Information Technology and Inventories: Substitutes or Complements?

Is information technology (IT) a substitute or complement for inventories? This study answers this question by understanding substitution and complementarity of IT and inventories insofar as they impact profitability of a firm. We use data on IT expenditures and inventories of U.S firms and find support for the substitution between IT and overall inventories. Because overall inventories comprise raw-material, work-in-process and finished goods inventories, should we take this result to imply that substitution argument applies uniformly to all types of inventories? The answer is no. Our disaggregated analyses indicate that while IT can be a substitute for raw material inventories, IT is a complement for finished goods inventories. We discuss implications of these findings for research and practice.