Issues in Linking Information Technology Capability to Firm Performance

The resource-based view has been proposed to investigate the impact of information technology (IT) investments on firm performance. Researchers have shown that a firm’s ability to effectively leverage its IT investments by developing a strong IT capability can result in improved firm performance. We test the robustness of this approach and examine several related issues. Our results indicate that firms with superior IT capability indeed exhibit superior current and sustained firm performance when compared to average industry performance, even after adjusting for effects of prior firm performance. However, the differences in the results from various analyses suggest that the impact of “halo effects” and prior financial performance of firms must be taken into consideration in future tests of IT capability. Further, it is critical to develop theoretically derived multidimensional measures of IT capability in order to continue to apply the RBV approach to assess the impact of IT investments on firm performance.