Week 1 Reading Summary-Jack Tong

Paper: Cheng, Zhuo, and Barrie R. Nault. “Industry level supplier-driven IT spillovers.”  Management Science 53, no. 8 (2007): 1199-1216.

This paper is about understanding the impact of upstream IT investment on downstream productivity, to be more specific, the authors examine the spillover effect of supplier-side IT stock capital investment on downstream industry productivity.

The authors list several reasons on the rationales behind the research motivation for this topic. First, supplier’s investment on IT infrastructure could translate into better or new products, service, or more efficient operation for downstream industries. Second, supplier’s improvement on interorganizational systems will provide more accurate demand forecast that benefits downstream companies. Despite the obvious benefits of supplier’s IT investment on inter-firm cooperation and management, little research has been done to scientifically examine the effect due to empirical data scarcity.  The authors develop a model for spillover effect of supplier-side IT investment explicitly accounting for the measurement error of the price deflator of the intermediate input, reflecting the mismeasurement of the quality enhancement provided by upstream IT investment. They find that the supplier-driven IT spillovers are both positive and significant. Moreover, they also indicate that because of the failure to account for the quality improvement, the measured price deflator overestimates the true deflator by approximately 30% at the mean level of IT capital stock.

In terms of relevant literatures and contributions of this paper, the authors list two aspects. The first is that the modeling approach proposed by the authors extend the production-function framework to a new field in understanding spillover effect of IT investment. Second, this paper also builds up findings and research in Supplier-driven IT spillovers.

The authors derive the proposed model from the basic Cobb-Douglas production function. They derive a model of supplier-driven IT spillovers by explicitly accounting for the errors in the measurement of intermediate input prices. The model facilitates authors to infer the magnitude of measurement error of the intermediate input price deflators from the estimates of the parameters.