Co-Authors
Ali Tafti (atafti@umich.edu)
Indranil Bardhan (bardhan@utdallas.edu)
Jie Mein Goh (jgoh@rhsmith.umd.edu)
Do information technology (IT) investments improve firm profitability? If so, is it on account of improvement in sales or is it on account of reduction in overall operating expenses? The empirical evidence in this paper, using archival data for the 1998-2003 period for more than 400 global firms, suggests that IT has a positive impact on profitability, thus resolving what Dedrick, Gurbaxani and Kraemer (2003) have characterized as “the profitability paradox” of IT. We also find that of the total effect of IT on profitability, a significant portion is accounted for by IT-enabled revenue growth. We do not find evidence for the effect of IT on profitability through IT-enabled operating cost reduction. Taken together, these findings suggest that firms have had greater success in achieving higher profitability through IT-enabled revenue growth than through IT-enabled cost reduction. These findings complement previous research that has established a positive effect of information technology on productivity and market value but not profitability. The findings provide important managerial implications and imply that firms should accord higher priority to IT projects that have revenue growth potential over those that focus mainly on cost savings.
Keywords: Information Technology, Profitability, Discretionary Expenditures, Revenue Growth, Cost Reduction, Firm Performance, Profitability Paradox.