The missing effect of investments of firms in information and communication technologies on productivity is studied by various recent papers (e.g. Olinerand Sichels 1994, Landauer 1995, Brynjolfsson and Hitt 1996). Several explanationsare given for this missing link. Our paper deals with two of them, using two newlyavailable data sets for the German service sector. Using data from a survey of innovative activities in services we show that investmentin information technology (IT) has a stronger effect on the quality of services thanon the productivity of the IT-using firm. IT investment seems to be especiallyeffective when innovations enhance the delivery speed and the spatial or temporalavailability of service. Moreover, data of the German IT survey point towards the needto differentiate between types of IT investment. It is shown that especially the mostrecent generation of IT as indicated by the number of PCs used is the source ofproductivity growth whereas traditional IT like mainframes exhibit only minorproductivity effects. We conclude from our results that mismeasurement of the quality of new products andprocesses is one important reason for our inability to uncover the productivity effectof IT. Moreover, dividing IT-investment by the type of IT clarifies that the kind of ITa firm uses is more important for productivity growth what than its quantity. In any case we expect that the bulk of the IT-related productivity growth is still to come. Inorder to realize the benefits from IT investment entirely, firms have to undergo a largerestructuring of business functions.