The Mediating Effect Of Innovation On The Relationship Between Information Technology Investments And Firm Performance: An Empirical Study
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Date
2011
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Business and Management
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Doctor of Philosophy
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This item is made available by Morgan State University for personal, educational, and research purposes in accordance with Title 17 of the U.S. Copyright Law. Other uses may require permission from the copyright owner.
Abstract
The last couple of decades has witnessed a plethora of research studies addressing the cause-and-effect relationship between Information Technology (IT) investments and performance at the firm level. These studies elicited mixed results between IT investments and performance which led to various points of view from IT Scholars and Practitioners. Recently, though, there is an emerging consensus that IT investments do augment the performance of the firm, albeit indirectly. However, there seems to be a dearth of research studies investigating the underlying mechanisms through which IT investments impact specific business processes to spur the agreed performance differentials. In response to calls for research that investigates the business processes impacted by IT investments, this study examines the underlying mechanisms through which IT investments influence innovation that in turn leads to improved firm performance. Since firms do not operate in isolation, and also because one business process has the potential to complement or suppress another, the study includes specific firm factors, namely debt ratio, growth potential, and firm size, as well as environmental factors such as market concentration ratio, diversification, and environmental uncertainty, and examines how these control factors impact innovation and, ultimately, firm performance. A set of hypotheses grounded in the knowledge-based view and the resource-based view theories of the firm is generated and empirically tested in a sample of 441 firms in the manufacturing industry, using a unique dataset that comprises IT investments data from InformationWeek 500, patents data from United States Patents and Trademark Office, as well as financial and market data from Research Insight (COMPUSTAT). Both hierarchical linear regression and mediated regression models are used to analyze the data; and after controlling for variations in specific firm and environmental factors, the empirical analysis yielded significant relationships between IT investments and innovation, and innovation and firm performance. Also, specific firm factors such as debt ratio and firm size, and environmental factors, namely, diversification and market concentration ratio, were found to be significantly related to innovation. However, and contrary to expectations, IT investments was found not to be significantly related to either of the measures of firm performance, namely, Tobin's Q and Return on Sales. These results highlight the indirect, though positive, role of IT investments in firm performance and reiterate that IT investments should be embedded and integrated in the business processes to spur firm performance differentials.