Sequential IT Investment: Can the Risk of IT Implementation Failure Be Your Friend?

Information Systems Research, Forthcoming

32 Pages Posted: 30 Mar 2018 Last revised: 6 Feb 2022

See all articles by Vidyanand Choudhary

Vidyanand Choudhary

University of California, Irvine - Information Systems Area

Mingdi Xin

Merage School of Business, University of California, Irvine

Zhe Zhang

University of Texas at Dallas, Naveen Jindal School of Management

Date Written: March 29, 2018

Abstract

An extensive literature has studied the benefits for a firm to be the first to invest in innovative technologies such as Information Technologies (ITs). However, IT investment often faces the risk of implementation failure. How would such risk affect an early adopter’s incentive to invest? Do late adopters benefit from information about the early adopter’s investment? In this paper, we investigate these questions in a context where two firms, a leader and a follower, invest in a cost-reducing IT sequentially. This paper differs from prior literature in two aspects: First, IT adoption is nonexclusive and available to all client firms. Second, IT implementation can fail. In this case, the follower may have information about the leader’s IT investment level or implementation outcome before making his own investment decision. We use a Hotelling model of duopoly competition to examine how IT implementation failure risks and the follower’s knowledge about the leader’s IT investment may affect the firms’ incentive to sequentially invest in IT.
Our results show that the risk of IT implementation failure impacts the firms’ investment incentives and profits through three distinct effects: the first-mover advantage mitigation effect, competition mitigation effect, and uncertainty-driven cost-based differentiation effect, and these three effects may drive the firms’ investment and profits in opposite directions. The follower’s knowledge about the leader’s IT investment level before making his own IT investment decision gives the leader a first-mover advantage and the follower a disadvantage. In contrast, the follower’s knowledge about the leader’s IT implementation outcome can benefit both the leader and the follower. Finally, we find that a spaced-out sequential IT investment schedule, in which the follower makes his investment decision after the leader’s IT investment level and implementation outcome are both known, leads to the highest industry-wide IT investment and social surplus.

Keywords: Sequential IT Investment, Risk of Implementation Failure

Suggested Citation

Choudhary, Vidyanand and Xin, Mingdi and Zhang, Zhe, Sequential IT Investment: Can the Risk of IT Implementation Failure Be Your Friend? (March 29, 2018). Information Systems Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3152605

Vidyanand Choudhary

University of California, Irvine - Information Systems Area ( email )

Irvine, CA
United States
949-824-8469 (Fax)

Mingdi Xin (Contact Author)

Merage School of Business, University of California, Irvine ( email )

4293 Pereira Drive
Irvine, CA 92697
United States

Zhe Zhang

University of Texas at Dallas, Naveen Jindal School of Management ( email )

800 W Campbell Road
Richardson, TX Texas 75083-0688
United States

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