Week3_Dewan and Ren (2011)_Xinyu Li

Prior literature states that the key to unlock the business value of IT lies in the synergy between IT investment and business strategy. Motivated by this idea, Dewan and Ren (2011) emphasizes the influence of firm boundary on the link between IT investment and firm performance. Their work differs from the previous studies in that they 1) focus on the role of the interaction between IT investment and firm strategy, 2) distinguish firms’ financial performance into return and risk, 3) classify IT investment by the nature of IT investments. The uniqueness affords their work the ability to explain the unsolved “profitability paradox”.

The paper firstly looks at how the boundary of firms moderates the relationship between IT investment and firm performance (return and risk). Two dimensions of the boundary—horizontal integration (diversification) and vertical integration—are discussed respectively. Since one major function of corporate IT is to facilitate coordination, the paper hypothesize that diversification positively moderates the link between IT investment and financial return. Likewise, it negatively moderates the IT-risk link because internal learning tend to reduce uncertainty brought by IT. Related diversification benefits more than unrelated diversification due to less coordination required by unrelated diversification. By the same token, the paper propose that vertical integration will decrease the influence IT investment has on financial risk. However, whether an IT investment is externally oriented should be taken into account when considering the moderating effect of vertical integration on the link between IT investment and financial return. Finally the paper also compares the moderating impact based on other firm characteristics such as service versus manufacturing, high IT-intensity versus low IT-intensity, recent time periods versus older time periods. All of the hypotheses are verified by empirical investigation. Robustness checks are also provided using different measurements of key independent variables and dependent variables.