Abstract

http://ssrn.com/abstract=942291
 
 

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Which Came First, it or Productivity? Virtuous Cycle of Investment and Use in Enterprise Systems


Sinan Aral


Massachusetts Institute of Technology (MIT) - Sloan School of Management

Erik Brynjolfsson


Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

D. J. Wu


Georgia Institute of Technology - Ernest Scheller Jr. College of Business



Abstract:     
While it is now well established that IT intensive firms are more productive, a critical question remains: Does IT cause productivity or are productive firms simply willing to spend more on IT? We address this question by examining the productivity and performance effects of enterprise systems investments in a uniquely detailed and comprehensive data set of 623 large, public U.S firms. The data represent all U.S. customers of a large vendor during 1998-2005 and include the vendor's three main enterprise system suites: Enterprise Resource Planning (ERP), Supply Chain Management (SCM), and Customer Relationship Management (CRM). A particular benefit of our data is that they distinguish the purchase of enterprise systems from their installation and use. Since enterprise systems often take years to implement, firm performance at the time of purchase often differs markedly from performance after the systems go live. Specifically, in our ERP data, we find that purchase events are uncorrelated with performance while go-live events are positively correlated. This indicates that the use of ERP systems actually causes performance gains rather than strong performance driving the purchase of ERP. In contrast, for SCM and CRM, we find that performance is correlated with both purchase and go-live events. Because SCM and CRM are installed after ERP, these results imply that firms that experience performance gains from ERP go on to purchase SCM and CRM. Our results are robust against several alternative explanations and specifications and suggest that a causal relationship between ERP and performance triggers additional IT adoption in firms that derive value from their initial investment. These results provide an explanation of simultaneity in IT value research that fits with rational economic decision-making: Firms that successfully implement IT, react by investing in more IT. Our work suggests replacing either-or views of causality with a positive feedback loop conceptualization in which successful IT investments initiate a virtuous cycle of investment and gain. Our work also reveals other important estimation issues that can help researchers identify relationships between IT and business value.

Number of Pages in PDF File: 22

Keywords: Business Value of Information Technology, Productivity, Simultaneity, Causality, Software Investment, Production Function, Enterprise Resource Planning, Supply Chain Management, Customer Relationship Management

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Date posted: November 5, 2006  

Suggested Citation

Aral, Sinan and Brynjolfsson, Erik and Wu, D. J., Which Came First, it or Productivity? Virtuous Cycle of Investment and Use in Enterprise Systems. Available at SSRN: http://ssrn.com/abstract=942291 or http://dx.doi.org/10.2139/ssrn.942291

Contact Information

Sinan Aral (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States
Erik Brynjolfsson
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
E53-313
Cambridge, MA 02142
United States
617-253-4319 (Phone)
HOME PAGE: http://digital.mit.edu/erik
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
D. J. Wu
Georgia Institute of Technology - Ernest Scheller Jr. College of Business ( email )
800 West Peachtree Street, NW
Atlanta, GA 30308
United States
404-894-4364 (Phone)
404-894-6030 (Fax)
HOME PAGE: http://mgt.gatech.edu/wu
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References:  36
Citations:  15

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