciencies derived from them, we are able to do this. Tables 6 and 7 provide comparisons of the average productive efciencies (APEjs) of individual countries, based on the twoequation-two-factor model (with or without IT appearing in the second equation in the absence of the six national characteristics) and the two-equation-two-factor model (with or without IT appearing in the second equation in the presence of the six national characteristics) tted into the whole sample. Then, Table 8 is designed to answer the

question: Do IT investments enhance (E) or reduce (R) the APEj of country j? First, looking at Tables 68, we immediately nd that there are efciency gains led by IT even without national characteristics in most of the developed countries and developing economies under study, based on the twoequation models. Consider JP (Japan) as an example. Its APEj is 0.6152 without IT, but increases to 0.7314 with IT, suggesting that Japan becomes more technically efcient with than without IT investments. Consider TW (Taiwan) from the group of developing economies as another example. Its APEjs are 0.8158 and 0.9483 without and with IT, respectively, implying that Taiwan encounters the same situation as Japan. However, there are three countries (two from the group of developed countries and one from the group of developing economies) where IT spending has resulted in the decline in their productive efciencies; these are CN, FR, and SG. But US and TW rank rst with IT, followed by IL and HK; and CN and CH rank rst without IT, followed by FR and HK. In the cases of CN and FR from the developed countries group and SG from the developing economies group, their IT investments failed to improve their rankings. In the case of SK from the developing countries group, it ranks last with and without IT although its IT spending has led to a 26.15% gain in itsAPEj . Like CN and FR, the engagement of IT investments in SG did not improve its ranking but, actually, has worsened its productive efciency during the time period 19932003. Therefore, the empirical evidence suggests that IT capital alone may not be a good prescription to change a countrys efciency status but that IT, if supplemented by some national characteristics in the production process, could lead to improvements on productive efciencies. The APEjs and their corresponding rankings from the two-equation models in the presence of the six national characteristics (see Tables 68) tell us exactly this point which is of critical relevance and importance to national policies implied by the phenomenon of complementarity, as explained in the preceding section. From Tables 68, we immediately nd that the six national characteristics have indeed contributed to efciency improvements in nine countries if we compare the two percentage-change columns in Table 8. These countries are CN, FR, JP, AU, HK, SK, MA, SG, and TL. For instance, in the cases of CN and FR, the national characteristics have helped reduce their negative percentage changes in efciency from 2.13 to 1.96% fro CN and from 6.02% to 4.06% for FR; and the other seven countries, JP, AU, HK, SK, MA, SG, and TL, have also evidently shown higher APEjs with IT than those without IT (0.8829 vs. 0.7275, 0.8814 vs. 0.8002, 0.9413 vs., 0.8995, 0.8165 vs. 0.6090, 0.9163 vs. 0.7106, 0.8834 vs. 0.7475, and 0.8972 vs. 0.7792, respectively), under the national policies of implementing the national characteristics in their production systems, resulting in higher positive percentage changes in efciency with than without the six national characteristics. There are six countries (GM, IL, UK, and US from the group of developed countries and CH and TW from the group of developing economies) that do not benet from the incorporation of the national

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characteristics with IT investments in their production processes because the six national characteristics have lowered their percentage increases in efciency (see Table 8). Consequently, the complementarity phenomenon is conrmed in nine countries (four of them are developed and ve are developing). Stated alternatively, the substitutability phenomenon, which means the situation where the presence of national characteristics weakens IT value, is observed in six countries (four are developed and two are developing) in the sample. Second, consider Tables 7 and 8 again. In the twoequation model without the six characteristics, two developed countries (i.e., CN and FR) and one developing nation (i.e., SG) have actually suffered from the deployment of IT investments (0.9408 with IT vs. 0.9613 without IT in the CN case, 0.9011 with IT vs. 0.9588 without IT in the FR case, and 0.7242 with IT vs. 0.7674 without IT in the case of SG). In the absence of IT, CN ranks rst but drops to the fourth place with IT spending. In contrast, US ranks the fourth place without IT but raises its ranking to the rst place in the presence of IT capital. The last place was won by SK with and without IT. In the two-equation models incorporating the six selected national characteristics, eleven out of 15 countries under consideration have slightly or greatly increased their productive efciencies during the 19932003 period. The notorious ones include GM (+36.13%), JP (+21.36%), AU (+10.15), SK (+34.07%), MA (+28.95%), SG (+18.18), and TL (+15.14%). On the contrary, there are four countries that have not beneted from the practice of national characteristics at all; these are CN, FR, US, and CH. For example, in the case of CN, APEj 0.9463 in the absence of IT but in the presence of the six characteristics in comparison with APEj 0.9613 when both IT and the six characteristics are absent; while its APEj is 0.9278 when both IT and the six characteristics are present in comparison with APEj 0.9408 in the presence of IT but in the absence of the six national characteristics. FR is the other country that faces the same fate as CN. TW is a developing economy that seems to have actually beneted from the application of the national characteristics, having APEj with IT slightly larger than that without IT. Its records are: APEj 0.9557 without IT in the presence of the six national characteristics, APEj 0.8158 without IT in the absence of the six characteristics, APEj 0.9640 with IT in the presence of the six characteristics, which is larger than APEj 0.9483 with IT in the absence of the six characteristics considered. However, the net consequence from these records is that its efciency percentage change declines from 16.24% without, to 0.87% with, the implementation of the six national characteristics. Furthermore, we also can observe from Tables 7 and 8 that CH is the only developing country that has not been beneted by the introduction of the six national characteristics into its production process along with IT. When the six national variables appear in its production process, its APEj is 0.9295 with IT vs. 0.9516 without IT. To sum up, we ask two questions of critical importance. Question 1 is: Does the IT investment alone enhance a countrysAPEj ? The answer is positive because there are 13

out of 15 countries have experienced efciency gains led by IT. Question 2: Do the IT spending and the six national characteristics combined strengthen a countrys performance as measured by productive efciency? The answer is again positive. There are eleven countries whose efciencies have been strengthened by the introduction of the national characteristics; but there are four nations who suffered from efciency decreases as a result of the presence of the national characteristics along with ITthe substitutability phenomenon. The empirical ndings have the following implications. (i) The empirical evidence disagrees very strongly to the notion that the productivity paradox exists only in developing economies and does not appear in developed countries (Dewan and Kraemer, 2000); as a matter of fact, it may or may not exist in a country irrespective of whether it is a developing or a developed country. (ii) The value of IT as measured by productive efciency is recognized in most of the countries considered (developed and developing), but is questionable for some countries (developed and developing). (iii) The issues of IT value and the paradox of productivity (efciency) are highly relevant to the relationships of substitution and complement among IT capital, non-IT capital, and ordinary labor; conventional wisdom suggesting that these three production inputs are pairwise substitutable has been rejected at the rm level (Lin and Shao, 2006b) and is now shown empirically unacceptable at the country level. (iv) National policies in the form of prudently incorporating certain national characteristics into production processes may be used to improve productive efciencies; more importantly, such national policies and IT use may be combined together in order to enhance productive efciencieshence, the complementarity phenomenon that has been surfaced in both the collective and the individual analysis; however, the phenomenon does not take place uniformly across different nations, though it happens in a majority of the countries considered.

6.3. A comparison with others for the G7 countries It is both interesting and instructive to compare the CES-based IT-efciency and IT/national characteristicsefciency with Lins (2009) IT-efciency, Shu and Lees (2003) IT-efciency, and Jorgensons (2003) ITproductivity for the G7 countries. A summary of the information needed to undertake such a comparison is presented in Table 9. The information contained in Table 9 reveals some points of interest which are stated as follows. In the rst place, the APEjs without and with national characteristics from this study differ, as discussed in the preceding subsection. The six national characteristics selected have increased the APEjs of all G7 economies and changed the rankings except for CN and IL, and US has won the rst place and JP the last place in both the absence and presence of the national characteristics. In the case of CN, its APEj has decreased from 0.9408 in the absence of the national characteristics to 0.9278 in their presence, an equivalent of a 1.38% decrease.

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Next, both the studies of Lins (2009) and Shu and Lee (2003) have deployed the same stochastic production efciency frontier model specied by the CobbDouglas production function. But their empirical results differ considerably. In general, the APEjs reported by Shu and Lee are much smaller than their counterparts given by Lin and, accordingly, the rankings are also quite different. For example, the APEj of CN obtained by Lin is 0.9466 which means to be the fourth place in comparison with 0.5410 estimated by Shu and Lee which ranks last among the G7 economies. Nevertheless, both studies have awarded the rst place to the US The signicant difference between these two works may be caused by the data irregularities in time periods for different countries in the sample used by Shu and Lee. Another good explanation is the different methods of estimation used. Shu and Lee applied the full information maximum-likelihood procedure, while Lin relied on the two-step nonlinear maximum-likelohood procedure. In the third (nal) place, Jorgensons (2003) study represents another distinguished view. He has analyzed the productivity of IT in the G7 countries. His results and ranking do not convey a similar tale. In his ranking on the basis of productivity, UK is the biggest winner and the last place goes to CN; and US wins the fth place, followed by JP. Nevertheless, it should be cautioned that although the same measure, APEj , is applied to different studies, the comparison of the results to previous studies is unconvincing because of the differences in data (from different time periods), econometric methods, and other factors. As such, the comparison of inter-study results may not be over-emphasized unless such a comparison is based on some standardization process that would make the interstudy results at least more comparable. Accordingly, the inter-study comparison may not provide useful information until a standardization process is found available.

on rm characteristics needed are available) to determine whether such IT investments are justied or not, as measured by productive efciency. Third, when IT investments are viewed as critical for a rms growth, survival, or competitiveness, their contributions (as measured by productive efciency) to the rms performance become the gauge of the IT investment decision-making; and the application of the time-varying stochastic frontier method may become a good strategy to better the rms competitive position. Fourth, when managers and rms are making IT investments to improve productivity of their business processes, the time-varying stochastic frontier approach provides an appropriate way to nd how the changes in the actual and/or the desired output improve or worsen productivity, using the relationship given by: productivity growth efciency change x technical change (Lin and Shao, 2000; Shao and Lin, 2001). Fifth and last, as mentioned before, in the time-varying stochastic frontier models, the substitution and complement of the three inputs (K, L, and I) are highly relevant to the desired (maximum) output represented by the production function f  which in turn affects the component of the productive (in)efciency represented by ujt . Thus, fully understanding and carefully exercising the relationships of substitution and complement among K, L, and I in the value-creating production process at the rm level are as benecial and important as at the macro level.

7. Concluding remarks Traditionally, the four issues, namely, the value of information technology (IT), the productivity paradox, the complementarity (or substitutability) phenomenon, and the substitution and complement relationships of inputs have been investigated separately instead of simultaneously. But, because they are interrelated and interacted, they must be dealt with jointly. In particular, we currently face a situation where country-level research in this area remains scarce and, consequently, knowledge accumulation at the country level is inhabited and poor (Lin, 2009; Lin et al., 2009; Melville et al., 2004). This study has attempted to bridge the gap. Lin and Shao (2006b) have examined three of the four issues jointly and critically at the rm level and suggested the need to investigate these complex issues with more research taking a global perspective. This research has intended to meet this need. Methodologically, we have developed the three-factor constant elasticity of substitution (CES) by means of the Taylors series expansion in comparison with the traditional two-factor CES models as used in Lin and Shao (2006b) at the rm level. In addition, the two- and threefactor CES functions become the principal components of the one- and two-equation stochastic production frontier models. The stochastic production frontier approach enables us to calculate a performance measure called productive (technical) efciency. The measure in turn makes it possible to analyze and compare the

6.4. The decision-making benets of this work for managers and rms Although this work examines the country as the level of analysis, there are obviously some decision-making benets of this work for managers and rms. These benets include, but are not limited to, the following: First, the stochastically dynamic frontier approach and the performance metric called productive (or technical) efciency which is built in and generated by the approach are well applicable at the rm level (e.g., Lin and Shao, 2000, 2006, b; Lin, 2009; Shao and Lin, 2000, 2001, 2002). Applying this approach, there is no need to search for other performance metrics elsewhere. Second, when managers and rms are faced with making IT investments to take advantage of business opportunities (e.g., e-commerce, knowledge management, etc. Peacock and Tanniru, 2005), efforts made to assess the impacts of IT on the rms performance are required; and the time-varying stochastic frontier method that has been applied to a set of panel data at the macro level in this study can readily be used at the rm level (when the data

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contributions of IT and national characteristics for individual countries. Empirically, we have treated IT in two ways: as an observed output-effecting variable and as a production factor. To assess the effects of IT on productive efciency, we have relied on the rst way by using the two equations models with IT as one of the factors in the second equation. This way may overcome or alleviate the omitted variable problem arising from the estimation without IT. Nonetheless, the two ways of treating IT have led to the same conclusions, consistent with (Lin et al., 2009). We have obtained estimates that are rich enough to draw numerous signicant conclusions that appear to be contradictory to, or inconsistent with, the literature on the issues mentioned above. Especially, our analytical methods used have been featured by both the collective and individual analytical skills. This represents a substantial departure from previous research. For example, collectively, it was concluded that the productivity paradox is an unpleasant phenomenon that occurs only in developing countries; however, individually, we have concluded that the unpleasant paradox is a global phenomenon, that is, it may exist in a country regardless of whether it is a developing or a developed one. Although whether or not it is worth investing in IT hinges on the value of IT as measured by productive efciency, it is also very important to exercise national policies by prudently applying a countrys national characteristics to its production systems along with IT investments in order to enhance and strengthen its productive efciency, as clearly suggested by our empirical results. The two-equation-two-factor and two-equation-three-factor frontier production models can be used to identify national characteristics for the formation of effective national policies designed to increase the value of IT as measured by productive efciency. Our empirical results indicate that it can make a tremendous difference between the output-efciency gains led by IT and national traits (e.g., the ination rate and per capita consumer expenditure) combined and those led by IT employed alone, thereby the so-called complementarity phenomenon is conrmed empirically. The empirical evidence rmly suggests that there is a link (positive or negative) between IT and efciency, that there is also a link between national characteristics and efciency, and that the combined effect of IT and national characteristics on a countrys output and efciency could be much greater than the impact of IT or national characteristics applied alone and independently. In other words, IT and national characteristics can be intertwined to increase the countrys output and enhance its efciency substantially. Thus, IT and national characteristics may be one of the many important driving forces behind the rise or fall in the productive efciency in the production process of the country irrespective of whether it is a developed or a developing nation. The impacts of different national characteristics upon output and efciency differ from country to country; but general economic conditions, the unemployment rate, and per capita consumer expenditure stand out as important contributing factors for both developed and developing nations.

We offer two extensions to this work for future research. At the country level, we have considered how the six selected national characteristics impact the productive efciency of a country. At the rm level, the counterparts (i.e., rm characteristics) of national characteristics may include related diversication, unrelated diversication, rm size, and vertical integration (Dewan et al., 1998) as well as the features of the competitive environment such as concentration and dynamism (Melville et al., 2007). When the data on these rm characteristics become available, the present study should be extended to investigate the effects of rm characteristics upon the rms performance as measured by productive efciency. The second extension relates to group comparisons. The purpose of comparing efciency estimates from two different groups can be better achieved if we can compare temporal changes in productive efciencies of Groups 1 and 2, instead of comparing average efciency estimates. The group-specic stochastic frontier model proposed by Lee (2006) can help to accomplish the purpose since it allows estimating temporal variation in productive efciency of each group of countries. As a nal remark, it is noted that the main incremental contribution of this study lies in the country level differences in the value of IT as measured by productive efciency, in the status of the productivity paradox, in the relationships of substitution and complement among IT capital, ordinary capital, and ordinary labor, and in the potential of the complementarity phenomenon created by IT and national characteristics. The other signicant contribution is the theoretical development and empirical application of the three-factor CES production model (when we say contribution, we mean contribution beyond prior literatures and the Lin and Shao, 2006a, b papers). Acknowledgments The authors thank two anonymous referees of this Journal for invaluable comments and detailed suggestions; and gratefully acknowledge nancial support from the College of Management at National Sun Yat-sen University, Taiwan, and the School of Management at The State University of New York at Buffalo, without which this paper would not have been produced. Research assistance provided by Chia-Hung Chuang, Ray Chen, Tejaswini Herath, and Zu-Wei Wang is also gratefully acknowledged. An earlier version of this paper was presented at the 37th Annual Meeting of the Institute of Decision Sciences, San Antonia, TX, November 1821, 2006, and at the 2007 Conference on Productivity Growth and Efciency Assessment, Taipei, Taiwan. References
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