Estimating the Business Value of Investments in Information Technology

• Main Authors: ANDERSON, Mark, Banker, Rajiv, HU, Nan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2002
• Subjects: Computer Sciences; Management Information Systems
• Online Access: https://ink.library.smu.edu.sg/sis_research/1116; http://aisel.aisnet.org/amcis2002/165/
• Institution: Singapore Management University

Recent studies of the business value of information technology (IT) relate the market value of firms to IT spending or IT capital using a linear specification of the relation between the business value of IT and IT investment. A linear specification implicitly assumes that returns to IT investments do not diminish as the level of IT spending or capital increases, inconsistent with economic theory. In the study described here, we specify a model that has the property of diminishing returns to investments in IT. Using data on IT spending from InformationWeek surveys, we provide support for an empirical specification that incorporates diminishing returns to IT spending. Companies cannot obtain sustainable competitive advantage through investments in IT alone because IT can be easily imitated (Clemons and Row 1991). This suggests that the business value of IT increases with a firmís investment in IT and decreases with investment by its industry peers. On the other hand, investment in new IT by many firms in an industry could lead to positive externalities that benefit the industry as a whole. For example, investments in systems that enable firms to interact more effectively with suppliers and customers may encourage greater investment in IT throughout the supply chain. We test whether or not industry peer IT spending has a negative impact on the value of firm IT spending and find that it does not.