IT-Performance Paradox Revisited: Resource-Based and Prisoner's Dilemma Perspective
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Executive Summary Many scholars regard information technology (IT) as a source of competitive advantage and key to performance improvement. However, the inconsistent empirical link between IT investment and performance has evolved into the IT-performance paradox debate. This paper revisits this issue by analyzing the value/payoff of IT investment. From the value creation of resource-based view, IT typically does not meet scarcity and appropriability criteria, thus limiting the value the investing firms can claim from their IT investment. From the prisoner's dilemma perspective, the dynamic interplay among firms, competitors, and IT vendors puts IT vendors in a position to benefit most from firms' IT investment while making it difficult for investing firms to truly realize the value/payoff from their IT investment. Thus, based on these perspectives, this paper theoretically demonstrates that IT vendors, not IT investing firms, are the ones who enjoy the more significant portion of value created by firms' IT investment. Introduction Information technology (IT) management scholars have long been in search of IT investment value and resulting performance improvement. However, research in IT investment value and performance has produced mixed results, and has evolved into the IT-performance paradox debate (e.g., Anderson et al., 2003; Brynjolfsson, 1993). While the research findings at the economy and industry levels have shown little promise of productivity or value derived from IT investment, researchers have turned their attention to the studies at the firm and functional levels and found more promising results. Nevertheless, research on IT investment and firm performance has continued to yield inconclusive results (e.g., Devaraj & Kohli, 2000; Mahmood & Mann, 2005). The common but implicit assumption that 'IT investment should create value to investing firms and result in the performance improvement, and it is key to tomorrow's competitive advantage' has driven business managers to heavily invest in IT (Mahmood & Mann, 1993, 2005) and has fueled research efforts to demonstrate the connection between firm performance and IT investment (Thatcher & Oliver, 2001). This IT value assumption may also have directed the explanation of mixed IT investment-performance results towards methodology-related issues such as inadequate sample size, lack of process orientation, and differences in analysis methods and the use of diverse performance measures (Chan, 2000; Kohli & Devaraj, 2003). This paper takes the position that in addition to methodology, theory that research rests up on can limit empirical findings. Thus, there is a need to step back and look at a bigger theoretical picture of IT investment value in order to better understand fundamental issues of IT investment and firm performance. From a practitioner standpoint, considering over $300 billion of annual IT investment in the U.S. alone in the late 1990's (Judge et al., 1998) and the massive IT investment worldwide of over $2 trillion a year in the post Internet boom era (Carr, 2003), it is legitimate to call for further understanding of IT investment and its resulting performance. From academic standpoints, the mixed research findings also call for alternative theoretical lenses that can better explain the phenomena, so that future studies can advance in a more integrative fashion. Hence, a further theoretical examination of IT investment and resulting firm performance is warranted. From the theoretical development standpoint, instead of holding on to common IT value assumption, this paper takes a step back and asks a fundamental question, "How likely is it that IT investment creates value to investing firms? " I believe that by removing the IT value assumption, we can gain more theoretical flexibility and can view the IT investment phenomenon from a broader perspective, yielding a better understanding of IT investment value and resulting firm performance. …