How to Leverage Intra-Firm IT Spillovers? It Takes Infrastructure Similarity and Governance Choice to Tango

Abstract

Do the firm’s investments in information technology (IT) within a business unit (BU) influence the performance of other BUs? While there is evidence of cross-entity IT synergies in the inter-firm and inter-industry contexts, the evidence is scarce about the IT synergies that may lead to added benefits across business units of a multi-business firm (MBF). Specifically, the existing literature is inconclusive about the leveraged versus organic nature of the organizational control needed to obtain such synergetic benefits. We examine whether IT centralization, as a top-down lever in organizations, is appropriate for harnessing cross-unit IT synergy potentials that exist due to IT assets relatedness (ITAR) across BUs. We further examine whether extents of ITC that are incommensurate with the existing levels of synergy potential are met with business losses. Our study utilizes observations across 9,885 unique units nested in 1,115 unique firms from 2005 to 2013. We find that BUs with relatively higher ITAR and higher levels of IT centralization realize greater intra-firm synergy benefits. This implies that a canonical organizational lever – governing the locus of control over IT – can help to reap higher rents from IT investments in BUs. Our elasticity estimates show that a 1 percent increase in the size of cross-unit synergy pools leads to a 0.011 percent increase in value-added. Particularly, we find that cross-unit IT synergy pools that exploit ITC along with ITAR overperform organic pools that only benefit from ITAR, especially in more recent years. This finding provides novel evidence supporting the role of top-down organizational levers in harnessing IT synergies. Additionally, the analysis in a restrictive sample focusing on newly merged/acquired BUs shows that deviation from the expected levels of ITC, i.e., ITC-ITAR misalignment, is detrimental to the BU’s productivity. Thus, utilizing ITC injudiciously is not a panacea in reaping cross-unit IT synergies.