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

Vidyanand Choudhary (), Mingdi Xin () and Zhe Zhang ()
Additional contact information
Vidyanand Choudhary: Paul Merage School of Business, University of California, Irvine, Irvine, California 92697
Mingdi Xin: Paul Merage School of Business, University of California, Irvine, Irvine, California 92697
Zhe Zhang: Naveen Jindal School of Management, The University of Texas at Dallas, Richardson, Texas 75080

Information Systems Research, 2023, vol. 34, issue 3, 1017-1044

Abstract: An extensive literature studies 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 in which 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 an 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; competition mitigation; and uncertainty-driven, cost-based differentiation effects, 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 an 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 the 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; IT investment uncertainty; first mover advantage; strategic IT investment (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://dx.doi.org/10.1287/isre.2022.1115 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:orisre:v:34:y:2023:i:3:p:1017-1044

Access Statistics for this article

More articles in Information Systems Research from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().