A comprehensive investigation on the relationship between information technology investments and firm diversification

This paper empirically investigates the role played by information technology in diversified firms by building a demand function for IT investments. First by reviewing the management literature, we briefly examine different types of diversification, including related diversification, unrelated diversification, and geographic diversification. After carefully developing the theoretical arguments we empirically test the relationship between IT investments and different types of diversification. We find that in general diversified firms demand more investments in information technology, but the positive relationship may also depend on the extent to which firms diversify. Our findings show that firms with diversified structures that increase the complexities of coordination and control, e.g. unrelated diversification or extensive geographic diversification, would face a lesser demand for IT investments because of the increased use of financial controls instead of strategic controls by these firms. Overall, we find that information technology can serve as an effective coordination and control mechanism for moderate levels of diversification whereas non-IT mechanisms for coordination and control becomes more suitable in a context of higher levels of diversification. The implications of these findings for research and practice are discussed.