Information Technology and Intangible Output: The Impact of IT Investment on Innovation Productivity

Abstract

Prior research concerning IT business value has established a link between firm-level IT investment and tangible returns such as output productivity. Research also suggests that IT is vital to intermediate processes such as those that produce intangible output. Among these, the use of IT in innovation and knowledge creation processes is perhaps the most critical to a firm's long-term success. However, little is known about the relationship between IT, knowledge creation, and innovation output. In this study, we contribute to the literature by comprehensively examining the contribution of IT to innovation production across multiple contexts using a quality-based measure of innovation output. Analyzing annual information from 1987 to 1997 for a panel of large U.S. manufacturing firms, we find that a 10% increase in IT input is associated with a 1.7% increase in innovation output for a given level of innovation-related spending. This relationship between IT, research and development (R&D), and innovation production is robust across multiple econometric methodologies and is found to be particularly strong in the mid to late 1990s, a period of rapid technological innovation. Our results also demonstrate the importance of IT in creating value at an intermediate stage of production, in this case, through improved innovation productivity. However, R&D and its related intangible factors (skill, knowledge, etc.) appear to play a more crucial role in the creation of breakthrough innovations.