The penrose effect in resource investment for innovation: Evidence from information technology and human capital

Resource-based theory views the firm as a bundle of resources administrated and coordinated by managers. We introduce the theoretical lens of Penrose effect to IS research, which refers to the fact that finite managerial capacities will suffer if the complexity of resource coordination is high. Therefore, although investment in knowledge-related assets, such as information technology (IT) and human capital, is associated with better innovation performance on the one hand, too much capital investment is likely to induce diminishing return on the investment because of Penrose effect. Accordingly, we take a curvilinear approach and propose that the relationships between IT/human capital investments and innovation performance are likely to be inverted Ushaped. Furthermore, we suggest that, in addition to bringing resource synergy, resource coordination also incurs costs, especially when the complexity of coordination among multiple resources is high. Thus, we take a nonlinear approach to examine the interaction effect of IT and human capital investments on innovation performance, which may not be always positive as past research often maintained. Longitudinal data from 404 German firms across several recent years confirm inverted U-shaped relationships between IT/human capital investments and innovation performance. In addition, we find that IT and human capital investments have a negative interaction effect, suggesting that high level of investment in one capital will lead to increasing coordination costs and diminishing return on investment in the other.