The Extroverted Firm: How External Information Practices Affect Innovation and Productivity

• Published in: Management science 2012-05, Vol.58 (5), p.843-859
• Main Authors: Tambe, Prasanna, Hitt, Lorin M., Brynjolfsson, Erik
• Format: Article
• Language: English
• Subjects: Applied sciences; Business innovation; Business structures; Competitive advantage; complementarities; Computer science; control theory; systems; Cost estimates; Customers; Debt management; Decentralization; Decision making; Economics; Employment; Exact sciences and technology; Experimental methods; external focus; Firm modelling; General aspects; high-performance work practices; high-tech clusters; Industrial investment; Information processing; Information systems. Data bases; Information technology; Innovations; Inventory control, production control. Distribution; Management science; Memory organisation. Data processing; New employees; Operational research and scientific management; Operational research. Management science; Organizational behaviour; Organizational change; organizational practices; Product development; Productivity; Return on investment; Software; Studies; Technological innovation; Technology adoption; Workplaces
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.1110.1446

We gather detailed data on organizational practices and information technology (IT) use at 253 firms to examine the hypothesis that external focus-the ability of a firm to detect and therefore respond to changes in its external operating environment-increases returns to IT, especially when combined with decentralized decision making. First, using survey-based measures, we find that external focus is correlated with both organizational decentralization, and IT investment. Second, we find that a cluster of practices including external focus, decentralization, and IT is associated with improved product innovation capabilities. Third, we develop and test a three-way complementarities model that indicates that the combination of external focus, decentralization, and IT is associated with significantly higher productivity in our sample. We also introduce a new set of instrumental variables representing barriers to IT-related organizational change and find that our results are robust when we account for the potential endogeneity of organizational investments. Our results may help explain why firms that operate in information-rich environments such as high-technology clusters or areas with high worker mobility have experienced especially high returns to IT investment and suggest a set of practices that some managers may be able to use to increase their returns from IT investments. This paper was accepted by Sandra Slaughter, information systems.