Abstract

Given the increased digitization of work and automation, the effect of information technology (IT) investment on labor input and employment has been a crucial issue for management. IT investment can a substitute or a complement for labor input in increasing firms’ performance. It therefore needs to examine the interaction effect between IT investment and labor input. As the labor input increases, it is more likely that the employment will increase accordingly. This study thus examines the relationship between IT investment and labor input and then identifies whether IT and employment are substitutes or complements in increasing firms’ performance, i.e., whether firms employ less people as they invest more in IT (substitutes) or whether firms employ more people by creating more jobs and tasks as they invest more in IT (complements). This study employs a firm-level panel dataset from Korea Institute for Advancement of Technology (KIAT) that includes 76 firms and 380 data points drawn from the years 2009-2013 (5 years). We use utilizes ordinary least squares (OLS) with Huber-White robust standard errors for the testing. The results indicate that the IT investment effect can be reversed on the interaction effect between IT investment and labor input. Based on the test result that hardware investment had a complementary effect with the labor input in increasing the performance of firms, firms can consider employing more people when they invest in hardware. Contrarily, software investment had a substitution effect with the labor input, which implies that firms can consider reducing the number of employees when they invest in software. We also found that IT staff investment had a substitution effect with the labor input, which indicates that firms can consider reducing the number of total employees when they hire more skilled IT staffs. Finally, we additionally found that IT investment effect with firm-level employment may be more salient in smaller firms and in non-IT industries. This research provides a useful framework for analyzing the strategic significance of the IT investment and employment.

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