The value of IT to firms in a developing country in the catch-up process: An empirical comparison of China and the United States

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Abstract

This study seeks to better understand the role of information technology (IT) to firms in a developing country in the catch-up process. Using the event study methodology, we empirically compare the value of IT investments to firms in China and those in the United States. Three factors that may affect the value of IT (industry, firm size, and firm type) are considered. We find that IT investment announcements significantly increase firms' market value in China but not in the US. This may be evidence that IT brings more benefits to firms in China, helping them to catch up with leader firms in the US. Furthermore, we find that the positive effects of IT investments are more easily observed in IT-using firms than in IT-producing firms in China. Our findings offer further insight into the catch-up theory and the value of IT investments.

Introduction

With the coming of the information age, information technology (IT) investments are becoming increasingly important to firms' survival and growth [5]. In particular, Asian firms have grown successfully with the help of IT [2], [15], [19], [25], [27], [30]. Such successes have obviously boosted the confidence of firms in developing countries. Indeed, many developing countries have turned to IT as a way to propel economic growth [36], [37], [39], [42].

The catch-up theory [16] explains the successes of firms in developing countries: backward countries can skip several stages of development and directly adopt advanced technologies. In particular, technologies are “short cuts” by which developing countries may “catch up” with developed countries. More specifically, Hobday [19] demonstrated the catch-up process in a product life cycle (PLC). He stated that latecomer firms in developing countries could directly enter the mature and standardized end stage of a PLC. In contrast, leader firms in developed countries must go through the entire PLC. The early stages of a PLC are characterized by high risks as the technologies employed are still at the experimental stage and the markets are ill-defined and non-standardized. Therefore, latecomer firms could reduce unnecessary expenses and catch up with leader firms by avoiding the early stages of a PLC.

Information technology could act as the short cut suggested in the catch-up theory. By adopting IT that has been proven to be successful in developed countries, firms in developing countries may grow faster than those in developed countries. Many researchers believe that the rise of Asian firms is related to the development of IT. However, some scholars have been skeptical about the role of IT in the catch-up process. They argued that IT adoption and implementation in developing countries face a broad range of obstacles, such as inadequate IT infrastructure, lack of communication, and ineffective policies [10], [12], [34]. Homer-Dixon [20] even reported that the gap between developing countries and developed countries is widening, owing to slow IT adoption and diffusion.

Puzzled by these arguments, researchers and practitioners are struggling to collect empirical evidence to determine whether IT propels the catch-up processes of firms in developing countries, and if so, to find out which factors may affect IT value. Although some studies have documented successful cases of latecomer firms in Asia [2], [24], [25], [27], little literature in the field has focused on the role of IT in the catch-up process. Besides, most of the previous studies on IT value were limited to US cases [14], [21]. We do not know whether their results are applicable to developing countries, especially those in the catch-up process.

China has maintained rapid economic growth, especially in IT industries, in spite of the Asian financial crisis of the late 1990s, and the subsequent global economic slowdown. IT growth in China may therefore represent the rapid adoption of IT by latecomer firms in developing countries. In contrast, US firms are leaders of the market. They would have profited from first-mover advantages [35] through high research and development (R&D) expenditure. Hence, the comparative studies of IT value to firms in these two countries can offer insight on whether IT plays a significant role in latecomer firms' catch-up process.

This study aims to assess the value of IT investments to firms in China, a developing country actively engaged in the catch-up process. We employ the event study methodology and compare the empirical impact of IT investments in China with that in the US. We shall investigate the following questions: (1) Can IT increase firms' value in a developing country (China) and in a developed country (US) respectively? (2) Does IT really provide an opportunity for firms in a developing country to catch up with those in a developed one? (3) How do various context factors (such as industry, firm size and firm type) affect the catch-up process?

The rest of the paper is organized as follows: We present our four hypotheses about the market value of IT investments in Section 2. Section 3 briefly explains the methodology of event study, and Section 4 describes our data. Section 5 presents the empirical results followed by discussion of the results in Section 6. Section 7 concludes the paper with a summary of its contributions.

Section snippets

Overall IT investment effect

IT is believed to automate processes [46], change business strategies [28], [29], and smooth the daily operation of firms [14]. Given the tangible and intangible value of IT, IT investments should bring benefits to firms. Yet previous empirical studies in the US have failed to support such a claim [14], [21]. One possible reason is the high risk of IT investments in the US. It is reported that over 80% of IT projects in the US failed [41]. Another possible reason is the high competitive

Event study methodology

Regarding the contribution of IT investments to firms, information systems (IS) scholars deem that IT value should be reflected as improved firm performance, which can be measured by return on assets, return on equity, and return on sales [3], [40]. However, in the absence of a theory about the process within the firm, the selected measures of firm performance are somewhat arbitrary [9]. Moreover, these accounting-based measures of profits are not good indicators of the true performance of

Data collection

To compare US firms and China firms, we consider data from the same period of 1999 to 2002 for both countries. In the US, there are many available databases carrying news of IT investments. We use Factiva as the main database. To collect news on IT investment announcements of firms traded on the US stock exchanges (such as NYSE, AMEX and NASDAQ), we searched the Factiva database from 1999 to 2002. The target news sources were Business Wire, PR Newswire, Dow Jones Business News and Dow Jones

Overall effects of IT investment announcements

Table 1 reports the CAR and test results of the 65 samples from China and the 63 samples from the US. From the table, we can see that CAR is positive for both China and the US. However, CAR was significantly different from zero for China but insignificant for the US. This implies that IT investment announcements can significantly increase firms' value in China, a developing country in the catch-up processes, but not in the US. Thus, Hypothesis 1(a) is supported while Hypothesis 1(b) is not.

Industry effect

To

Discussion

Our main finding is that IT investment announcements significantly increase firms' market value in China but not in the US. The increase in market value can be deemed the net present value that has resulted from the expected profits of IT investments [14]. In other words, IT investments can benefit firms in China but not in the US, which could be an empirical evidence of the successful catch-up process of China.

China clearly lags behind the US in IT development: The US began research on the

Conclusions

We have studied IT payoff from the perspective of the catch-up process. Using actual data of firm performance, we have compared IT value in two big economies (China vs. the US). The difference in the pattern of IT value in China and the US indicates that IT could be the technology short cut through which firms in developing countries could grow faster. Thus, the gap between developing and developed counties could be getting narrower with technology. The result could serve as a good explanation

Zhaoli Meng is an Assistant Professor in the School of Information at Renmin University of China. She received her Ph.D. degree from the National University of Singapore. Dr. Meng's primary research focuses on economic analysis of e-business, information technology and open source software. Her other research includes economic analysis and empirical investigations of auction bidding rule in electronic commerce and power market.

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    Zhaoli Meng is an Assistant Professor in the School of Information at Renmin University of China. She received her Ph.D. degree from the National University of Singapore. Dr. Meng's primary research focuses on economic analysis of e-business, information technology and open source software. Her other research includes economic analysis and empirical investigations of auction bidding rule in electronic commerce and power market.

    Sang-Yong Tom Lee is an Associate Professor in the College of Information and Communications, Hanyang University in Seoul, Korea. He received his Ph.D. degree from Texas A&M University (1999), and taught at the Department of Information Systems, National University of Singapore before joining Hanyang University. His research interests are economics of information systems, online information privacy, and value of IT. His papers have been published in or accepted by MIS Quarterly, Information & Management, Communications of the ACM, International Journal of Electronic Commerce, and others.

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