Sequential IT Investment : Can the Risk of IT Implementation Failure Be Your Friend?

An extensive literature has studied the benefits for a firm to be the first to invest in innovative technologies such as Information Technologies (ITs). However, investment in innovative technologies often faces high levels of uncertainty. How would such uncertainty affect a pioneering firm's incentive to invest? Do late adopters benefit from information about the pioneer's investment? In this paper, we investigate these questions in a context where firms engage in sequential investment in an innovative IT. This paper differs from prior literature in two main aspects: First, IT adoption is nonexclusive and available to all client firms. Second, IT implementation can fail. Moreover, we focus on IT implementation failure caused by client firms' organization-specific factors (e.g., organizational processes and people) such that a late adopter faces a similar risk of implementation failure as an early adopter. Such uncertainty has led to persistently high IT implementation failure rates that are well documented in prior literature. We use a standard Hotelling model with two competing firms to examine firms' incentive to sequentially invest in IT given the risk of IT implementation failure. One firm (the Leader) makes his IT investment decision before his competitor (the Follower). Our results show that the probability of IT implementation failure impacts firms' payoff through three distinct effects: the uncertainty-driven cost-based differentiation effect, first-mover advantage mitigation effect and competition mitigation effect, although these three effects may drive the firms' investment and profit in opposite directions. The follower enjoys an information advantage as a second mover since he can make his investment decision contingent on knowledge of the Leader's IT investment strategy and implementation outcome. However, having more information can benefit or hurt the follower, depending on the nature of the IT being adopted and the extent of market competition. Finally, we find that a spaced-out IT investment schedule in which the follower makes his investment decision after the Leader's investment strategy and implementation outcome are known leads to the highest industry-wide IT investment and social surplus