Software investment and organizational change: Evidence from panel data

Abstract

AbstractTechnological investment is a key managerial decision to make by firms. In recent years, firms increasingly invest in software systems to support big data analytics, digital transformation, and AI, which however do not always pay off. Recent research suggests that software availability may influence entry, at the industry level, by increasing labor productivity, reducing scaling costs, and/or facilitating demand forecasting. However, how these mechanisms through which firms' software investment may affect organizations by inducing various changes is unclear. Insights into these mechanisms require microdata at the firm level over years. We construct a unique panel dataset from 13,335 German firms across industry sectors in 2011–2017 to conduct a firm‐level econometric analysis. We find that, on average, firms' software investment improves demand forecasting but, interestingly, may reduce labor productivity and slow down scaling up. We further propose several organizational contexts in which software investment can be more beneficial to remedy such challenges. Labor productivity is improved only if firms reorganize labor work when making software investment, and scaling costs may be reduced if firms facilitate learning through investments in both software and human capital development. Putting together, this research contributes a new understanding of organizational changes induced by software investment and what contingency factors can make software investment more beneficial in the organizational contexts, to guide managers to make value‐increasing decisions.