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Why IT Matters: An Empirical Study of E-Business Usage, Innovation, and Firm Performance

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  • Philipp Köllinger

Abstract

The article argues that IT continues to have strategic relevance for companies because it en-ables innovation. A conceptual link between the adoption of IT and innovation is established. This conceptual link allows a market-based, economic explanation for variations in IT payoffs among firms: The successful adoption of new IT leads to innovation. Depending on the be-havior of customers and competitors, a successful innovation can enable companies to gain competitive advantages. The economic theory of innovation suggests conditions that are nec-essary for firms to benefit from innovative activities. The relevance of IT as an important enabler of innovation is demonstrated using a very large sample of enterprises from different industries and countries in the European Union surveyed in late 2003. It is shown that a substantial share of firms use IT to introduce new processes into their business, or to offer new products or services to their customers. To study the rela-tionship between firm performance and innovation, I estimate an error component model that controls for unobserved market-specific effects and various firm-specific characteristics. The regression results indicate that innovative firms are generally more likely to exhibit increasing turnover and employment. In addition, firms that conduct product or service innovations are also more likely to be profitable. Furthermore, enterprises using IT to innovate perform at least as well as those innovating without IT. Yet, no significant relationship between process innovation and profitability is found, suggesting that firms might have problems to appropri-ate excess profits from process innovations, independent from whether they are enabled by IT or not. Possible reasons for this include time-lags between process innovations and profit gains, problems to effectively protect process innovations from imitation by competitors, or a lack of complementary resources. The results suggest that the returns to IT critically depend on whether and how IT investments are transferred into innovative activities. In addition, they suggest that IT will maintain its strategic importance as long as the IT industry remains inno-vative in developing new IT hardware and useful new business applications for it.

Suggested Citation

  • Philipp Köllinger, 2005. "Why IT Matters: An Empirical Study of E-Business Usage, Innovation, and Firm Performance," Discussion Papers of DIW Berlin 495, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp495
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    References listed on IDEAS

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    Cited by:

    1. Avraam Papastathopoulos & Christina C. Beneki, 2011. "Predicting Innovation Activity In European Manufacturing Firms: A Multi-Country Empirical Study," International Journal of Management and Marketing Research, The Institute for Business and Finance Research, vol. 4(2), pages 49-65.
    2. Lukasz Arendt & Wojciech Grabowski, 2017. "Innovations, ICT and ICT-driven labour productivity in Poland," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 25(4), pages 723-758, October.
    3. Adel Ben Khalifa, 2019. "Direct and Complementary Effects of Investment in Knowledge-Based Economy on Innovation Performance in Tunisian Firms," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 10(2), pages 561-589, June.
    4. Charlita de Freitas, Luciano & Euler de Morais, Leonardo & Cervieri Guterres, Egon, 2017. "Efeitos da desoneração tributária sobre a difusão da banda larga no Brasil: Enfoque na incidência do FISTEL sobre o terminal de acesso individual por satélite [Effects of tax relief on broadband di," MPRA Paper 78732, University Library of Munich, Germany.
    5. Nadine Fabritz, 2015. "Investment in ICT: Determinants and Economic Implications," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 60.
    6. Yingzhu Yang & Qunhao Wang & Yang Gao & Lexiang Zhao, 2022. "Does Environmental Regulation Promote the Upgrade of the Export Technology Structure: Evidence from China," Sustainability, MDPI, vol. 14(16), pages 1-13, August.
    7. Faris Alshubiri, 2020. "Analysis of the Financial Model of the ICT Price Basket on Financial Development Indicators of GCC Countries," The Review of Socionetwork Strategies, Springer, vol. 14(1), pages 147-170, April.
    8. Nadine Fabritz, 2015. "ICT as an Enabler of Innovation. Evidence from German Microdata," ifo Working Paper Series 195, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

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    More about this item

    Keywords

    Firm performance; Innovation; Information technology; Fixed effects logit;
    All these keywords.

    JEL classification:

    • L0 - Industrial Organization - - General
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

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