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The impact of IT investment on firm performance in China: An empirical investigation of the Chinese electronics industry
Technological Forecasting & Social Change 76 (2009) 678–687
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Technological Forecasting & Social Change
The impact of IT investment on firm performance in China: An empirical investigation of the Chinese electronics industry Jae Kyeong Kim a,1, Jun Yong Xiang a,1, Sangho Lee b,⁎ a b
School of Business Administration, Kyung Hee University, 1 Hoegi-dong, Dongdaemun-gu, Seoul 130-701, Republic of Korea Center for Information Systems Studies, Korea Institute for Defense Analyses, Chungryang P.O. Box 250, Seoul 130-650, Republic of Korea
a r t i c l e
i n f o
Article history: Received 1 July 2007 Received in revised form 16 November 2007 Accepted 26 March 2008 Keywords: Business value of IT Productivity China The United States Developing country
a b s t r a c t Over the past three decades, the impact of information technology (IT) investments on firm performance has been the subject of active research. Although many studies have shown positive and significant benefits derived from IT investment, the findings of almost all these studies are based on data collected in developed countries. Few studies have been conducted to validate these results and to determine whether or not they are still applicable in developing countries. This study tries to investigate the effects of IT investment on firm financial performance in the electronics industry of China, still classified as a developing country, and compare it with the United States. Findings show that IT investment has a positive impact on firm performance in China. Moreover, the impact in China is not different from what occurred in the United States in terms of direction and the size against the assertion of previous studies and expectations. © 2008 Elsevier Inc. All rights reserved.
1. Introduction Investing in information technology (IT) is widely regarded as having enormous potential for reducing costs and gaining competitive advantage [1–4]. With the continuous increase in IT investment, executives and government policymakers have been concerned about the productivity and profitability of IT investment. The more attention executives give to the tangible benefits of IT investments, the more researchers are becoming interested in measuring the effects of IT investment. Although there has been considerable long-running debate about whether or not IT investment actually results in higher productivity, the majority of researchers come to believe in the positive effects of IT investment on firm performance, with accumulation of IT business value research in IT literature. Some researchers, however, have doubts about the generalization of the findings, because the findings of existing studies that have shown the positive impact of IT on firm performance are mainly based on data collected from developed countries, particularly the United States [5]. It is unclear whether the findings of previous firm-level studies in developed countries are applicable to other developing countries because there are differences among countries in terms of productivity and economic growth [6,7]. Furthermore, macro-characteristics such as labor costs, competition, IT resources, culture, and education, can affect the mechanism of IT value creation [8]. A few studies (e.g., [9]) were conducted on some developing countries, but it is still difficult to discover firm-level empirical studies showing consistent results on the relationship between IT investment and firm performance (Table 1). Since both excessive emphases on U.S. firms and lack of comparative studies among countries have inhibited knowledge accumulation concerning the IT business value, research regarding the effect of IT investment on firm performance in developing countries can be one of the important topics for future studies [5]. ⁎ Corresponding author. Tel.: +82 2 961 1178; fax: +82 2 961 1165. E-mail addresses: [email protected] (J.K. Kim), [email protected] (J.Y. Xiang), [email protected] (S. Lee). 1
Tel.: +82 2 961 9355; fax: +82 2 967 0788.
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Table 1 Research result of IT investment and firm performance by the sample. Sample Result
Developed countries
No effect or negative effect
● Dasgupta, Sarkis, and Talluri [14] ● Loveman [15] ● Menon and Lee [13] ● Strassmann [11,12] ● Bharadwaj [16] ● Bharadwaj, Bharadwaj, and Konsynski [17] ● Brynjolfsson and Hitt [1,18] ● Kudyba and Vitaliano [19] ● Li and Ye [20] ● Mitra [21] ● Rai, Patnayakuni, and Patnayakuni [22] ● Shu and Strassmann [23] ● Sriram and Krishnan [24] ● Devaraj and Kohli [27] ● Hitt and Brynjolfsson [47] ● Lee and Kim [29] ● Lee and Menon [30] ● Mahmood and Mann [31] ● Osei-Bryson and Ko [32] ● Prattipati and Mensah [33] ● Sriram and Stump [34] ● Weill [43] ● Zhu and Kraemer [35]
Positive effect
Mixed result
Developing countries
Developed countries vs. developing countries
● Zhu, Kraemer, Xu, and Dedrick [25]
● Huang, Ou, Chen, and Lin [38] ● Tam [9] ● Teo and Wong [41]
This study investigates the effects of IT investment on firm performance in China, which is one of these developing countries. Furthermore, the size of the effect in China will be compared to one in the United States, because differences in country characteristics can affect value creation of IT investment. Consequently, based on data from China, the current study attempts to compare the findings of previous research concerning the impact of IT investment on firm performance in developed countries, to that in developing countries, which is indicated as an important context extension of the research [10]. The structure of this paper is as follows: Section 2 offers a review of previous studies to demonstrate the importance of this study and hypotheses to discover new aspects. In the Method section, the research model, variables and constructs, and data sources are described. Section 4 presents the results of the research with analysis. Then, the contribution and implications of the findings are discussed in Section 5. Finally, in the Conclusions and limitations section, the results are summarized, limitations of the research are identified, and concluding remarks and future studies are provided. 2. Literature review and hypothesis development For many years, numerous empirical studies have been conducted regarding the relationship between investments in IT and associated effects on firm performance (See Table 1). However, research findings suggest that there is inconsistent evidence that IT investments lead to a significant increase in productivity. Research on the relationship between IT investment and firm performance can be classified into three categories: First, several researchers have asserted that there is no connection between IT investments and firm performance [11,12]. Rather, it is argued that IT investment could have a negative impact on the productivity of an organization because of inefficient allocation of management resources. Elasticity of other management activities (e.g., marketing, research and development (R&D), advertising) and other capital on firm performance are greater than the elasticity of IT capital [1,13]. In the worst case, as firms invest more in IT, there is a greater need for coordination between different activities and information systems across functional areas of the organization after installation of new information systems [14,15]. This so-called IT productivity paradox stimulated researchers to seek the reason for this phenomenon. The second research group has asserted that a significant positive relationship between IT investment and firm performance exists. As firms invest more in IT, their performance correspondingly increases [16–25]. Various techniques and sample data were used to explain the positive relationship between IT investment and firm performance. The third research group has reported partial or mixed results, and explained possible reasons for the results [9,26–35]. It was reported that there is a positive relationship between IT investment and a range of firm performance variables; while in some performance variables, there is a negative relationship or effect. To overcome this perplexing situation, many IT scholars have used more rigorous and scientific research frameworks: i) largesample data sets [17,36], ii) inclusion of additional factors such as a time lag [18,29], the information-intensity of the industry [4,24,29,30,37], iii) new methodology (e.g., structural equation modeling (SEM)) [25], and iv) new theories, such as a Resource-Based View (RBV) [4,16,38]. These studies have revealed the positive effects, or at least mixed effects, of IT investment on firm performance. The debate concerning the effects of IT investment on cost and efficiency-related performance has decreased according to the accumulated knowledge stock [29,39]. However, because these previous studies were based on the data from developed countries,
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particularly the United States [5], the findings and agreements cannot be simply generalized to apply to developing countries, which are different from developed countries in many aspects. There can be variation of macro-environments—such as productivity, economic growth [6], regulation levels [25], labor costs, IT skills' availability and heterogeneity [7], competition, complementary organizational innovations [40], culture [39] across countries. Such country characteristics can “create country-specific sets of IT attributes, and thereby impact firms' IT choices and resultant organizational performance impacts” [[8], p. 310]. For instance, if unit costs of labor are relatively cheaper than IT, as in the majority of developing countries, many firms may give priority to investing in labor rather than IT for similar business performance payoffs according to the microeconomics-based view [7]. Moreover, if there is a government subsidy or regulation for IT investment, as is often happening in developing countries, the effect of IT investment would be distorted [39]. Therefore, it cannot be said that the effects of IT investment in developing countries are similar to those in developed countries. Several studies [9,38,41] were conducted on newly industrialized economies, but the results were too inconsistent and limited to be used to understand the relationship between IT investment and firm performance in developing countries. Zhu, Kraemer, Xu, and Dedrick [25] found the positive impact of IT investment on implementation of e-business in developing countries with survey data. Thus, because of little prior firm-level empirical research on this issue in developing countries, despite obvious differences of country characteristics [5], the preceding issue – whether or not there are cost efficiency benefits derived from IT investment in China – is being tested in the first hypothesis. Hypothesis 1. There is a positive relationship between IT investment and cost efficiency in China. Hypothesis 1a. There is a positive relationship between IT investment and return on assets (ROA). Hypothesis 1b. There is a positive relationship between IT investment and return on equity (ROE). Hypothesis 1c. There is a positive relationship between IT investment and profit margin. Although the positive relationship between IT investment and cost efficiency has recently been accepted by more and more scholars and practitioners, the results of the effects of IT investment on organizational growth are still mixed. Ives and Learmonth [42] indicated that investment in IT could be used to gain competitive advantages and increase market share (strategic IT investment), via sales growth. This can happen when IT can be used as an enabling technology to better meet market demand (e.g., customer relationship management (CRM) system) and to spawn new businesses (e.g., new IT-based auxiliary products and services), or as an industry platform eventually restructuring an industry (e.g., e-business) [3,43]. Despite these arguments, however, there is not much clear empirical evidence to make a conclusion. The study by Weill [43] reveals that strategic IT investment has a negative impact on sales growth, but transactional IT investment has a positive impact. Brown, Gatian, and Hicks [44] found that investment in strategic information systems (SIS) could contribute to a firm's growth. More recently, while some other scholars [21,37] revealed that IT investment is an important contribution to a firm's growth, some empirical studies [28,29] still found no statistical evidence that IT investments have resulted in improvement of organizational growth in the United States. Although this issue has been widely studied, the results are still inconsistent, regardless of whether the samples are from developed countries or not. Therefore, the second hypothesis will investigate this issue with China data. Hypothesis 2. There is a positive relationship between IT investment and organizational growth in China. Hypothesis 2a. There is a positive relationship between IT investment and sales growth. Hypothesis 2b. There is a positive relationship between IT investment and earnings per share (EPS) growth. The size of the effect of IT investment on firm performance can vary according to the degree of economic development in a nation [8,9,39]. This argument can be based on the Resource-Based View (RBV) (For RBV see [8]). Resources can be classified into IT resources and complementary organizational resources. IT resources can be further divided into (i) infrastructure and (ii) business application as technology IT resources, and (iii) technical skills and (iv) managerial skills as human IT resources [8]. Decision-makers in the firms have acquired the best combination of such resources for their firms. Although the firms might have the same combination of resources, the firms can reveal differences in firm performance because some country characteristics can affect the creation of IT business value. Some country characteristics in developed countries can better affect the creation of IT business value than in developing counties. First, as telecommunication infrastructure can moderate the effect of IT on the firm and its trading partners in the supply chain [8], developed countries have better and wider telecommunication infrastructure in general. Second, there are richer resources of IT-skilled workforce to shape IT business value in developed countries. Comparing workers in developing countries, the workers in developed countries have accumulated more than enough experience in the effective use of IT due to the early introduction of IT [29]. Third, developed countries have already built up enough knowledge base to create or transform the value from IT investment [40]. Lastly, developed countries have advantages in many other aspects such as higher substitutability IT for labor, relatively less complex trade policies, and more complementary organizational innovations than developing countries [39]. Empirically, Zhu, et al. [25] found that the effect of e-business investment on firm performance in developed countries is smaller than in developing countries, against most expectations based on existing research, but the statistical significance of comparison was not reported. This study will directly compare business value of IT investment in the United States with China in the third and fourth hypotheses.
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Hypothesis 3. The effect of IT investment on cost efficiency in the United States is larger than in China. Hypothesis 4. The effect of IT investment on organizational growth in the United States is larger than in China. 3. Method 3.1. Research model This study revolves around the relationship between IT investment and firm financial performance in China and the United States (Fig. 1). Although various research models have been suggested in IT business value literature (e.g., [4,16,18,25]), the research model without any intermediate variable (e.g., business processes) and non-IT production factors (e.g., complementary organizational resources), which has often been used in IT business value research (e.g., [19,22,24,29]) in developed countries such as the United States, is still considered in this study. This study's concern is centered on the impact of IT investment on firm performance in China, and the size of the impact in China will also be compared to that in the United States. This study indirectly controls two contextual factors that can influence the relationship between IT investment and firm performance, such as a firm's size [17,20,25,45,46], and the information-intensity of the industry, which is one of the industry's characteristics [8,29]. A firm's size can be controlled by normalization with sales, and the information-intensity of the industry is controlled by concentrating only on the Chinese electronics industry, which is one of the highly information-intensive industries. For comparing China with the United States, a sample from U.S. information-intensive industries is used. Moreover, this study directly controls the year since the period of the data gathering is spread across the year. The equation to find the effects of IT investment on firm performance in China (the first hypothesis and the second hypothesis) follows Eq. (1). FPi = a + b · ITi + ei
ð1Þ
where the FPi is firm performance at firm i, ITi is IT investment at firm i, α is the intercept, β is the coefficient of IT investment that influences firm performance, and εi is the error term. The equation to compare the difference in the size of effect of IT investment on firm performance depending on the degree of economic development in nation (the third hypothesis and the fourth hypothesis) is below. FPi = a0 + a1 · D + b0 · ITi + b1 · D · ITi + c · year + ui
ð2Þ
where the FPi is firm performance at firm i, ITi is IT investment at firm i, year is a control variable for difference in the sampling period, a0 is the intercept, a1 is the differential intercept, b0 is the partial coefficient of IT investment that influences firm performance, b1 is the differential slope coefficient, c is the coefficient for year, D = 1 for observations in the United States and zero for observations in China, and ui is the error term. 3.2. Independent and dependent variables This study decides that the ratio of IT budget to sales, which can control the differences in each firm's size, can be the operational definition of IT investment in accordance with some previous studies (e.g., [29]) (See Table 2). IT investment has been described by numerous different measurements, such as the ratio of IT budget to sales [14,17,20,23,29,31,41,43], IT capital
Fig. 1. Conceptual research model.
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Table 2 Name and explanations of IT investment, firm performance variables. Type of variable
Variable name
Explanations
Previous studies
Independent variable
IT investment
IT budget as a percentage of sales. IT budget includes investment on computer hardware, software, communications devices and systems, as well as the IT personnel and resources dedicated to supporting these capabilities.
Dependent variable (firm performance)
Return on assets (ROA)
Return on assets is equal to a fiscal year's earnings divided by its total assets, expressed as a percentage.
Return on equity (ROE)
Return on equity is calculated by dividing net income by shareholder's equity.
Profit margin
Profit margin is net income divided by sales. Sales are net sales plus other operating revenue. In addition, net income includes gains or losses from discontinued operation but exclude extraordinary items.
Sales growth
The rate of sales growth. Sales are net sales plus other operating revenue.
EPS growth
The rate of earnings per share (EPS) growth
Bharadwaj, Bharadwaj, and Konsynski [17] Dasgupta, Sarkis, and Talluri [14] Lee and Kim [29] Li and Ye [20] Mahmood and Mann [31] Shu and Strassmann [23] Teo and Wong [41] Weill [43] Hitt and Brynjolfsson [47] Li and Ye [20] Sircar, Turnbow, and Bordoloi [48] Tam [9] Weill [43] Alpar and Kim [50] Hitt and Brynjolfsson [47] Strassmann [12] Tam [9] Bharadwaj [16] Lee and Kim [29] Li and Ye [20] Mahmood and Mann [31] Tam [9] Hu and Plant [28] Lee and Kim [29] Sethi, Hwang, and Pegels [51] Lee and Kim [29] Sethi, Hwang, and Pegels [51]
[1,9,15,18,30], and IT stock [19,47]. IT budget is generally understood as total investment in computer hardware, software, communications devices and systems, as well as the IT personnel and additional resources dedicated to supporting these capabilities [34,43,48], while both IT capital and IT stock are related to mainly computer hardware, software, communications devices and systems, excluding IT labor. Because our research model considers only IT investment as an independent variable, IT budget is better than the other two operationalizations. For performance variables, this study selects ROA, ROE, and profit margin as measures of profitability, the rate of sales growth and the rate of EPS growth as measures of organizational growth, since financial analysts, businessmen, and investors may have measured the value of firms with traditional financial ratios (Table 2). Firm performance can be classified into business process performance and organizational performance [8]. Business process performance is operational efficiency, such as customer satisfaction, flexibility of process, information sharing, and inventory turnover, of specific business processes. In contrast, organizational performance is overall firm performance in the organizational level (e.g., profitability, growth, market value). In the process-based view of IT business value research, IT affects business processes, which can show process-level performance, and then business process performance finally impacts on organizational performance [49]. If the result of IT investment is limited only to process-level performance, investment in IT would be hard to continue any longer. Consequently, this study focuses on organizational performance. Many researchers have used the traditional financial measuring methods such as ROA [9,20,43,47,48], ROE [9,12,47,50], profit margin [9,16,20,29,31], sales growth, and EPS growth [28,29,51] as a firm performance variable. Furthermore, new measures such as information productivity index (IPI) [33], Tobin's q [17], and return on management (ROM) [12] have also been suggested in some studies. However, the majority of researches have used broadly traditional accounting measures for a long time (See the appendix of [29]). 3.3. Data For the context of China, the sample comprises data from the survey, which was conducted by China's Ministry of Information Industry, concerning informatization of firms in the Chinese electronics industry. Details on informatization of the 100 firms investing the most in IT were then published in the annual report, which is “China's ITTOP 100 Firms” [52]. This study uses the 2005 annual report for 2004. This may be the most important canonical public data sources available regarding Chinese firms' IT investment information. The ITTOP 100 is similar to “Computerworld 100” or “InformationWeek 500,” which is an important secondary data sources widely used in existing studies [16,19,33] in the United States. Various measures on financial performance were obtained from the China Securities Regulatory Commission. The listed firms on the Shanghai Stock Exchange or the Shenzhen Stock Exchange have to report annually concerning financial status and performance information (e.g., financial statements, a statement of profit and loss) to the Commission. Financial information such as ROE, ROA, profit margin, and EPS was finally obtained from the annual reports, while the sales growth was obtained from ITTOP 100 [52].
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Table 3 Descriptive statistics of IT investment measures and firm performance measures for China. Variables
N
Minimum
Maximum
Mean
Standard deviation
IT investment ROA ROE Profit margin Sales growth EPS growth
87 35 37 38 71 34
0.009 0.365 1.187 0.309 −25.759 −97.080
3.260 10.258 27.962 16.277 58.211 91.429
0.348 3.887 9.722 5.226 19.909 − 5.937
0.495 2.713 6.477 4.597 16.404 44.948
Note. ROA is return on assets, ROE is return on equity, and EPS is earnings per share.
For the context of the United States, our sample comprises data from InformationWeek magazine. InformationWeek data were gathered from an annual survey and published in its annual special issue, “InformationWeek 500.” Many researchers have used secondary data from InformationWeek [16,29]. This study uses the annual IT budget data normalized by sales for the three-year period from 1995 to 1997. Corresponding financial measures were acquired from the “Annual Report on American Industry” section of Forbes magazine like Lee and Kim [29]. Concerning the information-intensity of the industry, which is one of moderating variables in business value of IT investment literature [29], this study uses the data in the U.S. high information-intensive industry corresponding to the Chinese electronics industry. 4. Analysis and results 4.1. Analysis and results for China Since the sample data comprise details from the ITTOP 100 list, the observation number can be 100. However, the IT investment variable has to be normalized with sales to control a firm's size. Due to limitation of financial data (e.g., sales, profit) in data sources, the observation number of the IT investment variable is 87, while the observation number of firm performance variables varies from 34 to 71 (See Table 3). The mean of IT investment as a percentage of sales is approximately 0.348%, and the means of ROA, ROE, profit margin, sales growth, and EPS growth are 3.887%, 9.722%, 5.226%, 19.909%, and − 5.937%, respectively. Although China is the largest IT market in the Asia-Pacific region [53], the size of IT investment in the Chinese electronics industry, which is one of the information-intensive industries, has been too insignificant up until recently, compared with the average of firms, which is approximately 3.00%, in the American electronics industry [54]. The reason for this may be that China is still a newly developing market; it may thus take a long time for firms to invest more heavily in IT and achieve greater benefits. The result of the Pearson correlation analysis identifies that there are positive relationships among firm performance variables (Table 4). This reveals that the constructs are consistent among firm performance variables. Contrary to expectations, a positive relationship exists only between IT investment and profit margin. There was no evidence indicating that IT investment has a positive impact on ROA, ROE, sales growth, and EPS growth. Since the capital market of China is still underdeveloped, it might take more time to make the measures concerning shareholder equity more rigorous and precise. After an examination of the validity of the basic assumptions (e.g., no outliers, normality, linearity, homoscedasticity, no autocorrelation) for the regression analysis [29], we could continue the regression analysis. Table 5 presents the results of linear regression analysis for various firm performance variables. The F-statistic is 3.576 for profit margin (in the fourth column) and the significance is at the 10% level. The adjusted R2, which means the adjusted explanation power of the regression model, is only 0.065. The coefficient of IT investment is 5.617 at the 10% significance level. There is a positive and significant effect of IT investment on profit margin, while no evidence of significant impact on other performance variables could be found. The result of regression analysis can support only Hypothesis 1c, while this cannot support Hypothesis 1a, Hypothesis 1b, Hypothesis 2a, and Hypothesis 2b.
Table 4 Result of Pearson correlations analysis between IT investment and firm performance for China.
IT Investment ROA ROE Profit margin Sales growth EPS growth
IT investment
ROA
ROE
Profit margin
Sales growth
EPS growth
1.000 0.267 0.099 0.301⁎ 0.092 − 0.069
1.000 0.859⁎⁎⁎ 0.815⁎⁎⁎ 0.043 0.164
1.000 0.537⁎⁎⁎ − 0.018 0.355⁎⁎
1.000 0.005 0.186
1.000 0.336⁎
1.000
Note. The asterisks ⁎⁎⁎, ⁎⁎, and ⁎ denote significance at the 1%, 5%, and 10% significance level, respectively. ROA is return on assets, ROE is return on equity, and EPS is earnings per share.
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Table 5 Results of linear regressions with IT investment for firm performance for China.. Parameter in Eq. (1)
Performance variable
α β N Adjusted R2 F-statistic
3.094⁎⁎⁎ 2.883 35 0.043 2.539
ROA
ROE 9.008⁎⁎⁎ 2.636 37 −0.018 0.349
Profit margin
Sales growth
3.760⁎⁎⁎ 5.617⁎ 38 0.065 3.576⁎
18.485⁎⁎⁎ 5.446 71 − 0.006 0.583
EPS growth −2.688 −13.280 34 −0.026 0.153
Note. α is the intercept, β is the coefficient of IT investment that influences firm performance. The asterisks ⁎⁎⁎ and ⁎ denote significance at the 1% and 10% significance level, respectively. ROA is return on assets, ROE is return on equity, and EPS is earnings per share.
4.2. Analysis and result for comparing China with the United States To compare the differences in regression models between China and the United States, this study analyzed Eq. (2) with a dummy variable approach. The observation number for profit margin in China and in the United States is 38 and 65, respectively (Table 6). The F-statistic is 8.437 and significant at the 1% level. The explanation power of the model is 26.7%. The intercept in China (a0) is 3.760 and significant at the 1% level, while the differential intercept (a1) is −0.681 but insignificant. While the partial coefficient for profit margin in China (b0) is 5.617 and significant at the 5% level, the differential slope coefficient (b1) is −4.331 but insignificant. Therefore, we conclude that the size of the impact of IT investment on profit margin in China is not statistically different to that in the United States. The control variable (year) is statistically significant. However, for sales growth and EPS growth in both China and the United States, all results were insignificant, and these are not reported in the study. As a result of this, we cannot support Hypothesis 3 and Hypothesis 4. 5. Discussion and implications Based on the Chinese secondary data, this study represents one of the first researches to empirically investigate the impact of IT investment on firm performance in China compared with the United States. Table 7 summarizes the results of the hypotheses tests. The results show that IT investment has a significant positive impact on firm performance in China, and the size of the impact of IT investment on cost efficiency (profit margin) does not differ according to the degree of economic development in the nation. This study contributes to IT business value literature in the following ways: Firstly, it is one of the first studies to assess the impact of IT investment on firm-level performance in China using secondary data. It is interesting to note that while the business value from IT investment has been refined largely in the U.S. context, this study suggests that there also exists a positive impact from IT investment in the Chinese context. The issue for the impact of IT investment in developing countries is one of the future research opportunities in IT business value literature as mentioned before [5,8]. The findings add to the evidence that IT investment has a positive impact on firm performance, thus expanding the scope of the evidence from developed countries to China. It may be meaningful to generalize theories on the relationship between IT investment and firm performance to overall economies, as a context extension of research [10]. Second, this study can reveal the purpose of IT investment by Chinese electronics firms in 2004. The study did not reveal a positive impact of IT investment on organizational growth (Hypothesis 2), but it demonstrated a positive effect of IT investment on cost efficiency (Hypothesis 1). If IT investment is not in the interests of a firm's expansion but primarily for the sake of a firm's efficiency, such as cost saving, then one may fail to find a positive effect of IT investment on a firm's expansion-related performance, such as sales growth, EPS growth. Some previous firm-level studies (e.g., [16,17,19,20,29]) that used profit-related performance variables have found significant positive relationship or effects between IT investment and firm performance. In contrast, other studies [28,29] that used growth-related performance variables have found no impact (or even a negative impact)
Table 6 Testing the equality of two regressions in China and the United States using Eq. (2) for profit margin. Parameter in Eq. (2) a0 a1 b0 b1 Adjusted R2 N0 N1 F-statistic
Unstandardized coefficients 3.760⁎⁎⁎ −0.681 5.617⁎⁎ −4.331 0.267 38 65 8.437⁎⁎⁎
Standard deviation
Significance
(0.976) (1.596) (2.739) (2.753)
0.000 0.670 0.043 0.119
Note. a0 is the intercept, a1 is the differential intercept, b0 is the partial coefficient of IT investment that influences firm performance, b1 is the differential slope coefficient, N0 is the observation number in China, and N1 is the observation number in the United States. The asterisks ⁎⁎⁎ and ⁎⁎ denote significance at the 1% and 5% significance level, respectively.
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Table 7 The summary of hypotheses tests.
Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis
1 1a 1b 1c 2 2a 2b 3 4
Hypotheses
Result
There is a positive relationship between IT investment and cost efficiency in China. There is a positive relationship between IT investment and ROA. There is a positive relationship between IT investment and ROE. There is a positive relationship between IT investment and profit margin. There is a positive relationship between IT investment and organizational growth in China. There is a positive relationship between IT investment and sales growth. There is a positive relationship between IT investment and EPS growth. The effect of IT investment on cost efficiency in the United States is larger than in China. The effect of IT investment on organizational growth in the United States is larger than in China.
Accept (partially) Reject Reject Accept Reject Reject Reject Reject Reject
of IT investment on sales growth, as illustrated in this study. It might be cautiously concluded that Chinese electronics firms did not invest in IT in 2004 for expansion, but efficiency. Finally, these results represent that the direction and the size of the impact of IT investment on firm performance in China is quite similar to one in the United States (Hypotheses 3 and 4). The finding is different from the review of Melville, Kraemer, and Gurbaxani [8] and the arguments of some studies (e.g., [29,39,40]). There may be two explanations for this: One explanation might be the advance of China, which is still one of the developing countries. In 1993, the Chinese government embarked on a series of “Golden Projects,” aiming to modernize the country's IT infrastructure [55]. Subsequently, increasing numbers of investments have been made in IT-related areas. China might have achieved significant improvement in necessary IT infrastructure and knowledge base to support IT [7]. At the same time, China has recently achieved great progress in economic development, and it is currently fourth in global gross domestic product (GDP) ranking, as of 2006, and second in GDP (PPP: purchasing power parity), as of 2005 [56]. Therefore, it may come as no surprise that IT investment has a similar positive impact on firm performance in China as in the United States, as shown by the results of this study. A second explanation might be country characteristics related to developing countries (China) did not have only a negative influence on the effect of IT investment in China. While some country characteristics (e.g., low price of labor, less competition) can positively impact on the effect of IT investment in China, the others (e.g., IT skills' rareness, less complementary organizational innovations) may negatively impact on the effect of IT investment in China. Chinese firms in this study are mostly large firms competing in the global marketplace, as they are responsible for total sales of approximately 60% of the entire Chinese electronics industry. After China joined the World Trade Organization (WTO) in 2001, Chinese firms have also experienced intense competition in the domestic market as well as the global marketplace. As seen in the review by Melville et al. [8], firms offering high-quality products with low-cost operating structures are more likely to achieve efficiency gains and increased productivity through IT than in less optimum situations. Furthermore, firms in developing countries such as China can more likely decrease risk by adopting successful technologies that have been tested and validated in developed countries such as the United States. Thus, these Chinese firms may enjoy even similar benefits to the U.S. firms, despite the lack of complementary assets, less experience, and insufficient knowledge base. Only a small proportion (6.5%) of profit margin variance can be explained by IT investment in China. This phenomenon is coincident with some previous studies (e.g., [17,19,20,50]) in the United States, which used only IT investment as an independent variable. One possible reason for this variance can be explained as follows: Adopting the widely used production function from a microeconomics-based perspective, the form Q = f(IT, K, L), where Q = output, IT = IT capital, K = non-IT capital, and L = labor, can be proposed [18]. In China, the labor force is still abundant and relatively inexpensive when compared to other production factors (e.g., IT capital or non-IT capital). The firm does not replace labor with IT until the marginal return of the IT is greater than the cost of labor. This is also consistent with the study by Quan, Hu, and Wang [7], who argued that many firms have found their advantage by purchasing human resources, rather than additional IT resources, due to the inexpensiveness of labor relative to the technology in China. 6. Conclusions and limitations This study is a firm-level empirical analysis of the relationship between IT investment and firm performance in China, one of the developing countries. The following findings of this study were obtained: First, there is a positive relationship between IT investment and cost efficiency in China (Hypothesis 1). Second, IT investment has no effect on organizational growth in China (Hypothesis 2) like in the U.S. context. Third, these findings do not differ according to the degree of economic development (Hypotheses 3 and 4). Consequently, it can be proposed that there is also a significant positive relationship between IT investment and firm performance in China, in contrast to the review by Melville et al. [8]. There are several limitations in this study. First, since there is still no stable large-sample data set concerning IT investment information in China, so this study was compelled to use limited sample data from China, hence this could lead to errors of too early generalization. Second, this study could not use a longitudinal approach due to the limited IT investment data available in 2004; hence, a more refined research model, including factors such as a time lag [29], could not be investigated. Third, the firms in the sample are comparatively heavy IT investment firms, so this may not accurately reflect the entire environment, and could possibly
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produce a skewed distribution. Fourth, regression analysis with only IT investment may not provide a comprehensive view of the mechanism concerning the creation of firm performance. Finally, the electronics industry is a highly information-intensive industry; more empirical evidence is thus required to generalize the findings to low information-intensive industries. Despite these limitations, this study empirically reveals the benefits of IT investment in China. The size of its impact in China is similar to that in the United States. Investment in IT is a necessary precondition to obtain the payoffs from it, whether in the U.S. context or not. Since only a small portion (6.5%) of profit margin variance can be explained by IT investment in China, it may be necessary to increase IT investment to improve firm performance with improvement of IT-enhancing complementary factors, such as capital stock, organizational innovativeness, and telecommunication infrastructure, at the same time. Moreover, it is necessary to establish the appropriate competitive strategy with IT, depending on the macro and industry characteristics, such as labor and other forms of capital, as stated by Quan et al. [7]. Future studies are needed to improve understanding of the business value derived from IT investment in other business environments – e.g., Korea, India, Finland, Japan, Mexico – whether in developing countries or not. Empirical studies using similar methods and different samples may be necessary to devise a theory in IT business value literature [10]. Secondly, longitudinal studies with a time lag can also be conducted in the long time span to understand the real value of IT investment. Finally, exploration of the role and mechanism of country characteristics in IT business value is also needed. Acknowledgements This research was supported by the 55th Kyung Hee University Anniversary Research Promotion Fund in 2003. References [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34]
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Jae Kyeong Kim is Full Professor and the Director of the Graduate School of Business Administration, Kyung Hee University in Seoul, Korea.
Jun Yong Xiang is a PhD candidate at the School of Business Administration, and a researcher at the Information Center, Kyung Hee University in Seoul, Korea.
Sangho Lee is an associate research fellow at the Center for Information Systems Studies, Korea Institute for Defense Analyses in Seoul, Korea and a visiting scholar at The University of Texas at Dallas, TX.
Contents lists available at ScienceDirect
Technological Forecasting & Social Change
The impact of IT investment on firm performance in China: An empirical investigation of the Chinese electronics industry Jae Kyeong Kim a,1, Jun Yong Xiang a,1, Sangho Lee b,⁎ a b
School of Business Administration, Kyung Hee University, 1 Hoegi-dong, Dongdaemun-gu, Seoul 130-701, Republic of Korea Center for Information Systems Studies, Korea Institute for Defense Analyses, Chungryang P.O. Box 250, Seoul 130-650, Republic of Korea
a r t i c l e
i n f o
Article history: Received 1 July 2007 Received in revised form 16 November 2007 Accepted 26 March 2008 Keywords: Business value of IT Productivity China The United States Developing country
a b s t r a c t Over the past three decades, the impact of information technology (IT) investments on firm performance has been the subject of active research. Although many studies have shown positive and significant benefits derived from IT investment, the findings of almost all these studies are based on data collected in developed countries. Few studies have been conducted to validate these results and to determine whether or not they are still applicable in developing countries. This study tries to investigate the effects of IT investment on firm financial performance in the electronics industry of China, still classified as a developing country, and compare it with the United States. Findings show that IT investment has a positive impact on firm performance in China. Moreover, the impact in China is not different from what occurred in the United States in terms of direction and the size against the assertion of previous studies and expectations. © 2008 Elsevier Inc. All rights reserved.
1. Introduction Investing in information technology (IT) is widely regarded as having enormous potential for reducing costs and gaining competitive advantage [1–4]. With the continuous increase in IT investment, executives and government policymakers have been concerned about the productivity and profitability of IT investment. The more attention executives give to the tangible benefits of IT investments, the more researchers are becoming interested in measuring the effects of IT investment. Although there has been considerable long-running debate about whether or not IT investment actually results in higher productivity, the majority of researchers come to believe in the positive effects of IT investment on firm performance, with accumulation of IT business value research in IT literature. Some researchers, however, have doubts about the generalization of the findings, because the findings of existing studies that have shown the positive impact of IT on firm performance are mainly based on data collected from developed countries, particularly the United States [5]. It is unclear whether the findings of previous firm-level studies in developed countries are applicable to other developing countries because there are differences among countries in terms of productivity and economic growth [6,7]. Furthermore, macro-characteristics such as labor costs, competition, IT resources, culture, and education, can affect the mechanism of IT value creation [8]. A few studies (e.g., [9]) were conducted on some developing countries, but it is still difficult to discover firm-level empirical studies showing consistent results on the relationship between IT investment and firm performance (Table 1). Since both excessive emphases on U.S. firms and lack of comparative studies among countries have inhibited knowledge accumulation concerning the IT business value, research regarding the effect of IT investment on firm performance in developing countries can be one of the important topics for future studies [5]. ⁎ Corresponding author. Tel.: +82 2 961 1178; fax: +82 2 961 1165. E-mail addresses: [email protected] (J.K. Kim), [email protected] (J.Y. Xiang), [email protected] (S. Lee). 1
Tel.: +82 2 961 9355; fax: +82 2 967 0788.
0040-1625/$ – see front matter © 2008 Elsevier Inc. All rights reserved. doi:10.1016/j.techfore.2008.03.008
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Table 1 Research result of IT investment and firm performance by the sample. Sample Result
Developed countries
No effect or negative effect
● Dasgupta, Sarkis, and Talluri [14] ● Loveman [15] ● Menon and Lee [13] ● Strassmann [11,12] ● Bharadwaj [16] ● Bharadwaj, Bharadwaj, and Konsynski [17] ● Brynjolfsson and Hitt [1,18] ● Kudyba and Vitaliano [19] ● Li and Ye [20] ● Mitra [21] ● Rai, Patnayakuni, and Patnayakuni [22] ● Shu and Strassmann [23] ● Sriram and Krishnan [24] ● Devaraj and Kohli [27] ● Hitt and Brynjolfsson [47] ● Lee and Kim [29] ● Lee and Menon [30] ● Mahmood and Mann [31] ● Osei-Bryson and Ko [32] ● Prattipati and Mensah [33] ● Sriram and Stump [34] ● Weill [43] ● Zhu and Kraemer [35]
Positive effect
Mixed result
Developing countries
Developed countries vs. developing countries
● Zhu, Kraemer, Xu, and Dedrick [25]
● Huang, Ou, Chen, and Lin [38] ● Tam [9] ● Teo and Wong [41]
This study investigates the effects of IT investment on firm performance in China, which is one of these developing countries. Furthermore, the size of the effect in China will be compared to one in the United States, because differences in country characteristics can affect value creation of IT investment. Consequently, based on data from China, the current study attempts to compare the findings of previous research concerning the impact of IT investment on firm performance in developed countries, to that in developing countries, which is indicated as an important context extension of the research [10]. The structure of this paper is as follows: Section 2 offers a review of previous studies to demonstrate the importance of this study and hypotheses to discover new aspects. In the Method section, the research model, variables and constructs, and data sources are described. Section 4 presents the results of the research with analysis. Then, the contribution and implications of the findings are discussed in Section 5. Finally, in the Conclusions and limitations section, the results are summarized, limitations of the research are identified, and concluding remarks and future studies are provided. 2. Literature review and hypothesis development For many years, numerous empirical studies have been conducted regarding the relationship between investments in IT and associated effects on firm performance (See Table 1). However, research findings suggest that there is inconsistent evidence that IT investments lead to a significant increase in productivity. Research on the relationship between IT investment and firm performance can be classified into three categories: First, several researchers have asserted that there is no connection between IT investments and firm performance [11,12]. Rather, it is argued that IT investment could have a negative impact on the productivity of an organization because of inefficient allocation of management resources. Elasticity of other management activities (e.g., marketing, research and development (R&D), advertising) and other capital on firm performance are greater than the elasticity of IT capital [1,13]. In the worst case, as firms invest more in IT, there is a greater need for coordination between different activities and information systems across functional areas of the organization after installation of new information systems [14,15]. This so-called IT productivity paradox stimulated researchers to seek the reason for this phenomenon. The second research group has asserted that a significant positive relationship between IT investment and firm performance exists. As firms invest more in IT, their performance correspondingly increases [16–25]. Various techniques and sample data were used to explain the positive relationship between IT investment and firm performance. The third research group has reported partial or mixed results, and explained possible reasons for the results [9,26–35]. It was reported that there is a positive relationship between IT investment and a range of firm performance variables; while in some performance variables, there is a negative relationship or effect. To overcome this perplexing situation, many IT scholars have used more rigorous and scientific research frameworks: i) largesample data sets [17,36], ii) inclusion of additional factors such as a time lag [18,29], the information-intensity of the industry [4,24,29,30,37], iii) new methodology (e.g., structural equation modeling (SEM)) [25], and iv) new theories, such as a Resource-Based View (RBV) [4,16,38]. These studies have revealed the positive effects, or at least mixed effects, of IT investment on firm performance. The debate concerning the effects of IT investment on cost and efficiency-related performance has decreased according to the accumulated knowledge stock [29,39]. However, because these previous studies were based on the data from developed countries,
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particularly the United States [5], the findings and agreements cannot be simply generalized to apply to developing countries, which are different from developed countries in many aspects. There can be variation of macro-environments—such as productivity, economic growth [6], regulation levels [25], labor costs, IT skills' availability and heterogeneity [7], competition, complementary organizational innovations [40], culture [39] across countries. Such country characteristics can “create country-specific sets of IT attributes, and thereby impact firms' IT choices and resultant organizational performance impacts” [[8], p. 310]. For instance, if unit costs of labor are relatively cheaper than IT, as in the majority of developing countries, many firms may give priority to investing in labor rather than IT for similar business performance payoffs according to the microeconomics-based view [7]. Moreover, if there is a government subsidy or regulation for IT investment, as is often happening in developing countries, the effect of IT investment would be distorted [39]. Therefore, it cannot be said that the effects of IT investment in developing countries are similar to those in developed countries. Several studies [9,38,41] were conducted on newly industrialized economies, but the results were too inconsistent and limited to be used to understand the relationship between IT investment and firm performance in developing countries. Zhu, Kraemer, Xu, and Dedrick [25] found the positive impact of IT investment on implementation of e-business in developing countries with survey data. Thus, because of little prior firm-level empirical research on this issue in developing countries, despite obvious differences of country characteristics [5], the preceding issue – whether or not there are cost efficiency benefits derived from IT investment in China – is being tested in the first hypothesis. Hypothesis 1. There is a positive relationship between IT investment and cost efficiency in China. Hypothesis 1a. There is a positive relationship between IT investment and return on assets (ROA). Hypothesis 1b. There is a positive relationship between IT investment and return on equity (ROE). Hypothesis 1c. There is a positive relationship between IT investment and profit margin. Although the positive relationship between IT investment and cost efficiency has recently been accepted by more and more scholars and practitioners, the results of the effects of IT investment on organizational growth are still mixed. Ives and Learmonth [42] indicated that investment in IT could be used to gain competitive advantages and increase market share (strategic IT investment), via sales growth. This can happen when IT can be used as an enabling technology to better meet market demand (e.g., customer relationship management (CRM) system) and to spawn new businesses (e.g., new IT-based auxiliary products and services), or as an industry platform eventually restructuring an industry (e.g., e-business) [3,43]. Despite these arguments, however, there is not much clear empirical evidence to make a conclusion. The study by Weill [43] reveals that strategic IT investment has a negative impact on sales growth, but transactional IT investment has a positive impact. Brown, Gatian, and Hicks [44] found that investment in strategic information systems (SIS) could contribute to a firm's growth. More recently, while some other scholars [21,37] revealed that IT investment is an important contribution to a firm's growth, some empirical studies [28,29] still found no statistical evidence that IT investments have resulted in improvement of organizational growth in the United States. Although this issue has been widely studied, the results are still inconsistent, regardless of whether the samples are from developed countries or not. Therefore, the second hypothesis will investigate this issue with China data. Hypothesis 2. There is a positive relationship between IT investment and organizational growth in China. Hypothesis 2a. There is a positive relationship between IT investment and sales growth. Hypothesis 2b. There is a positive relationship between IT investment and earnings per share (EPS) growth. The size of the effect of IT investment on firm performance can vary according to the degree of economic development in a nation [8,9,39]. This argument can be based on the Resource-Based View (RBV) (For RBV see [8]). Resources can be classified into IT resources and complementary organizational resources. IT resources can be further divided into (i) infrastructure and (ii) business application as technology IT resources, and (iii) technical skills and (iv) managerial skills as human IT resources [8]. Decision-makers in the firms have acquired the best combination of such resources for their firms. Although the firms might have the same combination of resources, the firms can reveal differences in firm performance because some country characteristics can affect the creation of IT business value. Some country characteristics in developed countries can better affect the creation of IT business value than in developing counties. First, as telecommunication infrastructure can moderate the effect of IT on the firm and its trading partners in the supply chain [8], developed countries have better and wider telecommunication infrastructure in general. Second, there are richer resources of IT-skilled workforce to shape IT business value in developed countries. Comparing workers in developing countries, the workers in developed countries have accumulated more than enough experience in the effective use of IT due to the early introduction of IT [29]. Third, developed countries have already built up enough knowledge base to create or transform the value from IT investment [40]. Lastly, developed countries have advantages in many other aspects such as higher substitutability IT for labor, relatively less complex trade policies, and more complementary organizational innovations than developing countries [39]. Empirically, Zhu, et al. [25] found that the effect of e-business investment on firm performance in developed countries is smaller than in developing countries, against most expectations based on existing research, but the statistical significance of comparison was not reported. This study will directly compare business value of IT investment in the United States with China in the third and fourth hypotheses.
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Hypothesis 3. The effect of IT investment on cost efficiency in the United States is larger than in China. Hypothesis 4. The effect of IT investment on organizational growth in the United States is larger than in China. 3. Method 3.1. Research model This study revolves around the relationship between IT investment and firm financial performance in China and the United States (Fig. 1). Although various research models have been suggested in IT business value literature (e.g., [4,16,18,25]), the research model without any intermediate variable (e.g., business processes) and non-IT production factors (e.g., complementary organizational resources), which has often been used in IT business value research (e.g., [19,22,24,29]) in developed countries such as the United States, is still considered in this study. This study's concern is centered on the impact of IT investment on firm performance in China, and the size of the impact in China will also be compared to that in the United States. This study indirectly controls two contextual factors that can influence the relationship between IT investment and firm performance, such as a firm's size [17,20,25,45,46], and the information-intensity of the industry, which is one of the industry's characteristics [8,29]. A firm's size can be controlled by normalization with sales, and the information-intensity of the industry is controlled by concentrating only on the Chinese electronics industry, which is one of the highly information-intensive industries. For comparing China with the United States, a sample from U.S. information-intensive industries is used. Moreover, this study directly controls the year since the period of the data gathering is spread across the year. The equation to find the effects of IT investment on firm performance in China (the first hypothesis and the second hypothesis) follows Eq. (1). FPi = a + b · ITi + ei
ð1Þ
where the FPi is firm performance at firm i, ITi is IT investment at firm i, α is the intercept, β is the coefficient of IT investment that influences firm performance, and εi is the error term. The equation to compare the difference in the size of effect of IT investment on firm performance depending on the degree of economic development in nation (the third hypothesis and the fourth hypothesis) is below. FPi = a0 + a1 · D + b0 · ITi + b1 · D · ITi + c · year + ui
ð2Þ
where the FPi is firm performance at firm i, ITi is IT investment at firm i, year is a control variable for difference in the sampling period, a0 is the intercept, a1 is the differential intercept, b0 is the partial coefficient of IT investment that influences firm performance, b1 is the differential slope coefficient, c is the coefficient for year, D = 1 for observations in the United States and zero for observations in China, and ui is the error term. 3.2. Independent and dependent variables This study decides that the ratio of IT budget to sales, which can control the differences in each firm's size, can be the operational definition of IT investment in accordance with some previous studies (e.g., [29]) (See Table 2). IT investment has been described by numerous different measurements, such as the ratio of IT budget to sales [14,17,20,23,29,31,41,43], IT capital
Fig. 1. Conceptual research model.
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Table 2 Name and explanations of IT investment, firm performance variables. Type of variable
Variable name
Explanations
Previous studies
Independent variable
IT investment
IT budget as a percentage of sales. IT budget includes investment on computer hardware, software, communications devices and systems, as well as the IT personnel and resources dedicated to supporting these capabilities.
Dependent variable (firm performance)
Return on assets (ROA)
Return on assets is equal to a fiscal year's earnings divided by its total assets, expressed as a percentage.
Return on equity (ROE)
Return on equity is calculated by dividing net income by shareholder's equity.
Profit margin
Profit margin is net income divided by sales. Sales are net sales plus other operating revenue. In addition, net income includes gains or losses from discontinued operation but exclude extraordinary items.
Sales growth
The rate of sales growth. Sales are net sales plus other operating revenue.
EPS growth
The rate of earnings per share (EPS) growth
Bharadwaj, Bharadwaj, and Konsynski [17] Dasgupta, Sarkis, and Talluri [14] Lee and Kim [29] Li and Ye [20] Mahmood and Mann [31] Shu and Strassmann [23] Teo and Wong [41] Weill [43] Hitt and Brynjolfsson [47] Li and Ye [20] Sircar, Turnbow, and Bordoloi [48] Tam [9] Weill [43] Alpar and Kim [50] Hitt and Brynjolfsson [47] Strassmann [12] Tam [9] Bharadwaj [16] Lee and Kim [29] Li and Ye [20] Mahmood and Mann [31] Tam [9] Hu and Plant [28] Lee and Kim [29] Sethi, Hwang, and Pegels [51] Lee and Kim [29] Sethi, Hwang, and Pegels [51]
[1,9,15,18,30], and IT stock [19,47]. IT budget is generally understood as total investment in computer hardware, software, communications devices and systems, as well as the IT personnel and additional resources dedicated to supporting these capabilities [34,43,48], while both IT capital and IT stock are related to mainly computer hardware, software, communications devices and systems, excluding IT labor. Because our research model considers only IT investment as an independent variable, IT budget is better than the other two operationalizations. For performance variables, this study selects ROA, ROE, and profit margin as measures of profitability, the rate of sales growth and the rate of EPS growth as measures of organizational growth, since financial analysts, businessmen, and investors may have measured the value of firms with traditional financial ratios (Table 2). Firm performance can be classified into business process performance and organizational performance [8]. Business process performance is operational efficiency, such as customer satisfaction, flexibility of process, information sharing, and inventory turnover, of specific business processes. In contrast, organizational performance is overall firm performance in the organizational level (e.g., profitability, growth, market value). In the process-based view of IT business value research, IT affects business processes, which can show process-level performance, and then business process performance finally impacts on organizational performance [49]. If the result of IT investment is limited only to process-level performance, investment in IT would be hard to continue any longer. Consequently, this study focuses on organizational performance. Many researchers have used the traditional financial measuring methods such as ROA [9,20,43,47,48], ROE [9,12,47,50], profit margin [9,16,20,29,31], sales growth, and EPS growth [28,29,51] as a firm performance variable. Furthermore, new measures such as information productivity index (IPI) [33], Tobin's q [17], and return on management (ROM) [12] have also been suggested in some studies. However, the majority of researches have used broadly traditional accounting measures for a long time (See the appendix of [29]). 3.3. Data For the context of China, the sample comprises data from the survey, which was conducted by China's Ministry of Information Industry, concerning informatization of firms in the Chinese electronics industry. Details on informatization of the 100 firms investing the most in IT were then published in the annual report, which is “China's ITTOP 100 Firms” [52]. This study uses the 2005 annual report for 2004. This may be the most important canonical public data sources available regarding Chinese firms' IT investment information. The ITTOP 100 is similar to “Computerworld 100” or “InformationWeek 500,” which is an important secondary data sources widely used in existing studies [16,19,33] in the United States. Various measures on financial performance were obtained from the China Securities Regulatory Commission. The listed firms on the Shanghai Stock Exchange or the Shenzhen Stock Exchange have to report annually concerning financial status and performance information (e.g., financial statements, a statement of profit and loss) to the Commission. Financial information such as ROE, ROA, profit margin, and EPS was finally obtained from the annual reports, while the sales growth was obtained from ITTOP 100 [52].
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Table 3 Descriptive statistics of IT investment measures and firm performance measures for China. Variables
N
Minimum
Maximum
Mean
Standard deviation
IT investment ROA ROE Profit margin Sales growth EPS growth
87 35 37 38 71 34
0.009 0.365 1.187 0.309 −25.759 −97.080
3.260 10.258 27.962 16.277 58.211 91.429
0.348 3.887 9.722 5.226 19.909 − 5.937
0.495 2.713 6.477 4.597 16.404 44.948
Note. ROA is return on assets, ROE is return on equity, and EPS is earnings per share.
For the context of the United States, our sample comprises data from InformationWeek magazine. InformationWeek data were gathered from an annual survey and published in its annual special issue, “InformationWeek 500.” Many researchers have used secondary data from InformationWeek [16,29]. This study uses the annual IT budget data normalized by sales for the three-year period from 1995 to 1997. Corresponding financial measures were acquired from the “Annual Report on American Industry” section of Forbes magazine like Lee and Kim [29]. Concerning the information-intensity of the industry, which is one of moderating variables in business value of IT investment literature [29], this study uses the data in the U.S. high information-intensive industry corresponding to the Chinese electronics industry. 4. Analysis and results 4.1. Analysis and results for China Since the sample data comprise details from the ITTOP 100 list, the observation number can be 100. However, the IT investment variable has to be normalized with sales to control a firm's size. Due to limitation of financial data (e.g., sales, profit) in data sources, the observation number of the IT investment variable is 87, while the observation number of firm performance variables varies from 34 to 71 (See Table 3). The mean of IT investment as a percentage of sales is approximately 0.348%, and the means of ROA, ROE, profit margin, sales growth, and EPS growth are 3.887%, 9.722%, 5.226%, 19.909%, and − 5.937%, respectively. Although China is the largest IT market in the Asia-Pacific region [53], the size of IT investment in the Chinese electronics industry, which is one of the information-intensive industries, has been too insignificant up until recently, compared with the average of firms, which is approximately 3.00%, in the American electronics industry [54]. The reason for this may be that China is still a newly developing market; it may thus take a long time for firms to invest more heavily in IT and achieve greater benefits. The result of the Pearson correlation analysis identifies that there are positive relationships among firm performance variables (Table 4). This reveals that the constructs are consistent among firm performance variables. Contrary to expectations, a positive relationship exists only between IT investment and profit margin. There was no evidence indicating that IT investment has a positive impact on ROA, ROE, sales growth, and EPS growth. Since the capital market of China is still underdeveloped, it might take more time to make the measures concerning shareholder equity more rigorous and precise. After an examination of the validity of the basic assumptions (e.g., no outliers, normality, linearity, homoscedasticity, no autocorrelation) for the regression analysis [29], we could continue the regression analysis. Table 5 presents the results of linear regression analysis for various firm performance variables. The F-statistic is 3.576 for profit margin (in the fourth column) and the significance is at the 10% level. The adjusted R2, which means the adjusted explanation power of the regression model, is only 0.065. The coefficient of IT investment is 5.617 at the 10% significance level. There is a positive and significant effect of IT investment on profit margin, while no evidence of significant impact on other performance variables could be found. The result of regression analysis can support only Hypothesis 1c, while this cannot support Hypothesis 1a, Hypothesis 1b, Hypothesis 2a, and Hypothesis 2b.
Table 4 Result of Pearson correlations analysis between IT investment and firm performance for China.
IT Investment ROA ROE Profit margin Sales growth EPS growth
IT investment
ROA
ROE
Profit margin
Sales growth
EPS growth
1.000 0.267 0.099 0.301⁎ 0.092 − 0.069
1.000 0.859⁎⁎⁎ 0.815⁎⁎⁎ 0.043 0.164
1.000 0.537⁎⁎⁎ − 0.018 0.355⁎⁎
1.000 0.005 0.186
1.000 0.336⁎
1.000
Note. The asterisks ⁎⁎⁎, ⁎⁎, and ⁎ denote significance at the 1%, 5%, and 10% significance level, respectively. ROA is return on assets, ROE is return on equity, and EPS is earnings per share.
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Table 5 Results of linear regressions with IT investment for firm performance for China.. Parameter in Eq. (1)
Performance variable
α β N Adjusted R2 F-statistic
3.094⁎⁎⁎ 2.883 35 0.043 2.539
ROA
ROE 9.008⁎⁎⁎ 2.636 37 −0.018 0.349
Profit margin
Sales growth
3.760⁎⁎⁎ 5.617⁎ 38 0.065 3.576⁎
18.485⁎⁎⁎ 5.446 71 − 0.006 0.583
EPS growth −2.688 −13.280 34 −0.026 0.153
Note. α is the intercept, β is the coefficient of IT investment that influences firm performance. The asterisks ⁎⁎⁎ and ⁎ denote significance at the 1% and 10% significance level, respectively. ROA is return on assets, ROE is return on equity, and EPS is earnings per share.
4.2. Analysis and result for comparing China with the United States To compare the differences in regression models between China and the United States, this study analyzed Eq. (2) with a dummy variable approach. The observation number for profit margin in China and in the United States is 38 and 65, respectively (Table 6). The F-statistic is 8.437 and significant at the 1% level. The explanation power of the model is 26.7%. The intercept in China (a0) is 3.760 and significant at the 1% level, while the differential intercept (a1) is −0.681 but insignificant. While the partial coefficient for profit margin in China (b0) is 5.617 and significant at the 5% level, the differential slope coefficient (b1) is −4.331 but insignificant. Therefore, we conclude that the size of the impact of IT investment on profit margin in China is not statistically different to that in the United States. The control variable (year) is statistically significant. However, for sales growth and EPS growth in both China and the United States, all results were insignificant, and these are not reported in the study. As a result of this, we cannot support Hypothesis 3 and Hypothesis 4. 5. Discussion and implications Based on the Chinese secondary data, this study represents one of the first researches to empirically investigate the impact of IT investment on firm performance in China compared with the United States. Table 7 summarizes the results of the hypotheses tests. The results show that IT investment has a significant positive impact on firm performance in China, and the size of the impact of IT investment on cost efficiency (profit margin) does not differ according to the degree of economic development in the nation. This study contributes to IT business value literature in the following ways: Firstly, it is one of the first studies to assess the impact of IT investment on firm-level performance in China using secondary data. It is interesting to note that while the business value from IT investment has been refined largely in the U.S. context, this study suggests that there also exists a positive impact from IT investment in the Chinese context. The issue for the impact of IT investment in developing countries is one of the future research opportunities in IT business value literature as mentioned before [5,8]. The findings add to the evidence that IT investment has a positive impact on firm performance, thus expanding the scope of the evidence from developed countries to China. It may be meaningful to generalize theories on the relationship between IT investment and firm performance to overall economies, as a context extension of research [10]. Second, this study can reveal the purpose of IT investment by Chinese electronics firms in 2004. The study did not reveal a positive impact of IT investment on organizational growth (Hypothesis 2), but it demonstrated a positive effect of IT investment on cost efficiency (Hypothesis 1). If IT investment is not in the interests of a firm's expansion but primarily for the sake of a firm's efficiency, such as cost saving, then one may fail to find a positive effect of IT investment on a firm's expansion-related performance, such as sales growth, EPS growth. Some previous firm-level studies (e.g., [16,17,19,20,29]) that used profit-related performance variables have found significant positive relationship or effects between IT investment and firm performance. In contrast, other studies [28,29] that used growth-related performance variables have found no impact (or even a negative impact)
Table 6 Testing the equality of two regressions in China and the United States using Eq. (2) for profit margin. Parameter in Eq. (2) a0 a1 b0 b1 Adjusted R2 N0 N1 F-statistic
Unstandardized coefficients 3.760⁎⁎⁎ −0.681 5.617⁎⁎ −4.331 0.267 38 65 8.437⁎⁎⁎
Standard deviation
Significance
(0.976) (1.596) (2.739) (2.753)
0.000 0.670 0.043 0.119
Note. a0 is the intercept, a1 is the differential intercept, b0 is the partial coefficient of IT investment that influences firm performance, b1 is the differential slope coefficient, N0 is the observation number in China, and N1 is the observation number in the United States. The asterisks ⁎⁎⁎ and ⁎⁎ denote significance at the 1% and 5% significance level, respectively.
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Table 7 The summary of hypotheses tests.
Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis
1 1a 1b 1c 2 2a 2b 3 4
Hypotheses
Result
There is a positive relationship between IT investment and cost efficiency in China. There is a positive relationship between IT investment and ROA. There is a positive relationship between IT investment and ROE. There is a positive relationship between IT investment and profit margin. There is a positive relationship between IT investment and organizational growth in China. There is a positive relationship between IT investment and sales growth. There is a positive relationship between IT investment and EPS growth. The effect of IT investment on cost efficiency in the United States is larger than in China. The effect of IT investment on organizational growth in the United States is larger than in China.
Accept (partially) Reject Reject Accept Reject Reject Reject Reject Reject
of IT investment on sales growth, as illustrated in this study. It might be cautiously concluded that Chinese electronics firms did not invest in IT in 2004 for expansion, but efficiency. Finally, these results represent that the direction and the size of the impact of IT investment on firm performance in China is quite similar to one in the United States (Hypotheses 3 and 4). The finding is different from the review of Melville, Kraemer, and Gurbaxani [8] and the arguments of some studies (e.g., [29,39,40]). There may be two explanations for this: One explanation might be the advance of China, which is still one of the developing countries. In 1993, the Chinese government embarked on a series of “Golden Projects,” aiming to modernize the country's IT infrastructure [55]. Subsequently, increasing numbers of investments have been made in IT-related areas. China might have achieved significant improvement in necessary IT infrastructure and knowledge base to support IT [7]. At the same time, China has recently achieved great progress in economic development, and it is currently fourth in global gross domestic product (GDP) ranking, as of 2006, and second in GDP (PPP: purchasing power parity), as of 2005 [56]. Therefore, it may come as no surprise that IT investment has a similar positive impact on firm performance in China as in the United States, as shown by the results of this study. A second explanation might be country characteristics related to developing countries (China) did not have only a negative influence on the effect of IT investment in China. While some country characteristics (e.g., low price of labor, less competition) can positively impact on the effect of IT investment in China, the others (e.g., IT skills' rareness, less complementary organizational innovations) may negatively impact on the effect of IT investment in China. Chinese firms in this study are mostly large firms competing in the global marketplace, as they are responsible for total sales of approximately 60% of the entire Chinese electronics industry. After China joined the World Trade Organization (WTO) in 2001, Chinese firms have also experienced intense competition in the domestic market as well as the global marketplace. As seen in the review by Melville et al. [8], firms offering high-quality products with low-cost operating structures are more likely to achieve efficiency gains and increased productivity through IT than in less optimum situations. Furthermore, firms in developing countries such as China can more likely decrease risk by adopting successful technologies that have been tested and validated in developed countries such as the United States. Thus, these Chinese firms may enjoy even similar benefits to the U.S. firms, despite the lack of complementary assets, less experience, and insufficient knowledge base. Only a small proportion (6.5%) of profit margin variance can be explained by IT investment in China. This phenomenon is coincident with some previous studies (e.g., [17,19,20,50]) in the United States, which used only IT investment as an independent variable. One possible reason for this variance can be explained as follows: Adopting the widely used production function from a microeconomics-based perspective, the form Q = f(IT, K, L), where Q = output, IT = IT capital, K = non-IT capital, and L = labor, can be proposed [18]. In China, the labor force is still abundant and relatively inexpensive when compared to other production factors (e.g., IT capital or non-IT capital). The firm does not replace labor with IT until the marginal return of the IT is greater than the cost of labor. This is also consistent with the study by Quan, Hu, and Wang [7], who argued that many firms have found their advantage by purchasing human resources, rather than additional IT resources, due to the inexpensiveness of labor relative to the technology in China. 6. Conclusions and limitations This study is a firm-level empirical analysis of the relationship between IT investment and firm performance in China, one of the developing countries. The following findings of this study were obtained: First, there is a positive relationship between IT investment and cost efficiency in China (Hypothesis 1). Second, IT investment has no effect on organizational growth in China (Hypothesis 2) like in the U.S. context. Third, these findings do not differ according to the degree of economic development (Hypotheses 3 and 4). Consequently, it can be proposed that there is also a significant positive relationship between IT investment and firm performance in China, in contrast to the review by Melville et al. [8]. There are several limitations in this study. First, since there is still no stable large-sample data set concerning IT investment information in China, so this study was compelled to use limited sample data from China, hence this could lead to errors of too early generalization. Second, this study could not use a longitudinal approach due to the limited IT investment data available in 2004; hence, a more refined research model, including factors such as a time lag [29], could not be investigated. Third, the firms in the sample are comparatively heavy IT investment firms, so this may not accurately reflect the entire environment, and could possibly
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produce a skewed distribution. Fourth, regression analysis with only IT investment may not provide a comprehensive view of the mechanism concerning the creation of firm performance. Finally, the electronics industry is a highly information-intensive industry; more empirical evidence is thus required to generalize the findings to low information-intensive industries. Despite these limitations, this study empirically reveals the benefits of IT investment in China. The size of its impact in China is similar to that in the United States. Investment in IT is a necessary precondition to obtain the payoffs from it, whether in the U.S. context or not. Since only a small portion (6.5%) of profit margin variance can be explained by IT investment in China, it may be necessary to increase IT investment to improve firm performance with improvement of IT-enhancing complementary factors, such as capital stock, organizational innovativeness, and telecommunication infrastructure, at the same time. Moreover, it is necessary to establish the appropriate competitive strategy with IT, depending on the macro and industry characteristics, such as labor and other forms of capital, as stated by Quan et al. [7]. Future studies are needed to improve understanding of the business value derived from IT investment in other business environments – e.g., Korea, India, Finland, Japan, Mexico – whether in developing countries or not. Empirical studies using similar methods and different samples may be necessary to devise a theory in IT business value literature [10]. Secondly, longitudinal studies with a time lag can also be conducted in the long time span to understand the real value of IT investment. Finally, exploration of the role and mechanism of country characteristics in IT business value is also needed. Acknowledgements This research was supported by the 55th Kyung Hee University Anniversary Research Promotion Fund in 2003. References [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34]
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Jae Kyeong Kim is Full Professor and the Director of the Graduate School of Business Administration, Kyung Hee University in Seoul, Korea.
Jun Yong Xiang is a PhD candidate at the School of Business Administration, and a researcher at the Information Center, Kyung Hee University in Seoul, Korea.
Sangho Lee is an associate research fellow at the Center for Information Systems Studies, Korea Institute for Defense Analyses in Seoul, Korea and a visiting scholar at The University of Texas at Dallas, TX.