Week2 Summary_Tambe et al. (2012)_ Xue Guo

The Extroverted Firm: How External Information Practices affect innovation and productivity

This paper proposes that IT are most productive when they allow firms to quickly respond to external information, such as customer interaction, benchmarking and using inter-organizational project teams. And it empirically proves that external focus, decentralization, and IT intensity are associated with productivity in modern firms.

The paper uses survey-based data from 253 firms to examine the hypothesis. At first, authors calculate correlations between organizational practices and IT measurements and gives the preliminary results that external focus, internal workplace organization and IT usage are complements in the production process. Then the paper tests the relationship between Innovation and various stage of the product development and found that firms’ ability to capture information from its environment is positively associated with product leadership and effective management of the product line. Then, the paper uses the full-sample data to test the complementarities in production. The OLS model contains the three-way interaction term of external focus, IT, and decentralization. The results show that the effect of IT on firm productivity is significant when the external focus and decentralization are matched in the either direction.

Another important point in this paper is the robustness check. The paper uses organization inhibitors as instrumental variables in the innovation and product development regressions because these variables may affect the costs firms face in adopting new organizational firms, as well as they are not directly correlated with firm performance. The results still hold when the models include instrumental variables and use other measures of the organizational practices.

This paper has rich implications. The firms that can better utilize their environment may outperform their competitors and external focus is distinct from organizational decentralization. It also helps to explain the fact that firms operated in information rich environments tend to have higher returns of IT investments.