Academic journal article Journal of Small Business Management

Fueling Innovation through Information Technology in SMEs

Academic journal article Journal of Small Business Management

Fueling Innovation through Information Technology in SMEs

Article excerpt

A commitment to innovation has long been considered to be important to the success of entrepreneurial ventures and small firms (Fiol 1996). Research has shown that innovation stimulates ventures' growth (e.g., Wolff and Pett 2006; Motwani et al. 1999; Hax and Majluf 1991) and also provides a key source of competitive advantage in the absence of scale economies (Lewis et al. 2002). Considered from the resource-based view of the firm (Barney 1991), successful innovation may be dependent on the presence of other organization-specific skills and capabilities. For example, substantial evidence has begun to accumulate that suggests that appropriate strategic employment of information technology (IT) may be essential in translating strategies (e.g., innovation) into enhanced firm performance (e.g., Ray, Muhanna, and Barney 2005; Sakaguchi, Nicovich, and Dibrell 2004). A direct linkage between IT and firm performance was established by Powell and Dent-Micallef (1997). Bharadwaj (2000) found that high IT-capable firms (those that invest heavily in IT) outperform competitors that do not invest to the same extent (also see, Sambamurthy, Bharadwaj, and Grover 2003). These results suggest IT offers firms a competitive competency, which aids firms in differentiating themselves in the marketplace, such as through innovation.

Despite their prominence as key constructs in the literature, possible relationships among innovation, IT, and performance have not been the subject of extensive investigation (Aral and Weill 2007; Oh and Pinsonneault 2007; Dewett and Jones 2001). It is generally acknowledged that the effective application of IT should enable firms to respond more appropriately to their environment (Das, Zahra, and Warkentin 1991) and to receive and process information more efficiently (Hanson 1999; Perrow 1967), thereby facilitating competitive advantage (Ray, Muhanna, and Barney 2005; Barney 1991; Porter and Millar 1985). Consequently, firms often invest substantial resources in IT assets (e.g., computer hardware, computer software, and personnel) (Krishnan and Sriram 2000). Over time, firms that invest more than their competitors in IT tend to realize greater returns from the marketplace (Bharadwaj 2000). However, there is not a substantial body of theory-driven empirical studies that demonstrate how innovation interacts with IT resources to enhance firm performance (for exceptions, see King and Burgess 2006; Huang and Liu 2005; Croteau and Raymond 2004; Johannessen, Olaisen, and Olsen 1999). The purpose of the present study is to contribute to the closure of this gap. We achieve this by investigating further the potential benefits of IT, here presented as investments by the firm in both tangible and intangible assets, for innovation pursuant to enhanced firm performance.

Although prior studies have established evidence of beneficial performance and productivity impacts of IT investments (see, e.g., Huang and Liu 2005; Bharadwaj, Bharadwaj, and Konsynski 1999; Bonk 1996), there is also considerable skepticism to the benefits of IT and, consistent with what has become known as the "productivity paradox" (Trott and Hoecht 2004), IT investments do not meet performance objectives (e.g., Clegg et al. 1997), or that there is little or no relationship between IT investment and firm performance (e.g., Powell and Dent-Micallef 1997). Various arguments have been put forward as to why there is a lack of consensus in the value of IT investment. For example, Powell and Dent-Micallef (1997) suggest that IT is now so readily available and, as such, does not offer competitive performance. Others point to mismeasurement problems related to inputs and outputs (Wilcock and Lester 1997), confusion related to generalization of studies due to issues related to the level of analysis, and the role of time lag effects between investment in technology and its payoff (Sangho and Kim 2006).

We acknowledge that although relationships among IT and strategic foci, such as innovation, and firm performance are the focus of considerable conjecture in various literatures (Sambamurthy, Bharadwaj, and Grover 2003; Johannessen, Olaisen, and Olsen 1999), further and ongoing investigation of these relationships in the context of small and medium-sized enterprises (SMEs) is warranted given the dramatic advancement of IT that has shifted SMEs to more advantageous positions in organizational flexibility and efficiency terms (Tanabe and Watanbe 2005; Izushi 2003; Larsen and Lomi 2002; Xiang and Lan 2001). …

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