Outsourcing IT and Technological Differentiation: Evidence from Digital Startups
78 Pages Posted: 6 Sep 2022
Date Written: August 31, 2022
Does outsourcing IT impact the breadth of a firm’s technological innovation? With the advent of cloud services, firms are licensing IT instead of developing it internally. Despite this growing trend, we know little about how early-stage resource acquisition decision affects technology adoption, innovation, and longer-term performance. When firms outsource their IT, they develop a supplier relationship with a cloud services provider and receive valuable resources related to their cloud provider’s platform. However, these cloud providers control which resources they develop and share, which technologies they suggest, and how well technologies fit with their platform, potentially impacting the nature of innovation. Using panel data on app-developing startups, I find that startups using cloud platforms adopt larger product development technology bundles, consisting of developer frameworks and tools core to coding digital product applications. But these technology bundles become more similar to those of others on cloud platforms to fit with the cloud platform’s underlying technology and reduce the coordination costs associated with using a larger number of interdependent technologies. To differentiate their products, startups adopt larger data analytics technology bundles that are increasingly dissimilar from others on cloud platforms, producing more robust and unique data resources. Lastly, adopting more similar production technology bundles (i.e., having a better technological fit) and less similar analytics technology bundles (i.e., having richer data resources) relates to increased performance.
Keywords: Data, Startups, Innovation, Technology, Cloud, Competition
JEL Classification: O30
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