How Should Firms Coevolve IT-Enabled Governance Capabilities With Regulatory Regimes?

Arun Rai and Jessica Pye, Georgia State University

Abstract

Our study is at the intersection of institutional governance and the firm’s IT governance capabilities. We develop the idea that IT capabilities for governance coevolve with the institutional environment. Prior research has seen that firms are investing significantly in developing IT capabilities for a range of governance activities (Aral and Weill 2007; Xue et al. 2011). While previous IS research has examined IT capabilities and firm performance (Aral and Weill 2007; Bharadwaj et al. 1999), the literature largely ignores how firms should coevolve its IT-enable governance capabilities within institutional regulatory contexts that change.

We situate our study in the U.S. electric utility industry (EUI). At the Federal level, the Energy Information Administration (EIA) collects, analyzes, and publicizes energy information that promotes policymaking and the Federal Energy Regulatory Commission (FERC) regulates interstate transmission of natural gas, oil, and electricity. Below this level, states are given autonomy in introducing deregulation policies, and, at any time, the states exhibit significant variance in the state of regulation (i.e., regulated vs. deregulated vs. suspended) as well as debates about regulation (i.e., uncertainty). The EUI is an ideal setting for our study as it enables us to control for the product characteristics, as electricity is a unique commodity: It cannot be efficiently stored; its characteristics are standardized and differ only in the production location. Therefore, supply has to match demand at any time period to avoid shortages, i.e., production and consumption happen simultaneously. These demands have led firms to invest in inter- and intra-firm IT coordination capabilities.

Previous research has examined inter- and intra-firm capabilities in various contexts (Bharadwaj et al. 2007; Rai et al. 2006; Rai and Tang 2010; Ray et al. 2005; Wooldridge 2009) and have concluded that inter-firm capabilities reduce transaction costs in market, whereas intra-firm capabilities reduce internal organizational costs. While the IS literature has examine these capabilities in various environments, the influence of these capabilities as sources of governance has not been explored in the realm of regulatory uncertainty and deregulation.

We collected data from several archival sources for 360 utility-firms to construct a panel dataset from 1994-2003. The data includes 6685 IT investment decisions made by these firms. Our data also contains detailed information at the state level on (a) transition from regulation to deregulation as well as suspension of regulation and (b) regulatory uncertainty. We developed a coding procedure to classify an IT investment as either inter-firm process integration or intra-firm process integration. We use a firm’s investments in each of these attributes as a proxy for a firm’s decisions to develop IT process integration capabilities based on the logic that the size of investment is a proxy for the emphasis that it places on capability development (Argyres 2011). We applied a two-stage coding scheme following Rai et al. (2012).

We developed various multilevel-mixed models to gain an integrated understanding across our institutional context. These models allows for the natural representation of the multi-level features of institutional analysis at the firm and state level as well as account for any firm or state heterogeneity. We find that (a) Deregulation Levelt has a significant negative effect on Tobin’s Qt+1 for each of the models; (b) Intert has a significant negative influence on Tobin’s Qt+1; (c) Intrat*Deregulation Levelt has a positive significant influence on Tobin’s Qt+1; (d) Intert*Regulatory Uncertaintyt has a positive significant influence on Tobin’s Qt+1.

Our study has implications on how IT governance capabilities need to be evaluated in regulatory context. Our study also extends the discussion on (a) adoption of systems with governance capabilities, (b) development of IT capabilities and governance, and (c) choice and portfolios of governance mechanisms. Our contribution is to the understanding of IT-enabled firm governance in the context of regulatory regimes across institutions over time.

References

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