Research Note—Business Value of Information Technology: Testing the Interaction Effect of IT and R&D on Tobin's Q

Abstract

T he business case for investing in information technology (IT) has received increasing scrutiny in recent years. We propose that IT investments create additional business value through interactions with other business processes. In this paper, we formalize the interaction effect of IT by focusing on one core function, namely, research and development (R&D). We hypothesize that investments in IT can interact with and complement a firm's R&D investments, enhancing the firm's shareholder value creation potential. We test this by hypothesis by estimating the interaction impact of IT and R&D investments on Tobin's q, a forward-looking measure of firm performance using a recent multiyear, firm-level, archival data set. Our results suggest that the interaction effect of R&D and IT on Tobin's q is positive and significant after controlling for other firm-and industryspecific effects. Our findings provide rigorous empirical support for recent anecdotal evidence in the managerial literature with respect to the manner in which IT is enabling R&D-intensive innovation processes. Our analysis underscores the need for coordinated investments in IT and R&D, and permeating IT capabilities throughout other business processes such as R&D.

The Role of IT in Innovation at the Organizational Level – A Literature Review

“…Much of the published work examines the effects of IT investments on high-level outcomes of innovation efforts reflected in the financial performance of a firm (firm survival, sales, stock price). Studies generally document a positive association between IT investments and firm performance [7,44], however more recent studies suggest diminishing returns for smaller firms [39] and non-technical sectors of the economy [65]. We also find two native IS theories in our sample.…”

The impact of firms’ social media initiatives on operational efficiency and innovativeness

“…We included five control variables, namely firm size, firm profitability, firm age, firm R&D intensity, and firm advertising expense in our research as they may be related to firms’ operational efficiency and innovativeness (Bellamy et al., 2014; Cohen and Levinthal, 1990; Kortmann et al., 2014; Kwong and Norton, 2007; Wu et al., 2010). We measured firm size as the natural logarithm of a firm’s sales (Bardhan et al., 2013; Hendricks et al., 2009), firm profitability as a firm’s return on assets (Chizema et al., 2015; Mukherji et al., 2011), firm age as the natural logarithm of the number of years since a firm’s founding (Bellamy et al., 2014; Vandaie and Zaheer, 2014), firm R&D intensity as a firm’s R&D expenditures over sales (Ba et al., 2013; Bardhan et al., 2013), and firm advertising expense as the natural logarithm of a firm’s spending on advertising (Lou, 2014; Pirinsky and Wang, 2006). We also included year (2006–2011) and industry (two‐digit SIC codes) dummies in our research to control for any unobservable time‐ and industry‐specific effects.…”

The differing impacts of operational and financial slack on occupational safety in varying market conditions

“…Valid instruments should be correlated with the endogenous independent variables but not with the error term (Wooldridge, 2015). However, it is difficult to select a strictly exogenous instrumental variable (Bardhan et al., 2013). Therefore, we followed previous recent studies using similar dynamic panel data and conducted a generalized method of moments (GMM) analysis to address the endogeneity concern (Lam et al., 2016; Senot et al., 2016; Sodero et al., 2013).…”