As information technology (IT) became cheaper and more common, many experts believed it would level the playing field for small businesses and allow them to compete with industry giants.
While that’s been the case for some, for many others it simply hasn’t.
“My experience has been that new technologies take far longer to actually change how we conduct business than people realize,” says Kristina McElheran, an assistant professor in U of T Scarborough’s Department of Management.
“This transformation is hard and risky and that makes for slow transitions.”
Many firms that already have a handle on IT can build on this head start, but according to McElheran, established businesses and innovative newcomers face uncertainty and make mistakes when it comes to IT.
McElheran says research into innovative trends in the economy tend to focus on two things: how firms come up with new products and services (the innovation piece), and technology diffusion (how new technologies spread to fuel the trend).
She says it’s not always clear how those two are connected, nor how firms move from one stage to the next.
“There is a very complicated set of decisions involving changes in activities, in complementary investments, adjustments to skill requirements and so on in firms that want to make use of new technologies,” she says.
McElheran adds that there is no reason to expect these new technologies will work for every firm — and that it is often hard to predict who the winners and losers will be.
Understanding how IT can make or break small firms is the goal of two of McElheran’s new research projects. These projects are among 32 recipients of the inaugural Knowledge Challenge grants, an initiative by the Kauffman Foundation to fund researchers addressing problems facing entrepreneurs.
“I'm very much obsessed by new technologies, digital transformation and how firms confront opportunities to be innovative by incorporating new methods or tools or processes,” says McElheran, who is also a lab economist in Toronto’s Creative Destruction Lab.
The funding for the combined grants totals more than $1.1 million (CAD). Both will run until September 2023.
Two projects connected by ideas
The first project is in collaboration with the Massachusetts Institute of Technology (MIT). It focuses on firms’ use of cloud computing (computer systems housed on servers on the internet instead of a local hard drive) and machine learning (a type of artificial intelligence where a computer can learn to perform actions without being programmed).
The data in this study will come from responses to questions McElheran helped create for the U.S. Census Bureau’s Annual Business Survey in 2017. The survey was sent to more than 800,000 small business owners and managers of large firms in the US. Thanks to McElheran, it now includes questions on machine learning and cloud computing — such as how much the firm spends on cloud services and how these services are used.
“There are a lot of anecdotal stories of firms that have used the cloud to lower barriers to entry, to scale quickly, to run experiments and reach this whole new level of flexibility in their IT resources,” she says.
Research McElheran conducted with Wang Jin at MIT’s Initiative on the Digital Economysuggests that young firms (which are often small) tend to benefit the most from cloud-based IT, but that study was restricted to the US manufacturing sector.
“By going beneath the stories into the data and finding the statistical regularities, we can hopefully find things that are more universally true, across a range of industries and firm settings,” she says.
“We can also start to track important new trends, such as machine learning and AI.”
The survey, which runs until 2021, will be the largest independently collected data set on these technologies. Its results will offer McElheran and other researchers important insights into how new technologies impact the founding and beginnings of small firms.
The second project still studies the newest robotics and AI technologies, as well as traditional enterprise technology investments. But this project will use an original methodology to make sense of a range of US Census data.
Typically, major investments in IT appear as “spikes” in investing — the project will delve into the details behind the spikes, such as what technologies firms invested in, and will then compare them with outcomes for these firms.
The two projects use entirely different data sets but are “connected by the ideas.”
“I'm most excited to find out how much is hype and how much is reality for these technologies and for business evolution and performance,” McElheran says.