IT Business Value and Industry Effects: The Role of the Competitive Environment

Abstract:     
Prior empirical research indicates differences in IT business value across industries, but the source of these differences is unclear. In this study we examine the role of the competitive environment in moderating IT business value. We identify two dimensions of the competitive environment that are likely to shape IT business value, have a strong basis in theory, and have been studied in the context of regular capital but not with respect to IT. Industry concentration is the degree to which the output of an entire industry is produced by a few firms, and is widely used as an inverse proxy for industry competitiveness. Industry dynamism denotes change that is difficult to predict, measured as the deviation of industry sales from a trend line. We estimate the moderating impact of concentration and dynamism on the marginal product of IT and regular capital by estimating a production function using data from large U.S. firms from 1987 to 1994. Results reveal that the marginal product of IT is lower in more concentrated industries, while the opposite is true for regular capital. There is limited evidence that the marginal product of IT is higher in more dynamic industries, and strong evidence that the marginal product of regular capital is lower in more dynamic industries. Taken together, results suggest that IT may provide enhanced value to firms in less concentrated (more competitive) and more dynamic environments. The findings raise new questions about IT business value in relation to a firm's competitive environment and the differences between IT and regular capital.

Keywords: Competitiveness, concentration, dynamic capabilities, dynamism, industry structure, information technology, IT business value, productivity

JEL Classifications: L10, 030

Working Paper Series