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

Prior research concerning IT business value has established a link between firm-level IT investment and tangible returns like output productivity. Research also suggests that IT is vital to intermediate processes like those that produce intangible output. Among these, IT’s use in innovation and knowledge creation processes are 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 IT’s contribution to innovation production across multiple contexts, using a quality-based measure of innovation output. Analyzing a panel of large U.S. manufacturing firms between 1987 and 1997, we find 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, R&D and innovation production is robust across multiple econometric methodologies and 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.