The Extroverted Firm: How External Information Practices Affect Innovation and Productivity

We gather detailed data on organizational practices and information technology (IT) use at 253 firms to examine the hypothesis that external focus---the ability of a firm to detect and therefore respond to changes in its external operating environment---increases returns to IT, especially when combined with decentralized decision making. First, using survey-based measures, we find that external focus is correlated with both organizational decentralization, and IT investment. Second, we find that a cluster of practices including external focus, decentralization, and IT is associated with improved product innovation capabilities. Third, we develop and test a three-way complementarities model that indicates that the combination of external focus, decentralization, and IT is associated with significantly higher productivity in our sample. We also introduce a new set of instrumental variables representing barriers to IT-related organizational change and find that our results are robust when we account for the potential endogeneity of organizational investments. Our results may help explain why firms that operate in information-rich environments such as high-technology clusters or areas with high worker mobility have experienced especially high returns to IT investment and suggest a set of practices that some managers may be able to use to increase their returns from IT investments. This paper was accepted by Sandra Slaughter, information systems.

[1]  L. Argote,et al.  KNOWLEDGE TRANSFER: A BASIS FOR COMPETITIVE ADVANTAGE IN FIRMS , 2000 .

[2]  W. Powell,et al.  Interorganizational Collaboration and the Locus of Innovation: Networks of Learning in Biotechnology. , 1996 .

[3]  Henry Chesbrough,et al.  Open Innovation: The New Imperative for Creating and Profiting from Technology , 2003 .

[4]  Karl T. Ulrich.  Introduction to the Special Issue on Design and Development , 2001, Manag. Sci..

[5]  Omar El Sawy,et al.  Absorptive Capacity Configurations in Supply Chains: Gearing for Partner-Enabled Market Knowledge Creation , 2005, MIS Q..

[6]  J. Cash,et al.  Information Technology and Tomorrow's Manager , 1988 .

[7]  Ravindran R. Pillai,et al.  Information Age organizations, dynamics and performance , 1999 .

[8]  Erik Brynjolfsson,et al.  Three-Way Complementarities: Performance Pay, Human Resource Analytics, and Information Technology , 2012, Manag. Sci..

[9]  Richard L. Nolan,et al.  Sense and Respond: Capturing Value in the Network Era , 1998 .

[10]  Kevin J. Stiroh,et al.  Reassessing the Impact of IT in the Production Function: A Meta-Analysis and Sensitivity Tests , 2002 .

[11]  Lorin M. Hitt,et al.  Beyond the productivity paradox , 1998, CACM.

[12]  Erik Brynjolfsson,et al.  Information Technology and Productivity: A Review of the Literature , 1996, Adv. Comput..

[13]  Elliot Bendoly,et al.  The Performance Effects of Complementarities Between Information Systems, Marketing, Manufacturing, and Supply Chain Processes , 2007, Inf. Syst. Res..

[14]  J. H. Dyer,et al.  Creating and managing a high‐performance knowledge‐sharing network: the Toyota case , 2000 .

[15]  H. Mendelson.  Organizational Architecture and Success in the Information Technology Industry , 2000 .

[16]  Haim Mendelson,et al.  Clockspeed and Informational Response: Evidence from the Information Technology Industry , 1998, Inf. Syst. Res..

[17]  Bernard J. Jaworski,et al.  Market Orientation: The Construct, Research Propositions, and Managerial Implications , 1990 .

[18]  J. March,et al.  A Behavioral Theory of the Firm , 1964 .

[19]  Ronald,et al.  Does Technological Progress Alter the Nature of Information Technology as a Production Input? New Evidence and New Results , 2010 .

[20]  Paul Attewell,et al.  Computing and organizations: what we know and what we don't know , 1984, CACM.

[21]  Scott Stern,et al.  Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development , 2007, Manag. Sci..

[22]  A. Arora,et al.  COMPLEMENTARITY AND EXTERNAL LINKAGES: THE STRATEGIES OF THE LARGE FIRMS IN BIOTECHNOLOGY* , 1990 .

[23]  Kenneth L. Kraemer,et al.  Information technology and economic performance , 2003, ACM Comput. Surv..

[24]  John F. Rockart,et al.  Computers, networks, and the corporation , 1991 .

[25]  Reinhilde Veugelers,et al.  In Search of Complementarity in Innovation Strategy: Internal R&D and External Knowledge Acquisition , 2006, Manag. Sci..

[26]  J. V. Reenen,et al.  Skill-Biased Organizational Change? Evidence from a panel of British and French establishments , 2001 .

[27]  Linda Wilbanks,et al.  IT Productivity = ?? , 2009, IT Prof..

[28]  Paul A. Pavlou,et al.  From IT Leveraging Competence to Competitive Advantage in Turbulent Environments: The Case of New Product Development , 2006, Inf. Syst. Res..

[29]  J. V. Reenen,et al.  The Organization of Firms Across Countries , 2009 .

[30]  H. Mendelson,et al.  Information systems and the organization of modern enterprise , 1993 .

[31]  Bernard J. Jaworski,et al.  Markor: A Measure of Market Orientation , 1993 .

[32]  Bernard J. Jaworski,et al.  Market orientation: Antecedents and consequences , 1993 .

[33]  S. Athey,et al.  An Empirical Framework for Testing Theories About Complimentarity in Organizational Design , 1998 .

[34]  Prasanna Tambe,et al.  The Extroverted Firm: How External Information Practices Affect Productivity , 2008, ICIS.

[35]  E. Johnsen.  Richard M. Cyert & James G. March, A Behavioral Theory of The Firm, Prentice-Hall, Inc., Englewood Cliffs, New Jersey, 1963, 332 s. , 1964 .

[36]  E. von Hippel,et al.  Sources of Innovation , 2016 .

[37]  John Van Reenen,et al.  Americans Do I.T. Better: US Multinationals and the Productivity Miracle , 2007 .

[38]  Kenneth L. Kraemer,et al.  Research Note - Does Technological Progress Alter the Nature of Information Technology as a Production Input? New Evidence and New Results , 2010, Inf. Syst. Res..

[39]  T. Bresnahan,et al.  Technical Progress and Co-Invention in Computing and in the Use of Computers , 1996 .

[40]  E. Brynjolfsson,et al.  Information Technology As A Factor Of Production: The Role Of Differences Among Firms , 1995 .

[41]  Paul Almeida,et al.  Learning - by - Hiring: When Is Mobility More Likely to Facilitate Interfirm Knowledge Transfer? , 2003, Manag. Sci..

[42]  E. Brynjolfsson,et al.  Computing Productivity: Firm-Level Evidence , 2003, Review of Economics and Statistics.

[43]  Shoshana Zuboff,et al.  In the Age of the Smart Machine: The Future of Work and Power , 1989 .

[44]  Thomas A. Kochan,et al.  What works at work : overview and assessment , 1996 .

[45]  Linda Duxbury.  The corporation of the 1990s: Information technology and organizational transformation , 1993 .

[46]  Erik Brynjolfsson,et al.  The productivity paradox of information technology , 1993, CACM.

[47]  Prasanna Tambe,et al.  Job Hopping, Information Technology Spillovers, and Productivity Growth , 2013, Manag. Sci..

[48]  E. Brynjolfsson,et al.  Paradox Lost? Firm-Level Evidence on the Returns to Information Systems Spending , 1996 .

[49]  Jerry A. Hausman,et al.  Errors in Variables in Panel Data , 1984 .

[50]  S. Crowther,et al.  The New Deal at Work – Managing the Market Driven Workforce , 2000 .

[51]  Arun Rai,et al.  Firm performance impacts of digitally enabled supply chain integration capabilities , 2006 .

[52]  F. Lichtenberg,et al.  The Comparative Advantage of Educated Workers in Implementing New Technology , 1987 .

[53]  M. Shubik,et al.  A Behavioral Theory of the Firm. , 1964 .

[54]  K. Kraemer,et al.  : Evidence from , 2022 .

[55]  Kenneth L. Kraemer,et al.  Review: Information Technology and Organizational Performance: An Integrative Model of IT Business Value , 2004, MIS Q..

[56]  Paul R. Milgrom,et al.  The Economics of Modern Manufacturing: Technology, Strategy, and Organization , 1990 .

[57]  R. Radner.  Hierarchy: The Economics On Managing , 1990 .

[58]  Jeanne G. Harris,et al.  Competing on Analytics: The New Science of Winning , 2007 .

[59]  Chung-ki Min,et al.  The substitution of information technology for other factors of production: a Firm Level Analysis , 1997 .

[60]  Jay R. Galbraith.  Organization Design: An Information Processing View , 1974 .

[61]  Howard Eisner,et al.  Information Age , 2008, Wiley Encyclopedia of Computer Science and Engineering.

[62]  Erik Brynjolfsson,et al.  Intangible Assets: Computers and Organizational Capital , 2002 .

[63]  John C. Narver,et al.  The Effect of a Market Orientation on Business Profitability , 1990 .

[64]  R. Scheines,et al.  Organizational Behavior and Human Decision Processes , 1977 .

[65]  Ann P. Bartel,et al.  How Does Information Technology Affect Productivity? Plant-Level Comparisons of Product Innovation, Process Improvement, and Worker Skills , 2007 .

[66]  MalhotraArvind,et al.  Absorptive capacity configurations in supply chains , 2005 .

[67]  Karl T. Ulrich,et al.  Special Issue on Design and Development: Product Development Decisions: A Review of the Literature , 2001, Manag. Sci..

[68]  Lorin M. Hitt,et al.  Information Technology and Internal Firm Organization: An Exploratory Analysis , 1997, J. Manag. Inf. Syst..

[69]  Prasanna Tambe,et al.  The Productivity of Information Technology Investments: New Evidence from IT Labor Data , 2011, Inf. Syst. Res..

[70]  E. Brynjolfsson,et al.  Beyond Computation: Information Technology, Organizational Transformation and Business Performance , 2000 .

[71]  Jeffrey H. Dyer,et al.  The Relational View: Cooperative Strategy and Sources of Interorganizational Competitive Advantage , 1998 .

[72]  Richard J. Murnane,et al.  Upstairs, Downstairs: Computers and Skills on Two Floors of a Large Bank , 2001 .

[73]  A. Chandler,et al.  Regional Advantage: Culture and Competition in Silicon Valley and Route 128 , 1994 .

[74]  Gary W. Loveman,et al.  Diamonds in the Data Mine , 2003 .

[75]  Shane Greenstein,et al.  Progress and Co-invention in Computing and in the Uses of Computers , 2008 .

[76]  Richard J. Murnane,et al.  Upstairs, Downstairs: Computer-Skill Complementarity and Computer-Labor Substitution on Two Floors of a Large Bank , 2000 .

[77]  P. David.  The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox , 1990 .

[78]  Sinan Aral,et al.  Testing Three-Way Complementarities: Incentives, Monitoring and Information Technology , 2009 .