FIRM CHARACTERISTICS AND INVESTMENTS IN INFORMATION TECHNOLOGY - SCALE AND SCOPE EFFECTS

This paper conducts an empirical analysis of the link between the scal e and scope of the firm and information technology (IT) investments, e mphasizing the role of IT in coordination and control. We extend the e conomic production function framework to include variables related to the boundaries of the firm, including related and unrelated diversific ation, vertical integration and growth options, and we estimate the re sulting model on a data set based on annual surveys of IT spending by large U.S. firms, conducted by Computerworld during the period 1988-19 92. Our results suggest that the level of IT investment is positively related to the degree of firm diversification, perhaps reflecting the greater need for coordination of assets within diversified firms. We f urther find that related diversification demands greater IT investment than unrelated diversification. Firms that are less vertically integr ated have a higher level of IT investment. Finally, firms with fewer g rowth options in their investment opportunity set tend to have a highe r IT investment, consistent with an agency perspective which predicts excessive IT investment by managers with ''free'' cash flow. Put toget her, these empirical relations between IT investments and firm charact eristics help us better understand the role of IT in coordination and control and the choices firms make in information systems and strategy .