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An Empirical Analysis of Software-as-a-Service Development Mode and Its Impacts on Firm Performance

We address the following two research questions: (1) under what circumstances will firms prefer internal SaaS development to external sourcing? and (2) how does the SaaS development mode affect firm performance? We examine the SaaS development actions in the computer industry (SIC code 737) from 2003 to 2012. The preliminary analysis results suggest that firms with large amount of working capital can consider developing SaaS application in-house. However, if firms have high level of R&D capability, they may have better absorptive capability of technology innovation. Firms can grasp SaaS innovation through external sourcing. Our results indicate that the strategic decision of SaaS development mode will have short-term impact on firm performance (i.e., gross margin and market share), but not for the long-run performance (Tobins’q).