IDEAS home Printed from https://ideas.repec.org/a/inm/orisre/v34y2023i3p1017-1044.html
   My bibliography  Save this article

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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Vidyanand Choudhary & Mingdi Xin & Zhe Zhang, 2023. "Sequential IT Investment: Can the Risk of IT Implementation Failure Be Your Friend?," Information Systems Research, INFORMS, vol. 34(3), pages 1017-1044, September.
    • Handle: RePEc:inm:orisre:v:34:y:2023:i:3:p:1017-1044
    DOI: 10.1287/isre.2022.1115
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/isre.2022.1115
    Download Restriction: no
    File URL: https://libkey.io/10.1287/isre.2022.1115?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Jerry R. Green & Suzanne Scotchmer, 1995. "On the Division of Profit in Sequential Innovation," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 20-33, Spring.
    2. Didem Demirhan & Varghese S. Jacob & Srinivasan Raghunathan, 2007. "Strategic IT Investments: The Impact of Switching Cost and Declining IT Cost," Management Science, INFORMS, vol. 53(2), pages 208-226, February.
    3. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
    4. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-366, May.
    5. Mingdi Xin & Vidyanand Choudhary, 2019. "IT Investment Under Competition: The Role of Implementation Failure," Management Science, INFORMS, vol. 65(4), pages 1909-1925, April.
    6. A. M. Spence, 1981. "The Learning Curve and Competition," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 49-70, Spring.
    7. Reinganum, Jennifer F, 1983. "Uncertain Innovation and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 73(4), pages 741-748, September.
    8. Matt E. Thatcher & David E. Pingry, 2004. "An Economic Model of Product Quality and IT Value," Information Systems Research, INFORMS, vol. 15(3), pages 268-286, September.
    9. James Bessen & Eric Maskin, 2009. "Sequential innovation, patents, and imitation," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 611-635, December.
    10. Markus Christen, 2005. "Research Note---Cost Uncertainty Is Bliss: The Effect of Competition on the Acquisition of Cost Information for Pricing New Products," Management Science, INFORMS, vol. 51(4), pages 668-676, April.
    11. Spulber, Daniel F, 1995. "Bertrand Competition When Rivals' Costs Are Unknown," Journal of Industrial Economics, Wiley Blackwell, vol. 43(1), pages 1-11, March.
    12. J. Miguel Villas-Boas & Udo Schmidt-Mohr, 1999. "Oligopoly with Asymmetric Information: Differentiation in Credit Markets," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 375-396, Autumn.
    13. Yogesh K. Dwivedi & David Wastell & Sven Laumer & Helle Zinner Henriksen & Michael D. Myers & Deborah Bunker & Amany Elbanna & M. N. Ravishankar & Shirish C. Srivastava, 2015. "Research on information systems failures and successes: Status update and future directions," Information Systems Frontiers, Springer, vol. 17(1), pages 143-157, February.
    14. Sinan Aral & Peter Weill, 2007. "IT Assets, Organizational Capabilities, and Firm Performance: How Resource Allocations and Organizational Differences Explain Performance Variation," Organization Science, INFORMS, vol. 18(5), pages 763-780, October.
    15. repec:bla:econom:v:71:y:2004:i:284:p:671-688 is not listed on IDEAS
    16. Erik Brynjolfsson & Lorin Hitt, 1996. "Paradox Lost? Firm-Level Evidence on the Returns to Information Systems Spending," Management Science, INFORMS, vol. 42(4), pages 541-558, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Shakira MUKHTAR & Anisa JAN, 2023. "Decoding financial literacy's mediating role: analyzing the influence of biopsychosocial indicators on financial satisfaction and risk tolerance among millennial investors," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(637), W), pages 219-242, Winter.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    2. Mingdi Xin & Vidyanand Choudhary, 2019. "IT Investment Under Competition: The Role of Implementation Failure," Management Science, INFORMS, vol. 65(4), pages 1909-1925, April.
    3. Chakravarthi Narasimhan & Z. John Zhang, 2000. "Market Entry Strategy Under Firm Heterogeneity and Asymmetric Payoffs," Marketing Science, INFORMS, vol. 19(4), pages 313-327, November.
    4. Matthew Selove, 2014. "A Dynamic Model of Competitive Entry Response," Marketing Science, INFORMS, vol. 33(3), pages 353-363, May.
    5. Sofka, Wolfgang & Schmidt, Tobias, 2004. "I Like The Way You Move: An Empirical Investigation into the Mechanisms Behind First Mover and Follower Strategies," ZEW Discussion Papers 04-87, ZEW - Leibniz Centre for European Economic Research.
    6. Christina Guenther, 2009. "Pioneer burnout: Radical product innovation and firm capabilities," Papers on Economics and Evolution 2009-22, Philipps University Marburg, Department of Geography.
    7. Chen, Yongmin & Pan, Shiyuan & Zhang, Tianle, 2014. "(When) Do stronger patents increase continual innovation?," Journal of Economic Behavior & Organization, Elsevier, vol. 98(C), pages 115-124.
    8. GianCarlo Moschini & Oleg Yerokhin, 2008. "Patents, Research Exemption, and the Incentive for Sequential Innovation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(2), pages 379-412, June.
    9. Färnstrand Damsgaard, Erika, 2009. "Patent Scope and Technology Choice," Working Paper Series 792, Research Institute of Industrial Economics.
    10. Yang Pan & Peng Huang & Anandasivam Gopal, 2019. "Storm Clouds on the Horizon? New Entry Threats and R&D Investments in the U.S. IT Industry," Information Systems Research, INFORMS, vol. 30(2), pages 540-562, June.
    11. Spyros Arvanitis & Florian Seliger, 2014. "Imitation versus innovation," KOF Working papers 14-367, KOF Swiss Economic Institute, ETH Zurich.
    12. Krasteva, Silvana & Sharma, Priyanka & Wang, Chu, 2020. "Patent policy, imitation incentives, and the rate of cumulative innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 178(C), pages 509-533.
    13. Prasanna Tambe & Lorin M. Hitt, 2014. "Measuring Information Technology Spillovers," Information Systems Research, INFORMS, vol. 25(1), pages 53-71, March.
    14. Gauguier, Jean-Jacques, 2009. "L’industrialisation de l’Open Source," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/4388 edited by Toledano, Joëlle.
    15. Zand, Fardad & Van Beers, Cees & Van Leeuwen, George, 2011. "Information technology, organizational change and firm productivity: A panel study of complementarity effects and clustering patterns in Manufacturing and Services," MPRA Paper 46469, University Library of Munich, Germany.
    16. Argyres, Nicholas S. & Liebeskind, Julia Porter, 2002. "Governance inseparability and the evolution of US biotechnology industry," Journal of Economic Behavior & Organization, Elsevier, vol. 47(2), pages 197-219, February.
    17. Luigi Balletta & Antonio Tesoriere, 2020. "Cumulative innovation, open source, and distance to frontier," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(6), pages 1875-1920, December.
    18. Joshua S. Gans & David H. Hsu & Scott Stern, 2002. "When Does Start-Up Innovation Spur the Gale of Creative Destruction?," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 571-586, Winter.
    19. Bernhard Ganglmair & Imke Reimers, 2019. "Visibility of Technology and Cumulative Innovation: Evidence from Trade Secrets Laws," CRC TR 224 Discussion Paper Series crctr224_2019_119v1, University of Bonn and University of Mannheim, Germany.
    20. Oleg Yerokhin & GianCarlo Moschini, 2008. "Intellectual Property Rights and Crop-Improving R&D under Adaptive Destruction," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 40(1), pages 53-72, May.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:orisre:v:34:y:2023:i:3:p:1017-1044. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.