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Does RFID improve firms’ financial performance? an empirical analysis

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An Erratum to this article was published on 25 June 2011

Abstract

Radio frequency identification (RFID) is viewed as a technology that improves supply chain efficiency by enhancing inventory efficiency, optimizing logistics, and coordinating the flow of materials. Although RFID has gained great attention in many business applications, the financial gain that accrues over time from RFID adoption is not well understood. We examine the effects of RFID on firm profits while adjusting for self-selection of adoption choice. We find that firms self-select into a certain adoption mode on the basis of their organizational characteristics. Our results also show that RFID confers significant benefits for firms that have adopted RFID. Interestingly, improved inventory ratio and sales efficiency begin to play a greater role in shaping higher profitability over time for firms that have adopted RFID possibly due to time-consuming processes for them to reap the benefits from RFID. However, we find that the values of RFID that accrue to firms are not universal across firm. That is, our results suggest that RFID confers a significant value for certain firms while it does not for other firms with unobservable disadvantages. In sum, our study sheds new light on what drives firms to adopt RFID and on which firms achieve higher financial performance in a post-adoption period as a result of RFID adoption.

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Notes

  1. We replicate our analysis using another profitability measure, return on asset (ROA) for robustness check. We obtain qualitatively similar results.

  2. Our model also controls for a portion of firm-specific effects since a substantial part of firm heterogeneity can be removed by difference-difference model specification.

  3. We thank an anonymous reviewer for raising this issue.

  4. In the economics and management literatures, it is also not uncommon to see that the same independent variables in the selection equation appear in the performance equations (see e.g., [30, 48]). This is because in our context, firms with favorable attributes to adopt RFID are also more likely to receive greater benefits from the adoption.

  5. The hypothetical profit gains for RFID firms had they not adopted is calculated by multiplying the estimated coefficients in Eq. 3c by firm attributes of RFID adopters (see [35]; [48]; [18] for details).

  6. While we follow the standard approach to choose appropriate matched firms, our sample selection criteria might affect our test results. To check the robustness, we also select the firm that is closest in size measured as total asset [50]. Results are qualitatively similar to those obtained from original estimates.

  7. We note that the coefficients of the IMR are marginally significant depending on the time-horizons considered (see columns 2 and 4 in Table 4). This suggests that self-selection may not be prevalent in our sample. However, as discussed earlier, it is difficult to interpret the meaning of the IMR since Eq. 3a imposes that self-selection effects are the same for both adoption modes which is less likely to be true (see [48] for more discussion).

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Authors and Affiliations

  1. University of British Columbia, Kelowna, BC, Canada

    Young Bong Chang

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Correspondence to Young Bong Chang.

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An erratum to this article can be found at http://dx.doi.org/10.1007/s10799-011-0104-7

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Chang, Y.B. Does RFID improve firms’ financial performance? an empirical analysis. Inf Technol Manag 12, 273–285 (2011). https://doi.org/10.1007/s10799-011-0088-3

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