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An Empirical Study of the Casual Relationship Between IT Investment and Firm Performance

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  • Qing Hu

    (Florida Atlantic University, USA)

  • Robert Plant

    (University of Miami, USA)

Abstract

The promise of increased competitive advantage has been the driving force behind the large-scale investment in information technology (IT) over the last three decades. There is a continuing debate among executives and academics as to the measurable benefits of this investment. The return on investment (ROI) and other performance measures reported in the academic literature indicate conflicting empirical findings. Many previous studies have based their conclusions on the statistical correlation between IT capital investment and firm performance data of the same time period. In this study we argue that the causal relationship between IT investment and firm performance could not be reliably established through concurrent IT and performance data. We further submit that it would be more convincing to infer causality if the IT investments in the preceding years are significantly correlated with the performance of a firm in the subsequent year. Using the Granger causality models and three samples of firm level financial data, we found no statistical evidence that IT investments have caused the improvement of financial performance of the firms in the samples. On the contrary, the causal models suggest that improved financial performance over consecutive years may have contributed to the increase of IT investment in the subsequent year. Implications of these findings, as well as directions for future studies, are discussed.

Suggested Citation

  • Qing Hu & Robert Plant, 2001. "An Empirical Study of the Casual Relationship Between IT Investment and Firm Performance," Information Resources Management Journal (IRMJ), IGI Global, vol. 14(3), pages 15-26, July.
  • Handle: RePEc:igg:rmj000:v:14:y:2001:i:3:p:15-26
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    Citations

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    Cited by:

    1. Marie-Ange VEGANZONES-VAROUDAKIS & Arup MITRA & Chandan SHARMA, 2011. "Total Factor Productivity and Technical Efficiency of Indian Manufacturing: The Role of Infrastructure and Information & Communication Technology," Working Papers 201115, CERDI.
    2. Xu, Xiaobo & Zhang, Weiyong & Li, Ling, 2016. "The impact of technology type and life cycle on IT productivity variance: A contingency theoretical perspective," International Journal of Information Management, Elsevier, vol. 36(6), pages 1193-1204.
    3. Stefan Schweikl & Robert Obermaier, 2020. "Lessons from three decades of IT productivity research: towards a better understanding of IT-induced productivity effects," Management Review Quarterly, Springer, vol. 70(4), pages 461-507, November.
    4. Mitra, Arup & Sharma, Chandan & Véganzonès-Varoudakis, Marie-Ange, 2016. "Infrastructure, information & communication technology and firms’ productive performance of the Indian manufacturing," Journal of Policy Modeling, Elsevier, vol. 38(2), pages 353-371.
    5. Zeng, Huixiang & Ran, Hangxin & Zhou, Qiong & Jin, Youliang & Cheng, Xu, 2022. "The financial effect of firm digitalization: Evidence from China," Technological Forecasting and Social Change, Elsevier, vol. 183(C).
    6. Cáudia Pinho & Mário Franco & Luis Mendes, 2022. "Influence of web portals on management support and university performance: an information quality perspective," Quality & Quantity: International Journal of Methodology, Springer, vol. 56(5), pages 3729-3749, October.
    7. Lunardi, Guilherme Lerch & Becker, João Luiz & Maçada, Antonio Carlos Gastaud & Dolci, Pietro Cunha, 2014. "The impact of adopting IT governance on financial performance: An empirical analysis among Brazilian firms," International Journal of Accounting Information Systems, Elsevier, vol. 15(1), pages 66-81.
    8. Hu, Qing & Quan, Jing “Jim”, 2005. "Evaluating the impact of IT investments on productivity: a causal analysis at industry level," International Journal of Information Management, Elsevier, vol. 25(1), pages 39-53.
    9. Khallaf, Ashraf, 2012. "Information technology investments and nonfinancial measures: A research framework," Accounting forum, Elsevier, vol. 36(2), pages 109-121.
    10. Marina Ortiz-Medina & Gonzalo Maldonado-Guzmán, 2020. "Information and Communication Technology and Growth in the Dominican Republic Microbusinesses," International Business Research, Canadian Center of Science and Education, vol. 13(9), pages 129-129, September.
    11. Winarno, Wahyu Agus & Tjahjadi, Bambang & Irwanto, Andry, 2021. "Time Lag Effects of IT Investment on Firm Performance: Evidence from Indonesia," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 55(3), pages 89-101.

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