Closing the Loop: An Empirical Investigation of Causality in IT Business Value

Researchers have established that information technology (IT) can improve firms’ productivity. Whether improved productivity leads to additional investment in IT, however, remains largely uninvestigated. In this paper, we consider whether the relationship between productivity and subsequent IT investment might be positive, negative, or ad hoc, and hypothesize that this relationship is positive. We analyze seven years of panel data from 1,223 healthcare firms and present empirical evidence supporting our hypothesis. When our finding is combined with extant research, it becomes reasonable to propose that unidirectional causality does not fully describe the process of IT business value creation. Instead, we argue that existing static models of IT business value with unidirectional causality can be recast as dynamic models that explicitly incorporate multiple time periods and a positive feedback relationship to more accurately capture the complexity of this process. The creation of IT business value can thus be understood as a positive feedback model where productivity in a given time period leads to IT investment in a future time period, where IT investment builds the stock of IT inputs, and where those IT inputs then impact productivity, beginning the cycle anew.