Ray_Firm Scope-IT-CMU

Ray_Firm Scope-IT-CMU - IMPACT OF INFORMATION TECHNOLOGY...

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I MPACT OF I NFORMATION T ECHNOLOGY (IT) ON F IRM S COPE AND P ERFORMANCE : T HE R OLE OF A SSET C HARACTERISTICS Gautam Ray Department of Information and Decision Sciences Carlson School of Mgmt - University of Minnesota Minneapolis, MN 55455 Rayxx153@umn.edu Ling Xue Department of Operations and Information Management The University of Scranton Scranton, PA 18503 xuel2@scranton.edu Jay B. Barney Department of Management and Human Resources Fisher College of Business Ohio State University 2100 Neil Avenue, Columbus, OH 43210 Barney.8@osu.edu March 18, 2011
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1 I MPACT OF I NFORMATION T ECHNOLOGY (IT) ON F IRM S COPE AND P ERFORMANCE : T HE R OLE OF A SSET C HARACTERISTICS Abstract This research draws on transactions-cost and resource-based theory to examine how information technology (IT) moderates the impact of firms’ assets to influence the level of vertical integration and diversification. The analysis suggests that IT is associated with a decrease in vertical integration and diversification in firms with more narrowly valuable assets. The analysis also indicates that IT is associated with an increase in vertical integration and diversification in firms with more broadly valuable assets. The relationships between IT and firms’ vertical and product market scope are found to be consistent with both transactions-cost as well as resource-based traditions. Keywords: Firm Scope, Information Technology (IT), Vertical Integration, Diversification, Usage-specificity, Resource flexibility.
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2 INTRODUCTION Information technology (IT) that includes personal computers, servers, networks (e.g., the Internet) and the associated software enable intra- and inter-firm and coordination. Several scholars have examined the relationship between IT and firms’ vertical and product market scope. With respect to vertical integration i.e., the different stages of the production process in a single product market, prior work - building mostly on transactions cost economics (Williamson, 1985) has argued that since IT can reduce transactions costs (Afuah, 2003), IT should lead firms to be less vertically integrated. Empirical work is generally consistent with this expectation. IT capital is found to be associated with smaller and less vertically integrated firms ((Brynjolfsson, Malone, Gurbaxani, & Kambil 1994; Dewan, Michael, & Min 1998; Hitt 1999); and less vertically integrated firms are found to have higher demand for IT capital as these firms have higher need for external coordination (Dewan et al. 1998; Hitt 1999). Empirical studies focusing specifically on Internet technology also provide evidence that IT is associated with a decrease in vertical integration (Brews and Tucci 2004). With respect to diversification i.e., the different product markets a firm participates in, prior work - building mostly on resource-based theory (Barney, 1991; Prahalad and Hamel, 1990) has argued that since firms can use IT to coordinate their assets and capabilities across different product markets within a firm’s boundaries, IT can facilitate the realization of economies of scope (e.g., Afuah, 2003; Gurbaxani and Whang, 1991). Thus, IT should lead
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Ray_Firm Scope-IT-CMU - IMPACT OF INFORMATION TECHNOLOGY...

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