Complementary Effects of Information Technology Investment on Firm Profitability: The Functional Forms of the Complementarities

Abstract

This paper focuses on developing economic theory on the interrelation between information technology investment components. Three functional forms to model the joint effects between components of investment on firm accounting profitability are identified and empirically tested. The results suggest that the complementarities between components of IT investment can be best modeled by using the multiplicative functional forms, providing a framework to model the joint effects of different factors that impact firm profitability.     

Causality in the alignment of information technology and business strategy

The need for a link between information technology (IT) use and organizational strategy has been identified and discussed for a number of years. The thrust of this work argues that the motives for investment in IT should derive from firm objectives and, more particularly, from the strategic plan which the organization wishes to pursue. This paper argues that, often, mere lip service is paid to the strategic nature of IT. Further, strategy justification has become a tool for securing investment in IT by circumventing established organizational policy on investments. Many IT investments labelled ‘strategic’ appear to be operational in nature. This paper discusses the nature and evaluation of strategy and relates it to the literature on IT as a strategic tool. The extent to which the relationship between IT and strategy has altered over recent years is subsequently investigated. The implementation process is investigated and evidence of IT investment activities and the returns available to investing organizations are reviewed. The paper argues that there are a number of alternative views on the IT-strategy relationship, some of which are organizationally detrimental.     

The leveraging influence of strategic alignment on IT investment: An empirical examination

Businesses have invested enormous sums in information technology (IT). The challenge now is to optimize these investments. We empirically examined the influence of the alignment between IS strategy and business strategy (strategic alignment) on the payoff of IT investment. Many studies have been performed on the value of IT investment and strategic alignment separately, in the past, but here we combined them by investigating the moderating affect of strategic alignment on the relationship between IT investment and firm performance for a group of manufacturing firms. The results indicated that there is a synergistic coupling between strategic alignment and IT investment with firm performance. Firms that have aligned IT and business strategies can invest in additional IT resources with some assurance that they will be leveraged substantially. One of our main contributions was in the examination of four differing perspectives of strategic alignment and their relationship with the payoff of IT investment.     

The Impact of Information Technology Investment on Enterprise Performance: A Case Study

Investment in information technology is steadily increasing, but many organizations find it difficult to formally assess the value of IT investments because the latter are often incorporated into broad management initiatives. the authors believe that the results of the research study reported on here can help firms to develop a better understanding of the dynamic relationship between IT investment and performance at both the firm and industry levels of analysis. This study clearly demonstrates the importance of adopting an organizational change perspective when assessing the impact of IT investment on firm performance.     

Information technology investments and firm value

Our objective in this paper is to develop a firm value model to assist IT managers and researchers in understanding the multiple effects that IT investments have on firm value. This firm value approach adds to the process-oriented approach through simultaneous evaluation of all of the factors that affect firm value. It is crucial for IT professionals to recognize the complex and diverse implications of IT investments on firm value. The implications of the firm value approach include forcing IT managers to think in terms of both industry and company-specific effects of IT investments, to consider both the magnitude and duration of competitive advantage due to IT investments, and the implications of the effect that IT investments have on risk and its relation to firm value. We demonstrate an application of the firm value framework by evaluating a major stream of research in MIS—event studies of IT investment announcements. Appendices to this paper can be found at http://www.itandfirmvalue.com.     

Exploring the relationship between information technology investments and firm performance using regression splines analysis

Identifying the business value of information technology (IT) investments has been a major concern of managers and researchers. Various studies have addressed this issue but have provided contradictory results. Here, we explore the relationship between IT investments and firm performance using a relatively new technique, multivariate adaptive regression splines (MARS), and attempt to answer two questions: (1) do investments in IT have a positive impact on organizational productivity? and (2) for a given level of investment, what portion of the total should be invested in IT to maximize organizational productivity? Our results suggest that depending on the conditions that applied, an unbiased observer could either conclude that investments in IT has a positive statistically significant effect on productivity, or that there is a ‘productivity’ paradox. This suggests that the relationship between IT investments and organizational performance is much more complex than that found in some other studies. Our results could also provide guidance to managers who are responsible for determining the allocation of organizational resources.     

Exploring the relationship between information technology investments and firm performance using regression splines analysis

Identifying the business value of information technology (IT) investments has been a major concern of managers and researchers. Various studies have addressed this issue but have provided contradictory results. Here, we explore the relationship between IT investments and firm performance using a relatively new technique, multivariate adaptive regression splines (MARS), and attempt to answer two questions: (1) do investments in IT have a positive impact on organizational productivity? and (2) for a given level of investment, what portion of the total should be invested in IT to maximize organizational productivity? Our results suggest that depending on the conditions that applied, an unbiased observer could either conclude that investments in IT has a positive statistically significant effect on productivity, or that there is a ‘productivity’ paradox. This suggests that the relationship between IT investments and organizational performance is much more complex than that found in some other studies. Our results could also provide guidance to managers who are responsible for determining the allocation of organizational resources.     

Exploring the relationships between IT competence,innovation capacity and organizational agility

Business environments today are characterized as being very dynamic and hyper competitive. Organizations in these environments have to be agile in order to adapt their strategies and actions to be successful. While it is recognized that information technology can enable firms to be agile, there is a limited understanding of the mechanisms through and the contexts in which Information Technology (IT) enhances agility. This study examines two key antecedents of organizational agility, namely the IT competence of a firm and its innovation capacity and, examine their independent and joint effects on agility. We test our model using data collected from large firms in the US. The results provide strong support for our model. We found that firms with superior IS capabilities coupled with an aggressive IT investment orientation create digital platforms that enable them to be agile. We also found that the innovation capacity of the firm has a positive relationship with organizational agility and that firms with higher innovation capacity are better able to leverage their digital platforms to enhance agility. Our results indicate that organizational agility has a strong positive impact of firm performance. We interpret and discuss these results and their theoretical and practical implications.     

Maximizing the positive influence of IT for improving organizational performance

In the analysis of whether information technology (IT) has an impact on organizational performance, focus is usually placed on the relationship between an organization’s investments in IT and that organization’s performance. Therefore, it is standard to devote special attention to the size and complexity of the organization, to the investments in other organizational resources that may affect the performance of IT, and to the manner in which the two variables are measured. However, one area that has not been well explored is the manner in which the relationship between investments in IT and organizational performance develops. In this article, we show empirically that the planning and management of IT influence the organization’s endowment of resources (physical and human), which consequently has positive effects on each of the IT-related areas usually found in organizations (applications, reliable and secure systems and communications, and training and support). In turn, the functioning of these areas influences the impact of IT on the organization, which then has positive effects on organizational performance. We have used data corresponding to IT management in Spanish universities, as well as independent rankings that are useful for evaluating their performance.     

Valuing information technology infrastructures: a growth options approach

Decisions to invest in information technology (IT) infrastructure are often made based on an assessment of its immediate value to the organization. However, an important source of value comes from the fact that such technologies have the potential to be leveraged in the development of future applications. From a real options perspective, IT infrastructure investments create growth options that can be exercised if and when an organization decides to develop systems to provide new or enhanced IT capabilities. We present an analytical model based on real options that shows the process by which this potential is converted into business value, and discuss middleware as an example technology in this context. We derive managerial implications for the evaluation of IT infrastructure investments, and the main findings are: (1) the flexibility provided by IT infrastructure investment is more valuable when uncertainty is higher; (2) the cost advantage that IT infrastructure investment brings about is amplified by demand volatility for IT-supported products and services; (3) in duopoly competition, the value of IT infrastructure flexibility increases with the level of product or service substitutability; and (4) when demand volatility is high, inter-firm competition has a lower impact on the value of IT infrastructure.     

Understanding the impact of business cases on IT investment decisions: An analysis of municipal e-government projects

This study synthesizes the extant literature to derive an integrative developmental framework for IT business cases that can be applied to diagnose the feasibility of technological investments. We then construct a theoretical model that postulates the impact of IT business case elements on the initial cost estimates of technological investments. Subsequently, our theoretical model is subjected to empirical validation through content analysis of IT business cases developed for municipal e-government projects. Findings indicate that the richness of the richness of business cases translates to more initial costs being identified in technological investments, thereby conserving resources for the organization through informed investment decisions.     

Information security breaches and IT security investments: Impacts on competitors

In current business climate, a firm’s information systems security is no longer independent from the industry’s broader security environment. A question arises, then, whether stock market values reflect the interdependence of security breaches and investments. In this paper, we used the event study methodology to investigate how a firm’s security breaches and IT security investments influence its competitors. We collected and reviewed 118 information security breaches and 98 IT security investment announcements from 2010 to 2017. We found substantial evidence supporting our hypothesis that information security breaches do, indeed, have a competition effect: when one firm is breached, its competitors have opportunities to absorb market power. For the IT security investment announcements, however, we observed the positive externalities, or contagion effect, in play: market investors feel that the security investments made by one firm increase the security level of the entire network, and hence, competitors also get benefits. Additionally, we found that the competition effect was higher when the breaches occurred after the preceding security investments than when there were no preceding investments before the breaches.     

Using regression splines to assess the impact of information technology investments on productivity in the health care industry

Abstract. This paper explores the impact of information technology (IT) investments on productivity using a new technique, multivariate adaptive regression splines (MARS). We believe that it provides additional insights on the nature of the impact of IT investments on productivity. The results from our study are compared with findings from a previous study that has also used the same data set. While the results of a previous study indicate that IT investments have a positive but uniform impact on productivity, our study suggests that the impact of IT on productivity is not uniform but is contingent on other complementary factors. Our findings describe that the complementary relationship exists between IT and non‐IT related investments. Thus, improved organizational productivity cannot be expected from investment in IT alone but only together with non‐IT investments. Our findings also point out that further investment may not necessarily bring on higher organizational productivity.     

Strategy, IT applications for planning and control, and firm performance: The impact of impediments to IT implementation

Our study examined the association among strategy, the extent of IT applications to 12 planning and control functions, and firm performance. Special attention was paid to the moderating effect on these relationships of 15 technical, human, and organizational impediments to IT implementation. We analyzed survey data obtained from 296 Taiwanese companies, supplemented by financial data from publicly disclosed financial reports. Results indicated that strategy significantly influenced the extent of IT applications for planning and control. In turn, the extent of IT applications had a significant direct effect on firm performance, while the direct effect of strategy was insignificant. The relationship between strategy and the extent of IT applications, and between the latter and firm performance were both stronger when the level of impediments to IT implementation was low. The findings went beyond these general relationships to reveal systematic differences in the specific IT applications and impediments of firms pursuing different strategies.     

IT capabilities and firm performance: A contingency analysis of the role of industry and IT capability type

Previous empirical studies examining the relationship between IT capability and accounting-based measures of firm performance reported mixed results. We argued that prior work has relied on aggregate overall measures of the firm's IT capability, ignoring the specific type and nature of IT capability; and also has not fully considered important environmental conditions that influence the relationship. Drawing on a resource-based view, we advanced a contingency perspective and proposed that IT capabilities’ impact on firm resources was contingent on the “fit” between the type of IT capability/resource a firm possesses and the demands of the industry in which it competes. Specifically, using publicly available rankings as proxies for two types of IT capabilities (internally and externally focused), we empirically examined the degree to which three industry characteristics (dynamism, munificence, and complexity) influenced the impact of each type of IT capability on measures of financial performance. After controlling for prior performance, we found there was general support for the posited contingency model. The implications of these findings are also discussed.     

A methodology of constructing a decision path for IT investment

Information Technology (IT) may be used for organizational efficiency, but should also be flexible to adapt to the rapidly changing competitive business environment. In competitive business circumstances, management continually asks: (1) How flexible must the firm be in investing in IT in order to meet unknown business needs in the future? At the same time, how efficient must the firm be in order to meet current business needs?; (2) How well must the firm align its business strategy with IT investment in order for it to support its strategic goals?; (3) how to construct a decision path for IT investments with respect to flexibility, efficiency and alignment between business strategy and IT investments?Although many researchers have struggled to answer these questions, they generally provide no means for incorporating these factors into the IT investment decision process.This paper suggests a method that identifies the degree of flexibility required (α-value), and accounts for and incorporates the α-value in making IT investments. The proposed method is based on a product development method called Quality Function Deployment (QFD). It will be applied to a real case of the “H-company” in Korea to validate and evaluate the proposed methodology.     

Closing the loop: Empirical evidence for a positive feedback model of IT business value creation

Researchers have established that information technology (IT) can improve firms’ productivity. Whether improved productivity leads to additional investment in IT, however, remains largely uninvestigated. In this paper, we consider whether the relationship between productivity and subsequent IT investment might be positive, negative, or ad hoc, and hypothesize that this relationship is positive. We analyze seven years of panel data from 1236 healthcare firms and present empirical evidence supporting our hypothesis. When our finding is combined with extant research, it becomes reasonable to propose that unidirectional causality does not fully describe the process of IT business value creation. Instead, we argue that existing static models of IT business value with unidirectional causality can be recast as dynamic models that explicitly incorporate multiple time periods and a positive feedback relationship to more accurately capture the complexity of this process. The creation of IT business value can thus be understood as a positive feedback model where IT investment in a given time period builds the stock of IT inputs, where those IT inputs then impact productivity, and where productivity leads to IT investment in a future time period, beginning the cycle anew.     

Reexamining the impact of information technology investment on productivity using regression tree and multivariate adaptive regression splines (MARS)

As health care costs increased significantly in the 1990s, investments in information technology (IT) in the health care industry have also increased continuously in order to improve the quality of patient care and to respond to government pressure to reduce costs. Several studies have investigated the impact of IT on productivity with mixed conclusions. In this paper, we revisit this issue and re-examine the impact of investments in IT on hospital productivity using two data mining techniques, which allowed us to explore interactions between the input variables as well as conditional impacts. The results of our study indicated that the relationship between IT investment and productivity is very complex. We found that the impact of IT investment is not uniform and the rate of IT impact varies contingent on the amounts invested in the IT Stock, Non-IT Labor, Non-IT Capital, and possibly time.     

Assessing the importance of industry in the adoption and assimilation of IT: Evidence from Italian enterprises

We analysed the role of industry in determining the diffusion and business value created by IT. Data was collected for this purpose by surveying 192 large enterprises in Italy. Our research revealed three findings. First, in the material services and non-hi-tech manufacturing industries, firms had a relatively limited adoption of IT, resulting in little business impact. Second, firms’ IT spending behaviour depended on their industry type and not on their IT capabilities. However their capabilities were more important than industry in explaining why firms achieved benefits from IT adoption that depended on the previous accumulation of IT resources and other capabilities. Third, industry type determined the degree to which IT affected profitability and its effectiveness in helping firms to defend their competitive advantage. Specifically, the slower the adoption of IT in an industry, the greater its impact on the firm's profitability.The implications of these findings for managers and policy-makers are discussed.     

Digital systems and competitive responsiveness: The dynamics of IT business value

The mechanics of competition involve perception and reaction to competitor moves. Both incur delays that can be reduced by digital systems. Using system dynamics and the Red Queen paradigm, we modeled the impact of IT investments on response delays and business value, with the following results: (a) value has significant transient components; (b) value depends on investment level and the relative delays of competitors; and (c) relative delays affect the first-mover advantage. These results show that when assessing the value of IT investments, it is important to consider (a) the temporal pattern of benefits, not just their total magnitude, and (b) the impact of ongoing moves by competitors.