Information Technology, Revenues and Profits: Exploring the Role of Foreign and Domestic Operations

Abstract

How does information technology (IT) enable firms to globalize their operations and achieve higher foreign profits? We use archival data for multinational firms publicly-traded in the United States for the years 1999 – 2006, and find indirect evidence for the role of IT to help firms achieve higher foreign profits through revenue growth rather than cost reduction. Our findings suggest that foreign responsiveness plays a more important role in generating foreign profits than does value chain structure. Our exploratory analyses for the effect of IT on domestic revenues and profits suggest some evidence for equalization of returns across foreign and domestic operations. Among additional results, we find that R&D is positively associated with foreign revenues and foreign profits with an effect greater than that of IT, and advertising is positively associated with foreign revenues with an effect greater than that of IT. By documenting how IT creates value for firms through globalization, we extend the business value of IT and international business literatures that have so far touched on firm-level globalization benefits from IT only in passing. The findings can help managers decide how to allocate discretionary expenditures to achieve strategic objectives such as foreign and domestic revenues and profits, and the role of revenue versus cost mechanisms.

Keywords: globalization, multinational corporations, foreign revenues, foreign profits, IT expenditures, business value of IT