Which Came First, IT or Productivity? The Virtuous Cycle of Investmentand Use in Enterprise Systems

While it is now well established that IT intensive firms are moreproductive, a critical question remains: Does IT cause productivity orare productive firms simply willing to spend more on IT? We address thisquestion by examining the productivity and performance effects ofenterprise systems investments in a uniquely detailed and comprehensivedata set of 623 large, public U.S. firms. The data represent all U.S.customers of a large vendor during 1998–2005 and include thevendor’s three main enterprise system suites: Enterprise ResourcePlanning (ERP), Supply Chain Management (SCM), and Customer RelationshipManagement (CRM). A particular benefit of our data is that theydistinguish the purchase of enterprise systems from their installationand use. Since enterprise systems often take years to implement, firmperformance at the time of purchase often differs markedly fromperformance after the systems “go live.” Specifically, inour ERP data, we find that purchase events are uncorrelated withperformance while go-live events are positively correlated. Thisindicates that the use of ERP systems actually causes performance gainsrather than strong performance driving the purchase of ERP. In contrast,for SCM and CRM, we find that performance is correlated with bothpurchase and golive events. Because SCM and CRM are installed after ERP,these results imply that firms that experience performance gains fromERP go on to purchase SCM and CRM. Our results are robust againstseveral alternative explanations and specifications and suggest that acausal relationship between ERP and performance triggers additional ITadoption in firms that derive value from their initial investment. Theseresults provide an explanation of simultaneity in IT value research thatfits with rational economic decision-making: Firms that successfullyimplement IT, react by investing in more IT. Our work suggests replacing“either-or” views of causality with a positive feedback loopconceptualization in which successful IT investments initiate a“virtuous cycle” of investment and gain. Our work alsoreveals other important estimation issues that can help researchersidentify relationships between IT and business value.