Firm Characteristics and Investments in Information Technology: Scale and Scope Effects

Sanjeev Dewan, Steven C. Michael and Chung-ki Min
Additional contact information
Sanjeev Dewan: University of Washington Business School, Mackenzie Hall, Box 353200, Seattle, Washington 98195
Steven C. Michael: Department of Business Administration, University of Illinois, Urbana Champaign, Illinois 61820
Chung-ki Min: Department of Economics, Hankook University of Foreign Studies, Seoul, Korea

Information Systems Research, 1998, vol. 9, issue 3, 219-232

Abstract: This paper conducts an empirical analysis of the link between the scale and scope of the firm and information technology (IT) investments, emphasizing the role of IT in coordination and control. We extend the economic production function framework to include variables related to the boundaries of the firm, including related and unrelated diversification, vertical integration and growth options, and we estimate the resulting model on a data set based on annual surveys of IT spending by large U.S. firms, conducted by Computerworld during the period 1988–1992. Our results suggest that the level of IT investment is positively related to the degree of firm diversification, perhaps reflecting the greater need for coordination of assets within diversified firms. We further find that related diversification demands greater IT investment than unrelated diversification. Firms that are less vertically integrated have a higher level of IT investment. Finally, firms with fewer growth options in their investment opportunity set tend to have a higher IT investment, consistent with an agency perspective which predicts excessive IT investment by managers with “free” cash flow. Put together, these empirical relations between IT investments and firm characteristics help us better understand the role of IT in coordination and control and the choices firms make in information systems and strategy.

Keywords: Information Technology Investment; Information Systems Strategy; Scale and Scope; Coordination; Diversification (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (40)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:orisre:v:9:y:1998:i:3:p:219-232

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