Competition makes IT better: Evidence on when firms use IT more effectively

Abstract

We study how technology upgrading through investment in information and communication technologies (IT henceforth) influences firm performance in the context of a developing country. We rely on a novel firm-level data set covering a large sample of Mexican manufacturing companies with detailed information on IT. We show that the impact of IT investment is only positive for firms that were exposed to an exogenous competitive shock due to the increase in competition from China after its WTO accession. We argue that incentives provided by competition are key in leading firms to make more effective use of the new information technologies. We also find evidence that these results are driven by the complementarity between IT investments and organizational or process changes within firms, specifically under the incentives of heightened international competitive pressures.