Journal of Money, Investment and Banking

ISSN 1450-288X Issue 9 (2009)

© EuroJournals Publishing, Inc. 2009
http://www.eurojournals.com/JMIB.htm

The Effect of Information and Communication Technologies

Investments and Strategic Alignment on Greek
Firms’Performance

Euripidis Loukis
Department of Information and Communication Systems Engineering
University of the Aegean, 83200 Karlovassi, Samos, Greece
E-mails: eloukis@aegean.gr
Tel: +302273082221

Ioakim Sapounas
Department of Information and Communication Systems Engineering
University of the Aegean, 83200 Karlovassi, Samos, Greece
E-mails: isapounas@aegean.gr
Tel: +302273082221

Alexandros Milionis
Department of Statistics and Actuarial - Financial Mathematics
University of the Aegean, 83200 Karlovassi, Samos, Greece
E-mail: amilionis@aegean.gr
Tel: +302273082350

Abstract

Firms all over the world make significant investments in information and
communication technologies (ICT) aiming to increase their efficiency and effectiveness. It
is of critical importance to investigate the impact of these investments on firms’
performance in various contexts, and also identify ‘soft factors’ that can increase this
impact. This paper presents the results of an empirical investigation of the effect of ICT
investments on Greek firms’ business performance, measured through value added and
labor productivity. It also examines for first time in Greece whether and to what extent this
effect can be increased if ICT investments are aligned with business strategy. The study is
based on a unique research dataset, including data from 237 Greek firms about business
performance, usage of ICT, adoption of modern organization forms and innovation, which
has been collected through a questionnaire-based survey among Greek firms conducted in
cooperation with ICAP, one of the largest business information and consulting companies
of Greece. Using these data econometric models of output and labor productivity have been
estimated based on the Cobb-Douglas production function. It has been concluded that ICT
investments in Greece make a positive and statistically significant contribution to both firm
output and labor productivity, so there is no ‘ICT Productivity Paradox’ in Greece.
Additionally, it has been found that this contribution can be increased considerably, in the
firms for which a very high degree of bilateral relationship between the ICT Plan and the
Overall Business/Strategy Plan exists.
Journal of Money, Investment and Banking - Issue 9 (2009) 81

Keywords: Information and Communication Technologies Investment, Survey on

Information and Communication Technologies Investment, Business
Performance, Strategic Alignment, Cobb-Douglas Production Function.
JEL Classification Codes: O3, D24

1. Introduction
Firms all over the world have been making for long time considerable investment in information and
communication technologies (ICT), aiming to increase the efficiency of both their internal processes
(e.g. through the adoption of enterprise resource planning (ERP) systems) and their transactions with
their customers, suppliers and business partners (e.g. through the adoption of e-business systems)
(OECD 2003, 2004, 2008). The ICT investments in OECD countries rose from less than 15% of the
total non-residential investment in the early 80s, to between 15% and 30% in 2001, and are trending
upwards (OECD, 2004). With regard to the supply side, the ICT sector is one of the most dynamic
sectors of the economy, with higher than average growth rates and research intensity; this results in
ICT products and services becoming better and cheaper, leading to their wide adoption by the economy
(European Commission, 2007). Therefore it is of critical importance to investigate the benefits and the
value that ICT investments create for firms and their effect on firms’ business performance, and also to
identify ‘soft factors’ that can increase their business value. Previous research in this area has revealed
that the benefits from ICT investment vary significantly among firms, depending to a large extent on
the combination of ‘hard’ ICT investments (i.e. in computers’ hardware, software and networks) with
appropriate ‘soft investments’ in new organizational practices and skills, business process re-
engineering, innovation, etc. (OECD, 2003; OECD, 2004; Melville et al 2004; Arvanitis & Loukis,
2009).
One of these ‘soft factors’, which has been extensively discussed in the relevant literature, is the
strategic alignment of ICT. It is defined as the extent to which business strategies are enabled, supported
and stimulated by ICT strategies (Broadbent & Weil, 1993). Luftman (2000) provides a more detailed
definition stating that “Business-IT alignment refers to applying Information Technology in an appropriate
and timely way, in harmony with business strategies, goals and needs. This definition of alignment
addresses: 1. how IT is aligned with the business and 2. how the business should or could be aligned with
IT”. ICT strategic alignment has been ranked as the most important issue that IS managers face in several
recent formal surveys conducted by the Society for Information Management (SIM) of USA
(www.simnet.org) concerning the key IS management issues (Luftman & McLean, 2004; Luftman, 2005).
The contribution of ICT strategic alignment to ICT business value and to business performance
has been investigated in some empirical previous studies, which are reviewed in the next section.
However, most of them are based on managers’ subjective perceptions of business performance or
contribution of ICT to business performance, as their main dependent variables, and not on objective
measures of them. Also, they lack sound theoretical foundations, so they do not include all the
fundamental independent variables. Moreover, all these previous empirical studies of the impact of
ICT strategic alignment on ICT business value and business performance have been conducted in the
context of only a few countries with high levels of economic development and ICT diffusion, and large
markets, such as USA and UK. Therefore the results of these studies are conditional on the
characteristics of these particular national contexts, since the relevant literature emphasizes that the
national context is affect all issues and dimensions of ICT business value (e.g. OECD 2003, OECD
2004, Melville et al 2004).
This paper contributes to filling the above research gaps. It presents an empirical investigation
of the effect of ICT investments on business performance in the Greek national context. It is quite
interesting to investigate the abovementioned research questions in Greece, taking into account its
differences from the highly developed countries in which most of the empirical studies on this subject
have been conducted. Greece does not belong to the highly developed countries, though it has made
considerable economic progress in the last decade and has become a member of the European
Economic and Monetary Union. It is characterised by smaller size of internal market, smaller average
82 Journal of Money, Investment and Banking - Issue 9 (2009)

firm size, lower intensity of competition and lower level of ICT penetration and Internet usage than the
highly developed countries (High-level Committee for the Greek National ICT Strategy, 2005).
According to Eurostat (http://epp.eurostat.ec.europa.eu) the expenditure for IT hardware, equipment,
software and other services in Greece is at the level of 1.2% of the Gross Domestic Product (GDP),
while in the whole European Union it is much higher at the level of 3.0% of GDP; also, concerning
Internet electronic commerce, the sales that Greek firms conducted through the Internet are on average
1.1% of their total sales, while in the whole European Union they reach the level of 4% of total sales.
Since most of the firms of the sample used in this study are listed at the Athens Stock Exchange (ASE),
it should also be mentioned that several changes have occurred during the 90’s in the legislative and
regulatory framework regarding ASE and the listed firms towards harmonization with international
standards (for details see for instance Alexakis and Xanthakis, 1995; Laopodis, 2004; Milionis and
Papanagiotou 2008) as a result of these changes Morgan Stanley Capital International upgraded ASE to
a developed market status, while previously ASE belonged to the so-called European Emerging
Markets. However, despite these reforms, the Greek firms have still some idiosyncratic characteristics,
mainly related to corporate governance, that are noteworthy, as they are not usually found in firms
listed in other developed financial markets: in many firms, even in big ones, the majority of company
ownership belongs to members of the same extended family. For the above reasons it is of much
interest to investigate the effect of ICT investments and also their alignment with business strategy on
business performance under such country specificities, which may affect firms’ decisions concerning
the use and the management of ICT, and therefore the generation of business value from them.
However, the findings of this study will be interesting not only for Greece, but also for many other
countries, which are not highly developed and have similar characteristics.
A second contribution of this paper is that it examines the effect of aligning ICT investment
with business strategy, by using objective measures of business performance and ICT investment, and
including such measures in econometric models, which are founded on the well-established and
validated Cobb-Douglas production function (Nicholson, 2004).
Finally, a third contribution of this paper is that for investigating empirically the above research
questions we created a unique research dataset, through a questionnaire-based survey among Greek
firms, titled ‘Usage of information and communication technologies, modern organization forms and
innovation in the Greek companies’, conducted in cooperation with ICAP, one of the largest business
information and consulting companies of Greece. It includes data from 281 Greek firms concerning
business performance, ICT investment, ICT management (including ICT strategic alignment), non-ICT
investment, employment and management of human resources, adoption of new organisational
practices, innovation and quality management. No similar database combining these data components
exists in Greece. Our data allow the empirical investigation of many critical research questions
concerning the contribution of ICT investments to business performance, and also their relations and
complementarities with several ‘soft factors’ (such as adoption of new organisational practices,
innovation, human resources management and quality management).
The structure of the paper is as follows: in section 2 the background of this study is presented,
while in section 3 its research hypotheses, method and data are described. Then in section 4 the results
are presented and discussed. Finally in section 5 the conclusions are summarised.

2. Background
Considerable research has been conducted in order to investigate the relation between ICT investment
and business performance, due to the big ICT investments made by firms all over the world, which
pose the critical question of how productive these investments are. The first period of this research,
from the mid 1980s until the mid 1990s, contrary to expectations, provided very little empirical
evidence of a positive and statistically significant relation between ICT investment and business
performance (e.g. Strassman, 1990; Strassman, 1997). These early results posed critical questions to
managers and researchers concerning the productivity and the usefulness of ICT investments, usually
Journal of Money, Investment and Banking - Issue 9 (2009) 83

referred to as the ‘ICT Productivity Paradox’ (Brynjolfsson, 1993), which is summed up in R. Solow’s
statement that ‘you can see the computer age everywhere but in the productivity statistics’ (Solow
1987). However, the second period of this research, from the mid 1990s until today, has provided
empirical evidence of positive and statistically significant relation between ICT investment and some
measures of business performance (e.g. Brynjolfsson & Hitt, 1996; Stolarick, 1999; Gilchrist et al,
2001; OECD, 2003). Subsequent research in this area has revealed that the positive impact and the
benefits from ICT investment vary significantly among firms, depending to a large extent on the
combination of ‘hard’ ICT investments (e.g. in computers’ hardware, software and networks) with
appropriate ‘soft investments’ in new organizational practices and skills (organizational and human
capital) (Arvanitis, 2005; Arvanitis & Loukis, 2009), business process re-engineering (Grover et al,
1998; Loukis et al, 2009).
Also, for more than two decades there has been a high level of interest of both
researchers and practitioners in the alignment between ICT and business strategy, which is
founded on the recognition that ICT have a significant strategic potential, i.e. if properly
exploited they can have a significant strategic impact on the enterprise and provide valuable
competitive advantages. The theoretical foundations of the strategic potential of ICT have
been laid by the work of M. Porter (1980) on competitive strategy, which identifies three
generic business strategies: differentiation, cost leadership and focus; also it concludes that
organizations use these generic strategies in order to control five basic industry forces,
which determine their competitive position and profitability: rivalry among existing
competitors, bargaining power of suppliers, bargaining power of buyers, threat of substitute
products/services and threat of new entrants. Concerning ICT he argues that each of the
above strategies requires a different kind of ICT usage in order to be effectively
implemented; also, the above five forces can be favorably affected by using ICT. McFarlan
(1984) reinforced the above foundations of the strategic potential of ICT; he argues that
ICT can have a strategic impact, if they are used in order to build barriers against new
entrants, build switching costs, change the basis of the competition, generate new products
and services and change the balance of power in supplier relationships. Important is the
contribution of Porter & Millar (1985) on this topic, who identify three basic ways that ICT
can affect competition: by altering industry structures, supporting differentiation and cost
leadership strategies, and also by spawning entirely new businesses; they also argue that
ICT have strategic potential if they can add value to a product or service in at least one of
the primary activities (inbound logistics, operations, outbound logistics, marketing and
sales, after-sales support and services) or one of the support activities (human resources
management, technology development, infrastructure management, procurement) of the
value chain.
These foundations gave rise to considerable research concerning various aspects of ICT
strategic alignment. This research can be grouped into three basic streams:
I. Conceptualization and basic understanding of ICT strategic alignment. The main objective of
this research stream is to conceptualize and understand the strategic alignment of ICT, focusing
on the identification of its basic processes, barriers, critical success factors and benefits (King,
1978; Lederer & Mendelow, 1988; Earl, 1989; Jarvenpaa & Ives, 1990; Zviran, 1990; Chan,
1992; Earl, 1993; Luftman, 1996; Reich & Benbasat, 1996; Armstrong & Sambamurthy, 1999;
Luftman, Papp & Brier 1999; Luftman & Brier, 1999; Kearns & Lederer, 2000; Reich &
Benbasat, 2000; Allen & Wilson, 2003; Campbell et al, 2005; Rantham et al, 2005). This
research stream has provided a basic conceptualization and understanding of the strategic
alignment of ICT, concerning mainly its basic processes, barriers, critical success factors and
benefits. However, more in-depth research is required on these topics, in various types and
sizes of enterprises, in various industries and national and cultural contexts, and for various
types of ICT, in order to get a deeper and more complete understanding of them.
84 Journal of Money, Investment and Banking - Issue 9 (2009)

II. Development of models/frameworks for directing/assessing ICT strategic alignment. This

research stream aims to support the practical application in ‘real-life’ of the ICT strategic
alignment concept by developing models/frameworks for assisting the technical and the
business management in directing and assessing ICT strategic alignment. The most widely used
of the models/frameworks that have been developed for directing strategic alignment is the
‘Strategic Alignment Model’ (SAM) developed by Henderson and Venkatraman (1999).
Avison et al (2004) used successfully and validated this SAM in a financial services firm, and
finally concluded that it has a good conceptual and practical value; also they developed a
framework for its practical application, which enables the technology and business management
to determine the current level of alignment and to monitor and change it in the future as
required. Also, a number of models/frameworks have been developed for assisting technical
and business management in assessing the level of ICT strategic alignment in their
organization. The most widely used of them is the ‘Strategic Alignment Maturity Model’
(SAMM) developed by Luftman (2000). The research of this stream has produced some first
‘high-level’ models/frameworks for directing and assessing ICT strategic alignment, which
offer some basic guidance, but in general they require further elaboration, evolution and
adaptation to the new ICT that are continuously emerging and the new models of their
exploitation by modern organizations.
III. Impact of ICT strategic alignment on the business performance. This third research stream aims
to investigate the impact of ICT strategic alignment on business performance or on the
contribution of IS to business performance. In this stream, despite its significance, has been
conducted less research work than in the other two. King & Teo examined empirically the
impact of four types of integration between the business plan (BP) and the information systems
plan (ISP) (administrative, sequential, reciprocal and full integration) on the
perceived contribution of ICT to various measures of organizational performance and
on the perceived extent of various types of ISP problems (organization problems,
implementation problems, database problems, hardware problems and cost problems)
(Teo and King, 1996; King and Teo, 2000); using data from 157 large USA firms from the
Corporate 1000 Book and performing independent sample t-tests and calculating correlations
they found that the extent of BP-ISP integration and also its proactive orientation has a
statistically significant positive relation with the perceived ICT contribution to organizational
performance, and also a statistically significant negative relation with the perceived extent of
ISP problems. Chan et al (1997) investigated empirically the impact of ICT strategic alignment
on perceived enterprise systems effectiveness and perceived business performance; using data
from 164 North-American financial services and manufacturing firms (from USA and Canada)
with more than 100 employees from the Dun and Bradstreet directories they constructed a
structural equations model (SEM), from which it was concluded that ICT strategic alignment
has statistically significant positive contributions to both perceived enterprise systems
effectiveness and perceived business performance. Using the same data Sabherwal and Chan
(2001) addressed the same research question, but in regard to the business strategy the
enterprise follows; they considered three different business strategies: ‘defenders’,
‘prospectors’ and ‘analyzers’ and found that the strategic alignment of enterprise systems
affects perceived business performance, only in enterprises following a ‘prospector’ or
‘analyzer’ business strategy, but not in the ones following a ‘defender’ business strategy. Cragg
et al (2002) examined the link between ICT strategic alignment and four measures of perceived
firm performance (long term profitability, sales growth, financial resources availability and
public image & customer loyalty) in the context of small firms; using data from 250 small UK
manufacturing firms and performing analysis of variance (ANOVA) they found that the
subgroup of firms having higher levels of ICT alignment had also higher levels of all these four
measures of perceived firm performance than the ones with lower levels of alignment.
Journal of Money, Investment and Banking - Issue 9 (2009) 85

It should be mentioned that all the above empirical studies have used subjective (perceived)
measures of business performance and/or ICT contribution to business performance. The only
empirical investigation of the impact of ICT alignment on business performance that uses objective
measures of business performance has been the one conducted by Byrd et al (2006); using on data from
275 fabricated metal products manufacturing companies from South-eastern USA they constructed
econometric models with sales revenue per employee and profit per employee as dependent variables,
while as independent variables they used the IT expenditure per employee, a measure of ICT strategic
alignment and an interaction term equal to the product of the above two variables. In these econometric
models the coefficient of this interaction term was found to be positive and statistically significant, so
it is concluded that there is a synergistic coupling (positive interaction) between ICT strategic
alignment and ICT investment with respect to both these measures of firm performance. However, the
econometric models constructed in this study did not include some fundamental independent variables,
such as non-IT capital and labour, which constitute basic determinants of firm output according to
production economics (Nicholson, 2004).
In conclusion, from the research of this stream has been produced some first evidence of a
positive contribution of ICT strategic alignment to business performance. However, further research is
required in order to understand better the contribution of different types of ICT strategic alignment to
various dimensions of business performance, in various sectoral, national and cultural contexts, based
on objective business performance measures and also on sound theoretical foundations from the area of
economics.

3. Research Hypotheses, Method and Data

Our research aims to overcome the deficiencies of the previous research on this issue, which have been
mentioned in the previous section, by the use of objective measures of business performance and/or
ICT contribution to business performance, and by estimating single equation econometric models.
Such models are simple in nature, but are based on sound theoretical foundations, such as the Cobb-
Douglas production function (Nicholson, 2004), and include all fundamental explanatory variables.
Our first research objective is to investigate, the effect of ICT investments on Greek firms’
business performance. We expect that ICT investment make a positive and statistically significant
contribution to business performance, since they increase the efficiency of both internal processes and
transactions with customers, suppliers and business partners, and also improve decision making and
coordination. Therefore our first null hypothesis is:
H0(1): ICT investment makes no contribution to business performance and we expect that it
will be rejected.
Our second research hypothesis concerns ICT strategic alignment. The bilateral co-ordination
between ICT plans/strategies and business plans/strategies results in the selection of the most
appropriate ICT investments, which support to the highest possible extent the selected business
strategy and action plan of the firm. The analysis of its internal environment, which is a critical pillar
business plans/strategies formulation, constitutes a very good foundation for determining the most
appropriate internal systems that should be built, in order to support its internal business functions,
reinforce its strengths and reduce its weaknesses; also it allows to use ICT in combination with unique
resources of the firm, in order to reinforce their potential for providing sustainable competitive
advantage. The analysis of the external environment of the firm, which is another critical pillar
business plans/strategies formulation, constitutes a very good foundation for determining the most
appropriate inter-organizational and ‘outward-looking’ (e.g. Internet-based) systems that should be
developed, for connecting the company with customers, suppliers and business partners. Furthermore,
the whole process followed for achieving a bilateral relationship between the ICT Plan and the
Business/Strategy Plan increases ICT managers’ business awareness and knowledge on one hand, and
executives’ awareness and knowledge about the capabilities and opportunities offered by ICT on the
other; also it builds mutual understanding and communication between executives and ICT managers
86 Journal of Money, Investment and Banking - Issue 9 (2009)

and facilitates a fruitful knowledge sharing among them, which can produce ICT-based competitive
advantages For the above reasons we expect that ICT strategic alignment results in a statistically
significant increase of the contribution of ICT investments to business performance. Therefore our
second null hypothesis is:
H0(2): ICT strategic alignment will not increase the contribution of ICT investment to business
performance
and we expect that it will be rejected.
Our study is based on two objective measures of business performance as basic dependent
variables, the value added (=yearly sales revenue minus yearly expenses for buying materials and
services) and the labour productivity (=value added per employee), and also on an objective measure of
enterprise systems investment. Simple econometric models will use these objective measures as the
dependent variable. The corresponding economic models are based on the theory developed in the area
of production economics, and in particular on the Cobb-Douglas production function (Nicholson,
2004), and include all fundamental variables. The Cobb-Douglas production function has been
successfully used in the past for estimating the contribution to firm output of various firm inputs,
including ICT investment (e.g. Brynjolfsson & Hitt, 1996; Stolarick, 1999; OECD, 2003; OECD,
2004). As recommended by this literature at first an extended form of the Cobb-Douglas production
function, will be used, in which the capital is divided into ICT capital and non-ICT capital:
VA = e β0 Lβ1 K β2 ICK β3 (1)
where VA is the yearly firm value added, and L, K and ICK are the yearly labour expenses, the non-
ICT capital and the ICT capital respectively, while the parameters β1 – β3 are the corresponding output
elasticities with respect to these inputs. By log-transforming equation (1) and including the disturbance
term ui we obtain the following log-linear econometric model:
ln VA= β0 + β1 ln ( L)+ β2 ln ( K ) + β3 ln ( I CK ) + ui (2)
Further, in order to investigate the effect of enterprise systems strategic alignment on the
contribution of the ICT capital to firm value added an ‘interaction term’ (Greene, 2003; Gujarati,
2003), which is equal to the product of a ‘strategic alignment factor’ STR_AL, a variable measuring
the extent of bilateral relationship between the ICT Plan and the Overall Business/Strategy Plan, and
the ln(ICK) is added to model (2):
ln VA= β0 + β1 ln ( L)+ β2 ln ( K ) + β3 ln ( ICK )+ β4 ln ( ICK ) ⋅ STR _ AL + ui (3)
Similar models will also be estimated for the second business performance measure (dependent
variable), the value added per employee, but with all the above independent variables (L, K, ICK)
standardised (divided by the number of firm employees N).
The data used for the estimation of the above econometric models were collected through a
survey among Greek companies, titled ‘Usage of information and communication technologies,
modern organization forms and innovation in the Greek companies’, conducted in cooperation with
ICAP, one of the largest business information and consulting companies of Greece. This survey was
based on a structured questionnaire, which included questions about: i) the basic financial data of the
company for the year 2004 (sales revenue, expenses for materials and services, labour expenses, value
of capital, value of computer capital, etc.), ii) its innovative activity, iii) the degree of adoption of new
forms of work organization, new forms of human resources management, quality management and
redesign of processes and structures, iv) usage of various kinds of ICT, v) IS management practices
and processes (including ICT strategic alignment). This is a unique database, since a similar one,
combining all these data components, had never been collected before in Greece; it can be quite useful
for future research, since it allows the empirical investigation of many critical research questions
concerning the contribution of ICT investments to business performance, and also their relations and
complementarities with several ‘soft factors’ (such as adoption of new organisational practices,
innovation, human resources management and quality management). The questions about the financial
data of the firm and ICT alignment we used in this study are given in the Appendix. The sample of the
Journal of Money, Investment and Banking - Issue 9 (2009) 87

survey was randomly selected from the database of ICAP and consisted of 304 Greek companies from
the 27 most important sectors of Greek economy. In this sample there was equal representation of the
small, the medium and the large companies: in particular, 103 of these companies were small (with
more than 10 and less than 50 employees), 103 were medium (with more than or equal to 50 and less
than 250 employees) and 98 were large (with more than or equal to 250 employees). Additionally two
similar samples were also created (with the same percentages of small, medium and large firms, and
the same percentages of companies from the above 27 sectors). The questionnaire was sent by mail to
the Managing Directors of the 304 companies of the first sample, and the recipients were asked to fill
in the questionnaire and return it by fax or mail within one month. After one month the recipients who
had not responded were contacted by phone again and reminded of the questionnaire; for most of the
companies of this first sample several phone calls were required, in order to have the questionnaire
filled in completely and correctly. Some companies declined participation, regarding such data as
confidential, or being too busy; each of these companies was replaced by a ‘similar’ company (i.e.
from the same size group and industry) from the second sample; in cases that the similar companies of
the second group were exhausted, we were using the third sample. In this way questionnaires from 281
companies (99 small, 98 medium and 84 large ones), 237 of which were complete, were received.
Their average number of employees was 492 and the median number of employees 84, while their
average and median sales revenue in 2004 was 183.7 and 9.5 million euro respectively.

4. Results
Initially for the firm value added (VA) we estimated model (2). However, although the variables are
expressed in logarithms and the problem of heteroscedasticity, usually encountered in cross-sectional
data, was expected to be reduced, White’s (White 1980) test for heteroscedasticity revealed the
existence of heteroscedasticity in model residuals. One way to overcome this problem is to use the so-
called White’s heteroscedasticity consistent estimators, instead of the OLS estimators (White, 1980).
However, further examination of the data revealed that the presence of heteroscedasticity in model
residuals is attributed to some aberrant observations. Such observations, which may be due to an error
at some stage of the data collection procedure, may introduce artificial heteroscedasticity as well as
autocorrelation (see Milionis, 2004). In addition to heteroscedasticity tests statistics, the values of other
model statistics, such as the partial regression coefficients and the coefficient of determination, are also
affected by the presence of aberrant observations. Therefore, the model was estimated again, by using
OLS and excluding ten aberrant observations. The results are shown in Table 1. In addition to the
partial regression coefficients, the corresponding standardised regression coefficients are also reported
in Table 1. The later (coefficients) can be used in order to compare the relative strength of the effect of
each explanatory variable on the dependent variable.
From the results on heteroscedasticity test, as reported in Table 1, it is evident that the
hypothesis of no heteroscedasticity in model residuals cannot be rejected. It is also evident that the
coefficients of labour, non-ICT capital and ICT capital, which are equal to the elasticities of the
corresponding inputs, are all positive and statistically significant, so we conclude that all these three
inputs make a positive contribution to firm value added, a result similar to those of other studies
referring to larger and more developed economies (Brynjolfsson & Hitt, 1996). Moreover, the
standardised coefficient of the ICT capital (0.138) is somewhat higher than the one of the non-ICT
capital (0.107), so we can conclude that the ICT investment contributes to value added more than the
investment in ‘traditional capital’ (regular assets); however, both these coefficients are substantially
lower than the one of the labour (0.710), reflecting the high importance of the labour input in the Greek
economy.
The results regarding the estimation of model (3) are shown in Table 2.
88 Journal of Money, Investment and Banking - Issue 9 (2009)
Table 1: Estimation results and statistics for model (1).
White’s statistic stands for the value of the statistic in White’s test for heteroscedasticity.

Dependent variable: ln(VA)

Explanatory Partial regression Standardized Coefficient t-value Significance
Variable coefficient
Constant 1.012 2.106 0.036
ln (K) 0.089 0.107 2.835 0.005
ln (ICK) 0.155 0.158 3.660 0.000
ln (L) 0.793 0.710 16.038 0.000
R square=0.815 Adjusted R square= 0.813
White’s statistic=4.09 Degrees of freedom=6 Critical value (95%)=12,59

Table 2: Estimation results and statistics for model (2).

Dependent variable: ln(VA)

Explanatory Variable Partial regression Standardized t-value Significance
coefficient Coefficient
Constant 1.334 2.608 0.010
ln (K) 0.086 0.104 2.759 0.006
ln (ICK) 0.129 0.131 2.891 0.004
ln (L) 0.787 0.706 15.984 0.000
ln(ICK)*STR-AL. 0.004 0.060 1.958 0.051
R square=0.819 Adjusted R square= 0.816

From the results of Table 2 it is evident that the coefficients of labour, non-ICT capital and ICT
capital remain all positive and statistically significant, as expected. The coefficient of the interaction
term between ICT investment and strategic alignment is positive and marginally significant at the 5%
significance level. Hence, strategic alignment of ICT investment increases its contribution to firm
value added.
However, more insight regarding the effect of strategic alignment may be gained by modifying
model (3) as follows:
ln VA= β0 + β1 ln ( L)+ β2 ln ( K ) + β3 ln ( ICK)+γ 1 ln ( ICK) ⋅ d1 +
(4)
+ γ 2 ln ( ICK) ⋅ d2 + γ 3 ln ( ICK) ⋅ d3 + γ 4 ln ( ICK) ⋅ d4 + ui
In model (4) the strategic alignment, which is a 5-valued variable, has been represented with
four binary dummy variables d1, d2, d3, d4, which correspond to a “small degree”, “moderate degree”,
“high degree”, and “very high degree” of bilateral relationship between the ICT Plan and the Overall
Business/Strategy Plan of a firm respectively. The advantage of model specification (4) over model
specification (3) is that although in (3) it is implicitly assumed that the differential effect corresponding
to different “values” of strategic alignment is identical, in specification (4) this differential effect may
be different and may be assessed from the values of the coefficients γ1, γ2, γ3 and γ4. The results
regarding the estimation of model (4) are presented in Table 3.
Journal of Money, Investment and Banking - Issue 9 (2009) 89
Table 3: Estimation results and statistics for model (4).

Dependent variable: ln(VA)

Explanatory Partial regression Standardized t-value Significance
Variable coefficient Coefficient
Constant 1.244 2.433 0.016
ln (L) 0.085 0.102 2.738 0.007
ln (K) 0.128 0.131 2.915 0.004
ln (ICK) 0.798 0.715 16.281 0.000
ln (ICK)*d1 -0.043 -0.043 -1.483 0.139
ln (ICK)*d2 -0.020 -0.034 -1.140 0.256
ln (ICK)*d3 0.016 0.049 1.407 0.161
ln (ICK)*d4 0.034 0.061 2.002 0.047
R square=0.824 Adjusted R square= 0.819

From these results it is evident that only in the case of very high degree of bilateral relationship
between the ICT Plan and the Overall Business/Strategy Plan of a firm there is a statistically significant
effect. For the other three cases the corresponding γ coefficient is not statistically significant. To certify
that the non-significance of γ1, γ2, γ3 is not a result of inflated standard errors owing to the existence of
multicollinearity some further analysis was undertaken. This includes estimation of the so-called
variance inflation factors (VIF) for the coefficient of each explanatory variable as well of the so-called
1
condition index. VIF for the jth coefficient is defined as: VIF = where R 2j represents the
1 − Rj
2

coefficient of determination in the regression with dependent variable the variable corresponding to
coefficient j on the remaining of the explanatory variables. Values of VIF greater than about 8 to 10 are
an indication that the corresponding variable is highly collinear. On the other hand the condition index
is given by the square root of the ratio of the maximum over the minimum eigenvalue of the data
matrix and it is a measure of collinearity in the whole data matrix. As a practical rule for values of the
condition index up to about 30-35 multicolinearity is considered to be modest (see for instance
Gujarati, 2003).
The results of this auxiliary collinearity analysis are shown in Table 4.

Table 4: Colinearity statistics

Coefficient VIF
Β2 1,725
β3 2,519
Β4 2,405
Γ1 1,039
Γ2 1,117
Γ3 1,489
γ4 1,156
Condition Index 30.6

From the results of Table 4 it is evident that there is no indication of severe collinearity in the
data matrix so the results of Table 3 regarding the statistical significance of the coefficients are not due
to collinearity. This leads us to the conclusion that strategic alignment contributes only in the firms for
which a very high degree of bilateral relationship between the ICT Plan and the Overall
Business/Strategy Plan exists. As a matter of fact for such firms the effect of ICT investment on VA
can be increased substantially as the values of the corresponding standardised coefficients for ln(ICK)
and ln(ICK)*d4 in Table 3 indicate (0.131 and 0.060) respectively).
90 Journal of Money, Investment and Banking - Issue 9 (2009)
Table 5: Regression model for the impact of standardised labour, non-ICT capital and ICT capital on labour
productivity.

Dependent variable: ln(VA/N)

Explanatory Partial regression Standardized t-value Significance
Variable coefficient Coefficient
Constant 1.153 1.856 0.065
ln (K/N) 0.091 0.129 2.779 0.006
ln (ICK/N) 0.154 0.172 3.531 0.001
ln (L/N) 0.794 0.625 12.982 0.000
R square=0.540 Adjusted R square= 0.534

Next we estimated similar models for the labour productivity (=VA/N). All the explanatory
variables are divided (standardized) by the number of firm employees N, and the results are shown in
Tables 5 (basic model) and 6 (model with interaction) respectively.

Table 6: Regression model for the impact of standardised labour, non-ICT capital, ICT capital and interaction
between standardised ICT capital and strategic alignment factor on labour productivity

Dependent variable: ln(VA/N)

Explanatory Partial regression Standardized t-value Significance
Variable coefficient Coefficient
Constant 1.357 2.193 0.029
ln (K/N) 0.085 0.121 2.633 0.009
ln (ICK/N) 0.120 0.134 2.631 0.009
ln (L/N) 0.796 0.627 13.207 0.000
ln (ICK/N)*d1 -0.065 -0.060 -1.321 0.188
ln (ICK/N)*d2 -0.031 -0.048 -1.037 0.301
ln (ICK/N)*d3 0.032 0.088 1.778 0.077
ln (ICK/N)*d4 0.061 0.106 2.240 0.026
R square=0.564 Adjusted R square= 0.550

From the results of Table 5 it is apparent that the coefficients of standardised labour, non-ICT
capital and ICT capital are all positive and statistically significant, so all these three inputs make a
positive contribution to labour productivity, as was the case with value added (Table 1). Further the
comparison of their standardised coefficient also leads to a conclusion similar to the one drawn for
value added. Finally from the model of Table 6 it is concluded the strategic alignment of ICT
investment increases its contribution to labour productivity.
The above results lead us to the rejection of both our research hypotheses H0(1) and H0(2) for
both examined measures of business performance, firm value added and productivity. In conclusion,
this empirical investigation leads to the conclusion that in Greece the ICT investment makes a
statistically significant positive contribution to business performance, so there is no ‘ICT Productivity
Paradox’; also, this empirical investigation contributes the third of the ICT alignment research streams
mentioned in section 3 and provides sound evidence that the strategic alignment of ICT investment
increases considerably its contribution to both these objective measures of business performance (value
added and labour productivity), but only for those firms for which a very high degree of bilateral
relationship between the ICT Plan and the Overall Business/Strategy Plan exists.

5. Summary and Conclusions

In the previous sections of this paper, an empirical investigation of the effect of ICT investments on
Greek firms’ business performance was presented. It has also been examined for first time in Greece
whether and to what extent this effect increases if ICT investments are aligned with business strategy.
It has been concluded that the ICT investment has a statistically significant positive effect on Greek
Journal of Money, Investment and Banking - Issue 9 (2009) 91

firms’ value added and labour productivity. Its output elasticity is somewhat higher than the one of the
non-computer investment, reflecting the important role that ICT capital plays in Greek firms; however,
it is lower than the one of the labour, reflecting the ‘labour intensive’ nature of Greek economy. Also,
it has been concluded that the strategic alignment of ICT investment increases considerably its
contribution to firm value added and labour productivity, but only for firms of very high degree of
bilateral relationship between the ICT Plan and the Overall Business/Strategy Plan.
The above conclusions enable a better understanding of the impact of ICT investment on
business performance, and also the role of ICT strategic alignment in this relation, in a national context
different from the ones of the highly developed countries, in which most empirical research on the
issues has been conducted. Greece has a lower economic and technological development than these
countries. It is characterised by smaller average firm size, smaller size of internal market, lower
intensity of competition and lower level of ICT usage, and also limited history and experience in this
domain, in comparison with the highly developed countries. Also, Greek firms have still some
‘idiosyncratic’ characteristics, mainly related to corporate governance, that are noteworthy, as they are
not usually found in firms listed in other developed financial markets: in many firms, even in the larger
ones, the majority of company ownership belongs to members of the same extended family; also in
many firms there is no distinction between ownership and management with big shareholders being
also the members of the board of directors. The above characteristics of the Greek national context
affect negatively the capability of Greek firms to manage their ICT investments and generate business
value from them. We believe that the findings of this study are interesting not only for Greece, but also
for many other countries, which are not highly developed and have similar characteristics.
Another contribution of this research is the creation of a unique research dataset, through a
questionnaire-based survey among Greek firms, titled ‘Usage of information and communication
technologies, modern organization forms and innovation in the Greek companies’, conducted in
cooperation with ICAP, one of the largest business information and consulting companies of Greece. It
includes data from 281 Greek firms concerning business performance, ICT investment, ICT
management (including ICT strategic alignment), non-ICT investment, employment and management
of human resources, adoption of new organisational practices, innovation and quality management.
This is a unique database, since a similar one, combining all these data components, had never been
collected before in Greece, and can be very useful for future empirical research in this domain.
Our findings provide additional evidence on the variability of the benefits and impact of the
‘hard’ ICT investments, due to their dependence on additional ‘soft ICT actions’. In this sense the
present study has interesting implications for management. Firms should combine their ‘hard’ ICT
investments (i.e. acquisition of new hardware, software and networks), with appropriate ‘soft actions’,
in order to achieve higher levels of benefits and impact on business performance form them. One of
these necessary ‘soft actions’ is the alignment of ICT investment to business strategy, which results in
the selection of the most appropriate ICT investments that support to the highest possible extent the
selected business strategy and action plan of the firm, and therefore leads to a higher level of ICT
benefits and business impact.
Further research is in progress by the authors for investigating the impact of various
mechanisms of ICT strategic alignment at different hierarchical levels on the contribution of various
types of ICT investments to business performance. Also, this research will be extended to other ICT-
related ‘soft actions’ as well, such as the creation of new processes for ICT service level management.
92 Journal of Money, Investment and Banking - Issue 9 (2009)

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Appendix:
Survey questions (used in this study)
• Yearly total sales revenue (without VAT):____________Euro
• Yearly total expenses for buying materials and services (without VAT): _________ Euro
• Yearly total labour (personnel) expenses (without VAT):__________ Euro
• Value of assets at the end of the year (without VAT): _______Euro
• Value of computer equipment (hardware, software and networks) at the end of the year (without
VAT): __________ Euro
To what extent there is bilateral relationship between the ICT Plan and the Overall
Business/Strategy Plan of your firm?
not at all to a small degree to a moderate degree to a high degree to a very high degree
□ □ □ □ □