Economies Before Scale: IT Strategy and Performance Dynamics of Young U.S. Businesses

We examine how dimensions of IT strategy affect the performance of young businesses, as well dynamics as they age. Extending core ideas from lifecycle theory and firm boundary research, we derive the relationship between IT sourcing and age-based differences in performance. We highlight the dynamic tension between outsourcing’s support for accessing frontier inputs in the short term, and ownership’s advantages for developing organization-specific resources and capabilities over time. Leveraging a large panel of Census Bureau micro-data from 2006 to 2014, we provide the first systematic evidence that young manufacturing establishments-both startups and new units of existing firms-disproportionately benefit from modern IT outsourcing (ITO). As for owned IT capital (ITK), the young enjoy productivity benefits despite high uncertainty, smaller operational scale, and less complementary organizational capital.

While returns appear commensurate with those for older producers, this is conditional on survival, which is improved by ITO but harmed by ITK accumulation in the first five years of life. Consistent with flexibility-related gains from ITO that combine with vintage-related advantages in early ITK investment, the young are revealed to have significantly greater IT productivity than older incumbents, who benefit primarily from traditional ITK. A large battery of tests supports a causal interpretation, as well as mechanisms rooted in mitigating the effects of uncertainty (as opposed to size-or cost related reasons). Overall, these findings grant insight into a pattern of young-business dynamism largely missing from current discussions of economic trends and managerial practices in an increasingly digital age.