An Empirical Study of the Relationship Between Information Technology and Firm Performance

Since the issue of the productivity paradox was first raised in the early 1990s, a vast amount of empirical research has been done on the performance impact of IT. Much existing research has focused on IT investment, even though value creation from IT depends largely on how it is used in organizations. By focusing on innovative uses of IT, this research empirically examines the relationship between IT innovation and firm performance. It uses Information Week’s annual data set of innovative IT users and the Compustat database. To construct a measure of IT innovation, we develop a second-order construct from four IT innovation variables (technology strategy, e-business strategy, business practices, and customer knowledge) by conducting exploratory factor analysis. As measures of firm performance, we employ Tobin’s q, return on assets, and revenue per employee. Our results show that there is a strong positive relationship between IT innovation and firm performance as measured by Tobin’s q and revenue per employee. By using IT innovation data, this research demonstrates that innovative use of IT is an important link to IT value, which seems to be missing in the literature.