IJFPSS, Vol 2, No.3, pp.

57-64 , Sep , 2012

M.M. Bagheri

Relationship among Information Technology Investment,

Firm Performance, Innovation and Firm Growth, Case Study:
Largest Iranian Manufacturers
Mahdi Mohammad Bagheri1, Abu Bakar Bin Abdul Hamid1, Ali Rezaei1, Abbas Mardani1
1

Department of Management, Faculty of Management and Human Resource Development,

University Technology Malaysia, 81310 UTM Johor Bahru, Johor, Malaysia
Email: mahdi_moba@yahoo.com

(Received Ague 2012; Published Sep 2012)

ABSTRACT
Information technology is the main item for improve the firm performance for organizations. On the basis of the resourcebased view, this paper investigates relationship between Information Technology (IT) investments and firm performance. The
research assesses whether innovation is moderated by firm growth and this study investigated the mediation effects of
innovation on ITs impact on firm performance. A set of hypotheses rooted in the resource-based view theories of the firm
was created and empirically tested. Survey email invitation approach was employed to send a letter of invitation to 1,100
potential participants at 300 firms to participate in the study. To analyze the data, both mediated regression and hierarchical
linear regression models were utilized; and following controlling for firm growth. The results of this study indicate that IT
increases the innovation of the firm. Innovation improves firm performance in terms of financial and operational. Results also
indicate that ITs impact on innovation is significantly moderated by firm growth. Finally, the results indicate that ITs
impact on firm performance is through innovation. This suggests that firms should consider IT investments that improve the
firms capabilities in order to achieve a significant impact on firm performance. The main purpose of this paper is to offer the
new perspectives in illumination how IT can create a sustained competitive advantage for the firm.
Key words: Information Technology (IT), Firm Performance, Firm Growth, Innovation, largest Iranian

manufacturers

INTRODUCTION
There are plethora of studies that have sought to identify
the complicated relationship between IT investments,
productivity, and performance which resulted in a number of
various definitions and conceptualizations of the variable of
IT investment. The definition, and thus the conceptualization
of IT investments, differs based on whether the study data are
driven from a survey or are obtained from archival sources.
Broadly speaking, IT investments encompass all the
expenditures and spending made by the firm on computers
and telecommunications resources, for example, hardware,
software, and related services (J. Dedrick, Gurbaxani, V., &

Kraemer, K. L, 2003). In another survey- based study, (P.

Weill, & Broadbent. M., 1998) conceptualized IT
investments as dollars invested in all computers,
hardware, software, communications, phone, fax, data, and
the people dedicated to providing IT services. Nevertheless,
most researchers have defined IT investments in a different
way. In fact, in most studies, IT investment is only limited to
hardware expenditures. In reality, firms have continued to
invest greatly in software, although it is not easy to expound
on these investments, partly because there is no metrics for
quantifying and measuring units of common as well as
custom software, contrasting with the case with packaged
57

IJFPSS, Vol 2, No.3, pp. 57-64 , Sep , 2012

software. Economists and management scholars concur on
the role of innovations in creating economic rents at the
levels of firm, industry, or economy (Brynjolfsson, 2009;
Porter, 1990; Schumpeter, 1942/87; Scott, 2008; A. H. Van
de Ven, 1986). Firms that are determined and persistent
innovators have been illustrated to appropriate superior
economics rents in comparison with their competitors (Scott,
2008). Alternatively, IT has permeated many phases of
organizations and is being used, for example, to internally
control, coordinate, and facilitate organizational processes
and management for decision-making. To contribute to and
facilitate interactions with consumers, suppliers, and other
stakeholders as shown in the use of consumer relationship
management as well as supply chain management systems
respectively ,firms have externally made IT investments (Li,
2006).
IT INVESTMENT AND FIRM PERFORMANCE
Firms are making considerable amounts of investments in
IT resources presuming that these investments result in
payoff (Liu & Ravichandran, 2008; Radhakrishnan, Zu, &
Grover, 2008; Xue, Liang, & Boulton, 2008). In many firms,
IT expenditures and spending are approximately 3% of the
total sales (Kobelsky, 2008) and roughly 40% of the firms
total capital expenditures (Ranganathan & Brown, 2006).
According to literature related to IT, there are many
researches that have sought to illustrate the returns from these
investments at the levels of firm, industry, or economy (J.
Dedrick, Gurbaxani, V., & Kraemer, K. L., 2003; Melville,
Kraemer, & Gurbaxani, 2004). Most of these researches have
been either conceptual or empirical. Researchers who
investigated IT investments under the IT strategy rubric have
examined the IT deployments, for example, Supply Chain
Management (SCM), Enterprise Resource Planning (ERP),
and Customer Relationship Management (CRM) and their
relationships with firm performance (Hayes, 2001; Poston &
Grabski, 2001; Subramani, 2004; Subramani & Walden,
2001) or new IT-enabled strategies that result in improved
business processes (D. Chatterjee, Pacini, C., &
Sambamurthy, V., 2002).
In studying the influence IT investments, based on ecommerce, on the market value of the firm, there is an event
study methodology to inspect the reactions of market to
announcements of 251 e-commerce initiatives by firms in
1998 (Subramani & Walden, 2001). In their study, IT
investment was defined as an announcement of a new
initiative related to electronic commerce or the expansion or
extension of an already existing initiative (p. 141) and
reported that the market reacts positively (i.e. stock price
increases) to firms that invested in e-commerce. Lastly, IT
management/capability researches are established on the
differences between firms laying stress on the employment
of IT or IT ability levels in the firm. Therefore, firms that
emphasize the employment of IT are categorized as
successful customers of IT and levels of ability is rooted in
the accessibility of top IT officials including Chief
Information Officers plus the roles they play in top
management teams (Bharadwaj, 2000; D. Chatterjee,
Richardson, V., & Zmud, R., 2001; Dehning, 2002;
Richardson, 2001b; Strassman, 1990). IT investments

M.M. Bagheri
account for almost 3% of many firms total sales (Henderson,
2007) and roughly 40% of many firms capital expenditures
(Karanja, 2011; Ranganathan & Brown, 2006). Another study
(P. Weill, 1992) suggested that IT investments results in great
triumph and pay-off when the firm enjoys a quality
management team committed to IT initiatives, whereas
attributed the superior firm performance to the superior
number of information workers.
INNOVATION AND FIRM PERFORMANCE
There is a suggestion that innovation is an essential to get
competitive advantage and organizational sustainability
(Porter, 1990). Organizations in the fast evolving knowledgeintensive service industries must pay close attention to
innovation (Howells, 2004; Miles, 2004). Innovation is new
ideas that are developed and implemented to achieve desired
outcome by people who engage in relationships with others
(A. Van de Ven, Polley, D.E., Garud, R., and Venkatamaran,
S., 1999). In addition, the concept of innovation has been
defined as a process that encompasses three overlapping
stages, such as, invention, innovation, and diffusion (Dosi,
1988; Enos, 1962; Mansfield, 1968). The first stage,
invention is the instigation of a new idea, process, or product
that is not necessarily economically valuable (Granted
patents), whilst the second stage, innovation, is the medium
that drives inventions to usability. Usability is the ability and
capability of the innovation to create economic rents for the
investing body by meeting the consumers or users needs.
Lastly, the third stage, diffusion, is the process whereby the
innovation travels from the industry to the customer market
and is welcomed by the users (Patent citations); also called
the adoption of an innovation (Rogers, 1995).
Since then, a concurrence has been reaching on the role of
innovation in greater firm performance, growth, and survival
(Christensen, 1996; G. Hamel, & Prahalad, C. K., 1994;
OReilly, 2004; Teece, Pisano, & Shuen, 1999; Zahra &
Covin, 1995). Nevertheless, maintaining a competitive
benefit through innovation is not as easy as it may look; and
firms that are determined and persistent innovators invest a
lot in relation to time, equipment, and personnel in studying
innovation. This is even more intimidating in environments
featured by resource immobility, in which the resource-based
view does argument for innovation as a key driver of firm
productivity, profitability, and survival (Barney, 1991b; G.
Hamel, 2000). Lack of or sluggishness in persistent
innovativeness has been demonstrated to result in shifts in
market dominance and supremacy from one generation to
another. For example, in the personal computer (PC)
industry, market domination has changed from Altair to
Tandy, to Apple, to IBM, to Compaq, to Dell, to HP (Tellis,
2001). The shift has been followed by superior and greater
firm performance of the leader firm.
FIRM GROWTH AND INNOVATION
Flourishing and growth in the economy is generally the
outcome of the interaction between savings and upgrading
and improvement in production efficiency (Foster, 2008;
Heshmati, 2003). Literature which explores firm growth dates
back to the influential work of Edith Penrose, The theory of
58

IJFPSS, Vol 2, No.3, pp. 57-64 , Sep , 2012

the growth of the firm (1959), where she outlined the
principles which guide the growth of the firm and the tempo
at which firms can efficiently and effectively grow. Penrose
also outlined the drivers of the tempo and direction of the
growth of the firm, including current knowledge bases, the
availability of top managerial and technical expertise, and
other related firm resources. Firm growth is a global strategic
plan; and when a firm shows positive growth, it signals that
the firms strategies are working (Grant, 2001). There are
compelling arguments on the tie between firm growth and
innovation grounded on broad theoretical and descriptive
assumption of the role of innovation in expanding and
extending the firm market share. For example, another author
demonstrates the results of the Mckinsey Global Survey of
Business Executives, who maintains that innovation is what
their firms need most for growth (Carden, 2005). From an
economic point of view, researches have also demonstrated
the role of firm growth in boosting innovation (Geroski,
2005). A number of researchers have recently empirically
illustrated the role that innovation plays in booming the
growth of the firm and vice-versa.

M.M. Bagheri

Figure 1, Research Model

As shown in Figure 1, the conceptual model developed for

this study is based on the extent to which IT improves
innovation and its impact on firm performance. This figure is
the operational definition for the constructs in this study. The
model also tested the impact of firm growth factors on the
effectiveness of IT in improving innovation and performance.
It explored the effects of increased innovation on financial
and operating performance and the mediating effects of
innovation on IT's impact on firm performance.
METHODOLOGY

FIRM PERFORMANCE
Yet while researchers have addressed the concept of
performance as well as the role it plays in organizational
effectiveness and efficacy for a long time (Campbell, 1977;
Kirchoff, 1997; Steers, 1977), it still remains one of the
controversial issues to both academics and business
practitioners (Ravichandran, Liu, Han, & Hasan, 2009;
Venkatraman, 1986). It is argued that researchers findings
lack consistency in terms of the definition and
operationalization of business performance. Although the
literature on studies addressing this issue is increasing, they
are concurrently becoming divergent, consequently
diminishing the chances of agreement in basic terminology
and definitions (Richard, 2009). Nevertheless, there is
concurrence that firm performance is influenced by the
strategies and operations in the market as well as non-market
environments (Orlitzky, 2003) and the present study
measures the firm performance with two dimensions
including
financial
performance
and
operational
performance.
HYPOTHESES
The hypotheses proposed in our research model consist of:
H1: IT Investments will be positively related to innovation.
H2: Innovation will be positively related to firm
performance.
H3: The impact of IT on innovation is moderated by firm
growth factor.
H4: IT impacts firm performance through the mediator
innovation.
CONCEPTUAL FRAMEWORK
The purpose of this study was to determine the extent to
which information technology (IT) improves innovation and
its impact on firm performance. The research model shows in
figure 1.

Sample
The section of analysis for this study was a sample of the
largest Iranian manufacturers from various industries. A total
of 1500 managerial personal of Iranian manufacturing firms
from various industries participate in this survey. These firms
located in four provinces including: Tehran, Markazi,
Esfahan and Yazd. A total of 1500 participants submitted
responses, resulting in a total of 1500 responses (n = 1500) in
300 companies that were included in this study's data
analysis. The respondents were asked three questions relevant
to their position to better understand the role of the
participant in the companies. Table 1 provides further
demographic information about this research.
Table 1. Sample demographics
Type of industry

Frequency

Automotive
Electronics and ICT
Chemical
Food
Plastic
Pharmaceutical
Textile
Mechanical
Others
Total

40
50
40
40
30
30
20
20
30
300

n
200
250
200
200
150
150
100
100
150
1500

Percent
0.13
0. 17
0.13
0.13
0.10
0.10
0.07
0.07
0.10
1.00

RESEARCH DESIGN
The research design for this study was quantitative method
and data collected from an online survey. Quantitative data
were collected for the majority of the questions using forcedchoice rating and a rating scale.
SURVEY INSTRUMENT
The survey questions were developed by the researchers
based on a review of the literature as presented in literature
review section. The survey was completed by respondents.
59

IJFPSS, Vol 2, No.3, pp. 57-64 , Sep , 2012

The survey consists of four constructs: (1) Firm growth
factor. (2) IT investment. (3) Innovation factor and (4) firm
performance. All constructs contained quantitative questions
with two optional open-ended questions at the end of the
survey that obtained qualitative data. The first construct
consisted of survey questions that collected data on firm
growth. This item was selected in order to determine if it
moderated the impact of IT on innovation. The second
construct consisted of survey questions that collected data on
the firm's use of IT in achieving innovation. This section was
comprised of three questions that were rated using a 5-point
Likert scale ranging from 1 (not at all) to 5 (very large
extent). A 5-point Likert scale was used in the survey to
achieve higher statistical variability among responses
(Saraph, 1989). One of the three questions contained three
sub questions to be answered using the same 5-point Likert
scale. The third construct consisted of survey questions that
collected data on the extent that IT budget improves
innovation. This section was comprised of three questions,
each with three to four sub questions that were also rated
using the 5-point Likert scale. The fourth construct consisted
of survey questions that collected data on the impact of
innovation on firm performance. This section consists of one
question with five sub questions. This question was rated
using a 5-point Likert scale ranging from 1 (very negative) to
5 (very positive).
DATA COLLECTION
Survey Monkey's email invitation method was used to send
a letter of invitation to participate in the study to 1500
potential participants at 300 firms. The letter of invitation
explained the purpose of the research study, why they were
chosen to participate, assured confidentiality of their
responses, and advised them of their access to real-time
survey results. The letter of invitation requested their
voluntary participation in the study and provided the survey
hyperlink to consent to participate and begin the survey. This
link directed the participant to the informed consent. Upon
consent, the participant was taken to the survey.
DATA ANALYSIS
Confirmatory factor analysis
A survey method approach was used to analyze the data
collected. The quantitative data analysis consisted of
reliability and validity analysis, descriptive statistical
analysis, and inferential statistical analysis. Quantitative data
analysis was conducted using SPSS software packages. The
survey instrument was tested for reliability and validity on
the three constructs: IT investment and Firm Performance (2
items). First, Confirmatory Factor Analysis (CFA) loadings
were used to determine the content and construct validity of
the IT investment, innovation and Firm Performance
constructs. Construct validity, also referred to as content
validity, determines how accurately the survey items measure
the three constructs. Second, Cronbach's alpha test was used
for internal consistency reliability of the IT investment,
innovation and Firm Performance constructs. Cronbach's
alpha test determines the relation of the items in the
construct. If the individual survey items are sufficiently

M.M. Bagheri
interrelated, their combination in comprising a single
construct is justified for use in the study.
IT investment constructs. Table 2 presents the means,
standard deviations (SD), Cronbach's alpha (), and factor
loadings for the IT Use construct. The IT investment
construct had a Cronbach's alpha of 0.848, which represents
good reliability. Validity of the IT investment construct was
determined by measuring the construct/content validity.
Researchers use factor loadings to evaluate the model fit of a
construct. Researchers consider factor loadings below 0.4 as
low and above 0.6 as high. The factor loadings of the IT
investment showed high construct/content validity (IT2 =
0.775). In combination, the results of reliability and validity
testing indicate that the IT Use construct has both high
reliability and high content/construct validity in measuring
the use of IT in firms to innovation.
Innovation constructs. Table 2 presents the means,
standard deviations (SD), Cronbach's alpha (), and factor
loadings for the innovation construct. The innovation (INO)
construct had a Cronbach's alpha of 0.936, which represents
excellent reliability. Validity of the innovation construct was
determined by measuring the construct/content validity of the
construct. The factor loadings showed high construct/content
validity ( = 0.8092). The factor loading was significant
at the 95% level ( < 0.05). In combination, the results of
reliability and validity testing indicate that the innovation
construct has extremely high reliability and extremely high
content/construct validity in measuring the innovation of the
firms.
Firm Performance constructs. Table 2 presents the
means, standard deviations (SD), Cronbach's alpha (), and
factor loadings for the Firm Performance construct. The Firm
Performance (FP1) construct had a Cronbach's alpha of
0.872, which represents good reliability. The Firm
Performance construct has two sub constructs of financial
measures (FP1a) and operational measures (FP1b). Both of
these sub constructs also had good reliability with Cronbach's
alpha of 0.827 and 0.676, respectively. Validity of the Firm
Performance construct was determined by measuring the
construct/content validity of the five items comprising the
construct. The factor loadings of the sub constructs showed
high construct/content validity (FP2 = 0.880 and FP6
=1.080). Additionally, the five individual Firm Performance
items showed high construct/content validity ranging from
0.668 to 0.807. All factor loadings were significant at the
95% level (p<0.05). In combination, the results of reliability
and validity testing indicate that the Firm Performance
construct has both high reliability and high content/construct
validity in measuring the performance of the firm.
Table 2. Reliability and Validity of IT Investment (IT),
Innovation (INO), and Firm Performance (FP) Constructs
Construct
IT Investment (IT)
Innovation (INO)
Firm Performance (FP1)

Sub Construct Mean SD

2.763
2.968
3.660
FP1a
3.648
FP1b
3.680
Notes: Mean/SD of constructs measured along
(1=low, 5=high). N = 1500. = Cronbachs
consistency.

60

Factor

0.782 0.848 0.775

0.826 0.936 0.809
0.589 0.872
0.618 0.827 0.880
0.660 0.676 1.080
a 5-point Likert scale
alpha test of internal

IJFPSS, Vol 2, No.3, pp. 57-64 , Sep , 2012

M.M. Bagheri

HYPOTHESES TESTING RESULTS

This section presents the results of testing the hypotheses.
Hypothesis 1 and 2 were tested using regression analysis.
Hypothesis 3 was tested using hierarchical regression
analysis to determine if a moderating relationship existed
between firm growth factor and IT impact on innovation.
Hypothesis 4 was tested using causal steps strategy, product
of coefficients, and bootstrapping. Regression analysis was
conducted on (Baron, 1986): (1) dependent variable Firm
Performance on the independent variable IT, (2) the
mediating variable innovation on the independent variable IT,
and (3) the dependent variable Firm Performance on the
independent variable IT and mediating variable innovation.
Significance was determined by Type I error rates less than p
= 0.05 (two-tailed tests). Figure 2 presents the model of the
hypotheses tested.

Additionally, the analyses tested the relationship of

innovation on improving firm performance in terms of
financial measures and in terms of operational measures. The
results of testing H2 infer that innovation is a significant
predictor of improving firm performance (Adjusted R Square
= 0.291, t = 8.92, = 0.392, p < 0.01). Innovation explains
29.1 percent of change in firm performance. Based on these
results, the alternative hypothesis H2 was accepted.
Hypotheses testing on the financial measures of firm
performance (H2a) infer that innovation is a significant
predictor of firm performance. (Adjusted R Square = 0.224, t
= 7.52, = 0.360, p < 0.01). As a result, the null hypothesis
of H02c was accepted. Hypotheses testing on the operational
measures of firm performance (H2d) infer that innovation is a
significant predictor of improving firm performance
(Adjusted R Square = 0.289, t = 8.89, = 0.440, p < 0.01).
As a result, the null hypotheses of H02d, was accepted. In
summary, the results of testing null hypothesis 2 and its sub
null hypotheses suggest that innovation is an important
predictor of improving firm performance. Tests of this
hypothesis and the related sub hypotheses provide strong
support that innovation improves firm performance with
powerful and comprehensive impacts on all measured aspects
of financial and operational performance.
Table 4. Analysis of Hypothesis H02 and its Sub Hypotheses as
Tested Using Regression Analysis
Hypotheses

Figure 2 Hypotheses Model

Hypothesis 1: IT increases innovation.

To test this hypothesis regression analysis was conducted.
Table 3 presents the regression analyses of innovation on IT
investment. The regression analysis tested the relationship
between the firm's use of IT and innovation to determine if IT
increases innovation. The results of testing H1 infer that IT is
a significant predictor of increasing innovation (Adjusted R
Square = 0.485, t = 13.33, = 0.722, p < 0.01). IT explains
48.0 percent of change in innovation Based on these results,
the alternative hypothesis H1 was accepted. In summary, the
results of testing the hypothesis 1 suggest that IT is an
important predictor of increasing innovation. The tests of this
hypothesis provide strong support that IT increases
innovation.
Table 3. Analysis of Hypothesis H1 as Tested Using Regression
Analysis
Hypotheses DV IV

SE
t
p*
H1
INO IT 0.725 0.054 13.34
0.000
Note. *Regression coefficient at < 0.01 level.

R2(adj)
48.0%

Hypothesis 2: Innovation improves firm performance.

The following null sub hypotheses were tested:
H2a: innovation improves firm performance in terms of
financial measures.
H2b: innovation improves firm performance in terms of
operational measures.
Table 4 presents the regression analyses of innovation
comprising the firm performance construct including its sub
constructs of financial measures and operational measures on
the innovation construct. The regression analyses tested the
relationship between innovation and firm performance to
determine if innovation improves firm performance.

H2
H2a
H2b

DV

IV

SE

p*

R2(adj)

FP
FP1
FP2

INO
INO
INO

0.392
0.360
0.440

0.044
0.048
0.050

8.92
7.52
8.89

0.000
0.000
0.000

29.1%
22.4%
28.9%

Note. *Regression coefficient at p<0.01 level. INO = Innovation, FP =

Firm Performance, FP1 = Financial Measures (Firm Performance sub
construct), FP2= Operational Measures (Firm Performance sub construct).

Hypothesis 3: The impact of IT on innovation is

moderated by firm growth factor.
H3 investigated the impacts of moderating variable firm
growth factors. Table 5 presents the results of testing the
combined firm growth infer that the impact of IT on
innovation is moderated by firm growth factors. Specifically,
a significant relationship was found between the IT impact on
the innovation with moderator by firm growth (t = 2.29, =
0.128, p < 0.025). In summary, the results of testing the
hypothesis 3 suggest that firm growth (FG) is an important
for increasing innovation. The tests of this hypothesis provide
strong support that firm growth (FG) increases innovation.
Table 5. Analysis of Hypotheses H3 as Tested Using Hierarchical
Regression Analysis
Hypotheses DV IV
SE
t
p
R2(adj
H3
INO FG 0.128 0.034
2.29
0.025 50.5%
Note.*Regression coefficient at p<0.01 level. INO= (Innovation
construct), FG= Firm Growth

Hypothesis 4: IT impacts firm performance through the

mediator innovation.
The mediating role of innovation was investigated to
determine if this intervening variable explains how IT affects
firm performance. That is, does IT impact firm performance
through innovation? This hypothesis was tested using causal
steps strategy, product of coefficients, and bootstrapping.
61

IJFPSS, Vol 2, No.3, pp. 57-64 , Sep , 2012

M.M. Bagheri

Table 6 presents the regression analyses for all three steps. As

shown, a significant relationship was found between IT and
firm performance, between IT and innovation, and between
IT, innovation and firm performance as all p values were less
than 0.05 for all three regression equations. Further, the
coefficient of regression was lower for IT in the third
equation ( = 0.229), than in the first equation ( = 0.403).
That is, the impact of IT on firm performance is less when the
mediation variable innovation is introduced into the
regression equation. This suggests that innovation is a
mediator. However, while the significance of the mediation
effect is strongly suggested, it is not statistically tested.

concerned with how IT adds value to the firm (Sambamurthy,

Bharadwaj, & Grover, 2003). The insights gained from the
mediation effects of innovation suggest that IT deployments
focused on improving the innovation to strategies for
improving firm performance.
Table7. Mediation of the Effect of IT on Firm Performance
through Innovation Product of Coefficients Bootstrapping

Table 6) Causal Steps Strategy of H4

IV
SE
t
IT 0.403 0.046 8.73
IT 0.725 0.054 13.34
IT 0.229 0.062 3.71
FG 0.240 0.059 4.06
Note. *Regression coefficient at < 0.01 level.
FG = firm growth, FP = Firm Performance.
Hypotheses Step DV
H4
1
FP
2
FG
3
FP

p
0.000
0.000
0.000
0.000

R2(adj)
28.1%
48.0%
33.5%

To test the significance of the mediating effect of

innovation (indirect effect) the product of coefficients test
was used. This test is based on the product of the indirect
effects at a 5% level. As shown in Table 7, the results of the
product of coefficients test confirmed the significance of
innovations indirect effects ( = 0.174; p < 0.01). That is, IT
impacts firm performance through the mediator innovation.
However, the product of coefficients test assumes the
products of the coefficients is normally distributed, which is
unlikely. The final step in determining innovation as a
mediator for IT impact on firm performance was conducted
using the nonparametric bootstrapping test (Preacher &
Hayes, 2008). Five thousand bootstrap samples were used in
this re-sampling procedure to estimate the empirical
distribution of indirect effects and to determine the
significance of the indirect effect. Based on this distribution,
the regression coefficients, standard errors, and the percentile
confidence intervals (95% level) were calculated. As shown
in Table 7, the confidence interval was 0.082 to 0.266. Since
zero is not within the confidence interval, the indirect effect
is statistically significant at the 95% level. That is, the
bootstrapping test confirmed that IT impacts firm
performance through the mediator, innovation. In summary,
the mediating role of innovation on IT impact on firm
performance was investigated using three testing methods.
First, causal steps strategy tested the direct effects of IT on
firm performance, IT on innovation, and IT and innovation
on firm performance. The results suggested a mediation
effect. Next, the product of coefficients statistically tested the
indirect effects, assuming a normal distribution, and
confirmed the mediation effect. Finally, bootstrapping
statistically tested the indirect effects by creating a
distribution of the product of coefficients that also confirmed
the mediation effect. Confirmation of the mediation effect by
all three tests, causal steps strategy, product-of-coefficients,
and bootstrapping, provides a robust confirmation of the
mediating relationship of innovation on IT impact on firm
performance. Based on the results of all three tests, H 4 was
accepted. As the mediation results show, IT improves firm
performance by improving the firms innovation. This
finding is most important to IT professionals who are

Point
Estimate

SE

IT

0.229

0.059

Direct Effects
3.887

0.000*

0.113

0.326

INO

0.240

0.063

3.818

0.000*

0.117

0.363

0.174

Indirect Effects
0.047
3.703
0.000*

0.082

0.266

INO

P-Value Lower

95% CI
Upper

Not: 5,000 bootstrap samples. CI = confidence Interval. FP = Firm

Performance; IT = Information Technology; INO = Innovation. < .05;
> 1.96., Direct effects: dependent variable = FP (firm performance),
independent variables IT and INO (Innovation).

IMPLICATIONS AND CONCLUSION

A large scale study with a larger sample size might provide
a greater confidence in relation to the generalizability of the
findings from the current research, the analysis and
diagnostics employed in the study did not disclose any reason
for concern in terms of the quality of the data. In spite of the
modest sample sizes, the results are consistent with the
theoretical assumptions and expectations. Making use of
patents as measures of innovation can cause some limitations
too. However, there is a long-lasting debate on the
application of raw-patents counts as a measure of innovation
productivity at the levels of firm, industry or economy
(Archibugi, 1992; Cohen, 1989; Dosi, 1988; Griliches, 1998).
In this vein, some critic have made argument that; 1) there
are patenting discrepancies both at the national, international,
industry, or economy level; 2) there are patenting differences
between large and small corporations; 3) patents should not
be treated equally ,weight should be assigned in accordance
with the economic value of the patent; 4) patents are the end
products of a complex R&D process that might lead to no
patents but still offer a firm other supplementary intangible
benefits; and 5) some patents take quite a long time to be
fully developed and applied-for and consequently might not
be directly connected with the IT investments overlapping
their application or grant years. The findings of this study
imply that IT enhances the innovation to granted patents
through improving information quality in regard with
adequacy, accuracy, accessibility, and appropriateness. IT
also augments the innovation to patent citations. The results
of the present study recommends that innovation contributes
to and improves firm performance in relation to sales,
profitability, market share, speed to market, and customer
satisfaction, although in varying degrees. The results have the
implication that IT influence on firm performance is through
innovation. This proposes that firms should give priority to
investments in IT that enhance the granted patents and patent
citations to achieve a significant influence and impact on firm
performance. The current study has also provided evidence
that all items which are measured in innovation are
significant.
62

IJFPSS, Vol 2, No.3, pp. 57-64 , Sep , 2012

REFRENCES
Archibugi, D. (1992). Patenting as an indicator of
technological innovation: A review. Science and Public
Policy, 6, 357358.
Barney, J. B. (1991b). The resource based view of strategy:
Origins, implications and prospects. Editor of Special
Theory Forum in Journal of Management, 17, 97-211.
Baron, R. M., & Kenny, D. A. (1986). The moderatormediator variable distinction in social psychological
research:
Conceptual,
strategic,
and
statistical
considerations. Journal of Personality & Social
Psychology, 51, 1173-1182.
Bharadwaj, A. (2000). A Resource-Based perspective on
information technology capability and firm
performance: An empirical investigation. MIS Quarterly,
24, 169-196.
Brynjolfsson, E., & Schrage, M. (2009). The new, faster face
of innovation: Thanks to technology, change has never
been so easy-or so cheap. MIT Sloan Management Review.
Retrieved
from
http://sloanreview.mit.edu/businessinsight/articles/2009/3/5139/the-new-faster-faceofinnovation/.
Campbell, J. P. (1977). On the nature of organizational
effectiveness. In P.S. Goodman, J. M. Pennings, &
Associates (Eds.), New perspectives on organizational
effectiveness. San Francisco: Jossey-Bass, 13-55.
Carden, S. D. (2005). What global executives think about
growth and risk. McKinsey Quarterly, 2, 1625.
Chatterjee, D., Pacini, C., & Sambamurthy, V. (2002). The
Shareholder Wealth and Trading Volume Effect of IT
Infrastructure Investments. Journal of Management
Information Systems, 19(2), 7-43.
Chatterjee, D., Richardson, V., & Zmud, R. (2001).
Examining the shareholder wealth effects of new CIO
position announcements. MIS Quarterly, 25(1), 43-70.
Christensen, C. M., & Bower. J. L. (1996). Customer power,
strategic investment, and the failure of leading firms.
Strategic Management Journal, 17(3), 197-218.
Cohen, W. M., & Levin, R. C. (1989). Empirical studies of
innovation and market structure. In R. Schmalensee & R.
Willig (Eds.). Handbook of Industrial Organization,
Amsterdam: Elsevier, 2, 1059-1107.
Dedrick, J., Gurbaxani, V., & Kraemer, K. L. (2003).
Information technology and economic performance: A
critical review of empirical evidence. ACM Computing
Surveys, 35(1), 1-28.
Dedrick, J., Gurbaxani, V., & Kraemer, K. L. (2003).
Information technology and economic performance: A
critical review of empirical evidence. ACM Computing
Surveys. 35(1), 1-28.
Dehning, B., & Stratopoulos, T. (2002). DuPont analysis of
an IT-enabled competitive advantage. The International
Journal of Accounting Information Systems, 3(2), 165176.
Dosi, G. (1988). Sources, procedures and microeconomic
effects of innovation. Journal of Economic Literature, 26,
11201171.
Enos, J. L. (1962). Petroleum progress and profits.
Cambridge, MA: The MIT Press.
Foster, L., Haltiwanger, J., & Syverson, C. (2008).
Reallocation, firm turnover, and efficiency: Selection on

M.M. Bagheri
productivity or profitability? The American Economic
Review, 98(1), 394-450.
Geroski, P. A. (2005). Understanding the implications of
empirical work on corporate growth rates. Managerial and
Decision Economics, 26(2), 129-138.
Grant, R. (2001). Contemporary strategy analysis: Concepts,
techniques, applications. London: Blackwell Publishers.
Griliches, Z. (1998). R&D and productivity: The econometric
evidence. Chicago: The University of Chicago Press.
Hamel, G. (2000). Leading the Revolution. Boston: Harvard
Business School Press.
Hamel, G., & Prahalad, C. K. (1994). Competing for the
future: Breakthrough strategies for seizing control of your
industry and creating the markets of tomorrow. Boston:
Harvard Business School Press.
Hayes, D. C., Hunton, J. E., & Reck. J. L. (2001). Market
reaction to ERP implementation announcements. Journal of
Information Systems. 15(1), 3-18.
Henderson, C., Kobelsky, K., Richardson, V. J., & Smith, R.
E. (2007). The relevance of information technology
expenditures. Working paper, University of Arkansas.
Heshmati, A. (2003). Productivity growth, efficiency and
outsourcing in manufacturing and service industries.
Journal of Economic Surveys, 17(1), 79-112.
Howells, J. a. T., B.S. (2004). Innovation in services: issues
at stake and trends. A Report for DG Enterprise of the
European Commission, under contract INNO Studies 2001.
Karanja, E. (2011). The mediating of innovation on the
relationship between information technology investment
and firm performance: An empirical study.(Dissertation).
ProQuest LLC.
Kirchoff, B. (1997). Organization effectiveness measurement
and policy research. Academy of Management Review,
2(3), 347-355.
Kobelsky, K., Richardson, V. J., Smith, R. E., & Zmund, R.
W. (2008). Determinants and consequences of firm
information technology budgets. The Accounting Review,
83(4), 957-995.
Li, S., Sun, B., & Wilcox, R. T. (2006). Cross-selling
sequentially ordered products: An application to consumer
banking services. Journal Marketing Research, 42(2), 233239.
Liu, Y., & Ravichandran, T. (2008). A comprehensive
investigation on the relationship between information
technology investments and firm diversification.
Information Technology and Management, 9(3), 169-180.
doi: 10.1007/s10799-008-0042-1
Mansfield, E. (1968). The Economics of Technological
Change. New York, NY: W. W. Norton, New York.
Melville, N., Kraemer, K., & Gurbaxani, V. (2004). Review:
information technology and organizational performance: an
integrative model of it business value. MIS Q., 28(2), 283322.
Miles, I. (2004). Innovation in services. in J. Fagerberg, D.
Mowery and R. Nelson (eds.),Understanding innovation.
Oxford: Oxford University Press.
OReilly, C. A., & Tushman, M. L. (2004). The
ambidextrous organization. Harvard Business Review,
82(4), 7481.

63

IJFPSS, Vol 2, No.3, pp. 57-64 , Sep , 2012

Orlitzky, M., Schmidt, F.L., & Rynes, S. L. (2003).
Corporate social and financial performance: A
metaanalysis. Organization Studies, 24(3), 403-441.
Porter, M. (1990). The competitive advantage of nations.
New York, NY: Free Press.
Poston, R., & Grabski, S. (2001). Financial impacts of
enterprise resource planning implementations. [doi:
10.1016/S1467-0895(01)00024-0]. International Journal of
Accounting Information Systems, 2(4), 271-294.
Preacher, K., & Hayes, A. (2008). Asymptotic and
resampling strategies for assessing and comparing indirect
effects in multiple mediator models. Behavior Research
Methods, 40(3), 879-891. doi: 10.3758/brm.40.3.879
Radhakrishnan, A., Zu, X., & Grover, V. (2008). A processoriented perspective on differential business value creation
by information technology: An empirical investigation.
[doi: 10.1016/j.omega.2006.06.003]. Omega, 36(6), 11051125.
Ranganathan, C., & Brown, C. V. (2006). ERP Investments
and the Market Value of Firms: Toward an Understanding
of Influential ERP Project Variables. Info. Sys. Research,
17(2), 145-161. doi: 10.1287/isre.1060.0084
Ravichandran, T., Liu, Y., Han, S., & Hasan, I. (2009).
Diversification and Firm Performance: Exploring the
Moderating Effects of Information Technology Spending.
J. Manage. Inf. Syst., 25(4), 205-240. doi:
10.2753/mis0742-1222250407
Richard, P. J., Devinney, T. M., Yip, G. S., & Johnson, G. .
(2009). Measuring organizational performance: Towards
methodological best practice. Journal of Management,
35(3), 718-804.
Richardson, V. J., & Zmud. R. W. (2001b). Wealth effects
accompanying appointments of outside directors to the
boards of internet companies. Working paper.
Rogers, E. (1995). Diffusion of innovations (4th ed.). New
York, NY: Free Press.
Sambamurthy, V., Bharadwaj, A., & Grover, V. (2003).
Shaping agility through digital options: reconceptualizing
the role of information technology in contemporary firms.
MIS Q., 27(2), 237-263.
Saraph, J. V., Benson, P. G., & Schroeder, R. G. (1989). An
Instrument for Measuring the Critical Factors of Quality
Management. Decision Sciences, 20(4), 810-829.
Schumpeter, J. A. (1942/87). Capitalism, Socialism and
Democracy. London, UK: Unwin.
Scott, D. A., Mark, W. J., & Joseph, V. S. (2008).
Institutionalizing innovation. MIT Sloan Management
Review, 49(20), 1-10.

M.M. Bagheri
Steers, R. (1977). Organizational effectiveness: A behavioral
view. The Goodyear series in management and
organizations. Santa Monica, CA: Goodyear.
Strassman, P. A. (1990). The Business of Value of
Computers. New Canaan, CT: Information Economics
Press.
Subramani, M. (2004). How do suppliers benefit from
information technology use in supply chain relationships?
MIS Q., 28(1), 45-73.
Subramani, M., & Walden, E. (2001). The Impact of ECommerce Announcements on the Market Value of Firms.
Info.
Sys.
Research,
12(2),
135-154.
doi:
10.1287/isre.12.2.135.9698
Teece, D. J., Pisano, G., & Shuen, A. (1999). Chapter 6 Dynamic Capabilities and Strategic Management. In H. Z.
Michael (Ed.), Knowledge and Strategy (pp. 77-115).
Boston: Butterworth-Heinemann.
Tellis, G. J., & Golder, P. (2001). Will and vision: How
latecomers grow to dominate markets. McGraw Hill.
Van de Ven, A., Polley, D.E., Garud, R., and Venkatamaran,
S. (1999). The innovation journey. University Press, New
York, NY.
Van de Ven, A. H. (1986). Central problems in the
management of innovation. Management Sciences. 32(5),
590-607.
Venkatraman, N., & Ramanujam, V. (1986). Measurement of
business performance in strategy research: A comparison
of approaches. The Academy of Management Review.
11(4), 810-814.
Weill, P. (1992). The relationship between investment in
information technology and firm performance: A study of
the valve manufacturing sector. Information Systems
Research, 3(4), 307333.
Weill, P., & Broadbent. M. (1998). Leveraging the new
infrastructure: How market leaders capitalize information
technology. Boston, MA: Harvard Business School Press.,
320.
Xue, Y., Liang, H., & Boulton, W. R. (2008). Information
technology governance in information technology
investment decision processes: the impact of investment
characteristics, external environment, and internal context.
MIS Q., 32(1), 67-96.
Zahra, S. A., & Covin, J. G. (1995). Contextual influences on
the corporate entrepreneurship-performance relationship: A
longitudinal analysis. [doi: 10.1016/0883-9026(94)00004E]. Journal of Business Venturing, 10(1), 43-58.

64