Abstract

We develop theory that describes how increased IT investment motivates different actions within different types of industries. We contend that manufacturing firms tend to have revenue that is firm dependent, regardless of the number of employees and thus use IT to reduce costs by reducing firm size, as stated in previous theory. However, retail and service firms tend to have revenue that is tied to the number of employees and use IT to increase firm size in order to allow greater revenue. Using 629 yearly observations from 37 industries from 1985 to 2005, we find that IT investment precedes size decreases with manufacturing firms and size increases with retail and service firms. Further, impulse response functions indicate that differences in firm size differences following IT investment eventually vanish, and non- IT-investing firms eventually achieve the same firm size after several years, indicating that IT allows firms to be more responsive.

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