The Resource-Based View of IT Business Value: Complementary Investments or Embedded Knowledge?

In this paper we test a primary postulate of the resource-based theory of IT business value. From this perspective, IT is not rare but pervasive, and it is only the combination of investments with other resources that makes the investment inimitable. Therefore, the effect of IT on firm performance cannot be direct effects, but rather firm performance can only be affected when IT expenditures are combined with other investments. We test this theory using panel data of large firms spanning 7 years. Firm level data is gathered from Compustat and matched to IS Budget data from InformationWeek's annual rankings. We find that no support for the RBV postulate that IT Expenditure cannot have direct competitive advantage but must be combined with expenditure on other assets to effect firm performance. Instead we find support for the opposing hypotheses: IT expenditure and capital expenditures have independent, direct effects on firm revenue as well as firm profit, even in the presence of the interaction variable. The results imply that IT investments may be a source of direct competitive advantage, unlike the postulate of the resource-based view theorists. This may be because an IT system has embedded knowledge and creates knowledge, making it rare and imperfectly imitable. Rather than investing in generic IT systems and trying to obtain uniqueness from investments in complementary resources, firms can try embedding firm-specific knowledge when designing or modifying their systems and using their systems to create knowledge. This is the first study to test the resource-based view's postulate that value from IT comes only with the combination of IT investments and investments in other assets and not from direct effects. By disproving this postulate, we open the door to new hypotheses based on knowledge in and from IT systems.