The Relationship Between Investment in Information Technology and Firm Performance: A Study of the Valve Manufacturing Sector

Abstract

Large amounts of resources have been and continue to be invested in information technology (IT). Much of this investment is made on the basis of-faith that returns will occur. This study presents the results of an empirical test of the performance effects of IT investment in the manufacturing sector. Six years of historical data on IT investment and performance was collected for 33 valve manufacturing firms from the CEO, the controller and the production manager in each firm. Investment was perceptually categorized by management objective (i.e.: into strategic, informational and transactional) and tested against four measures of performance (sales growth, return on assets, and two measures of labour productivity). Heavy use of transactional IT investment was found to be significantly and consistently associated with strong firm performance over the six years studied. Heavy use of strategic IT was found to be neutral in the long term and associated only with relatively poor performing firms in the short term. This study suggests that early adopters of strategic IT could have spectacular success but once the technology becomes common the competitive advantage is lost. In addition, the context of the firm was included in the analysis. Conversion effectiveness, which measures the quality of the firm-wide management and commitment to IT, was found to be a significant moderator between strategic IT investment and firm performance.

Information technology (IT) investment and the role of a firm: an exploratory study

“…In reviewing past research, Weill (1992) commented that not all IT investment is alike and that the context of the "rm is important for converting IT investments into productive outputs. Similarly, Li and Ye (1997) found that the impact of IT investments appear to be dependent on the "rm's contextual factors.…”

“…A broad de"nition of IT, in accordance with that of Weill (1992), was adopted which includes all hardware, software, communications, telephone and facsimile as well as personnel and resources dedicated to IT, whether centralized or decentralized. In this study, the term &IS' is used interchangeably with &IT'.…”

“…According to Weill (1990Weill ( , 1992, IT is not a homogeneous entity; therefore, total IT investment is too broad a construct to be useful when analyzing its associations with "rm performance. Most IT investment research do not distinguish among the di!erent types of IT, with respect to performance e!ects.…”

The Association between Information Technology Investments and Audit Risk

“…Besides, IT only provides comparative and temporary advantage which will diminish when peer firms also implement IT. Earlier research by Weill (1992) argues that, even though IT can improve firm performance through cost reduction and revenue expansion, the competitive advantage may disappear once IT becomes common. show that IT investments make a greater contribution to overall firm risk than do non-IT investments.…”

Interdependencies between People and Information Systems in Organizations

“…Organizations that can overcome the cultural and functional barriers involved should reap the benefits through improved returns on their human and IS capital. (Barua et al 1995, Weill, 1992, Soh and Markus 1995.…”