The Relationship Between Investment in Information Technology and Firm Performance: A Study of the Valve Manufacturing Sector

Abstract

Large amounts of resources have been and continue to be invested in information technology (IT). Much of this investment is made on the basis of faith that returns will occur. This study presents the results of an empirical test of the performance effects of IT investment in the manufacturing sector. Six years of historical data on IT investment and performance were collected for 33 valve manufacturing firms from the CEO, the controller and the production manager in each firm. Investment was perceptually categorized by management objective (i.e., strategic, informational and transactional) and tested against four measures of performance (sales growth, return on assets, and two measures of labor productivity). Heavy use of transactional IT investment was found to be significantly and consistently associated with strong firm performance over the six years studied. Heavy use of strategic IT was found to be neutral in the long term and associated only with relatively poorly performing firms in the short term. This study suggests that early adopters of strategic IT could have spectacular success but once the technology becomes common, the competitive advantage is lost. In addition, the context of the firm was included in the analysis. Conversion effectiveness, which measures the quality of the firm-wide management and commitment to IT, was found to be a significant moderator between strategic IT investment and firm performance.