Author: Wang, Ziyi
Title: Three studies on financial innovation and digital economy
Advisors: Xu, Xin (MM)
Jin, Yong Jimmy (AF)
Degree: Ph.D.
Year: 2023
Subject: Financial engineering
Credit derivatives
Swaps (Finance)
Information technology -- Economic aspects
Hong Kong Polytechnic University -- Dissertations
Department: Department of Management and Marketing
Pages: ix, 104 pages : color illustrations
Language: English
Abstract: My research centers on the topic of financial innovation and digital economy, which can be classified into two main areas of focus: empirical analysis of financial innovation and theoretical analysis of digital economy. In terms of empirical analysis, I delve into the influence of financial product innovation, such as Credit Default Swap (CDS), on the investment in information technology by target companies, as seen in Study 1. Regarding the theoretical analysis of digital economy, I present two studies focusing on the strategies of IT service providers. The first study (Study 2) examines the distribution strategy of a cloud-computing service provider, where I explore the optimal distribution strategy of a software as a service (SaaS) enterprise under both centralized and decentralized channels. The second study (Study 3) scrutinizes the competition and cooperation strategies of two-sided e-commerce platforms in a vertically differentiated market.
In Study 1, my examination focuses on the causal effect of CDS on IT investment. CDS contracts are actively traded in the financial market to mitigate credit risk and are considered one of the most significant financial inventions of the past 20 years. I empirically investigate the causal relationship between CDS and firm-level IT investments, using a US market sample. Through my research, I discover that the initiation of CDS trading can significantly reduce IT investment in the underlying firms, and the decrease mainly stems from software expenditure rather than hardware. Additionally, further analysis reveals that CDS trading decreases IT investment by impacting the credit risk of firms. This effect is particularly notable for firms that heavily rely on debt for financing, belong to high-tech industry sectors, and have stable earnings. This research lies at the intersection of finance and information systems research. The study’s findings can be directly applicable to the ongoing policy debate surrounding CDS and have implications for the relationship between financial innovations and IT.
In Study 2, my analysis focuses on the optimal distribution strategy of a Software as a Service (SaaS) enterprise under centralized and decentralized channels. SaaS is a subscription-based web-based software delivery model centrally managed by a provider. Nowadays, SaaS giants tend to diversify their products and distribution modes. I examine the supply chain structure of a monopoly firm that provides both low-end and high-end SaaS. Low-end SaaS is standard and can be subscribed to directly online. High-end SaaS includes customized services, which require communication with customers and should be provided by an internal/external unit. For high-end SaaS distribution, SaaS firms typically choose between a retailing division mode and an external reseller mode. This study explores and compares the two distribution modes of a monopoly SaaS provider. Through analytical work, I reveal that several factors, including the external reseller’s marketing advantage and customization cost, significantly impact the SaaS firm's choice of the two distribution modes. The firm tend to adopt the retailing division mode in high-end SaaS distribution when the customization cost is high, or when customization cost is low and the external reseller’s marketing advantage is small. I further study the impact of network effect by numerical analysis. I observe that, when the external retailer’s marketing advantage is large, the network effect has an increasing positive impact on the profit of the retailing division mode first and then has an increasing negative impact. When the external retailer’s marketing advantage is small, the network effect always has an increasing negative impact on the profit of the external reseller mode.
In Study 3, my investigation centers on the competition and cooperation strategies of two-sided e-commerce platforms in a vertically differentiated market. Recently, e-commerce giants, including Amazon, have started linking products sold by their competitors on their platforms, which has been labeled “co-opetition,” a combination of cooperation and competition. I examine this strategy by creating a theoretical model within the e-commerce platform context. The model comprises one small and one large co-opetiting firm, each with its online sales platform and market, where vertically differentiated quality products are sold. Three types of cooperation strategies are analyzed, including one-way cooperation, two-way cooperation, and non-cooperation. Product quality differentiation emerges as a significant factor that drives cooperation decision making. Compared to non-cooperation, two-way cooperation results in higher profit margins for both firms when the quality differentiation between the firms is high. Finally, the current one-way cooperation prevents the small firm from paying a listing fee to the large firm, making it unlikely to occur under the co-opetition setting.
To sum up, study 1 focuses on the impact of financial innovation, specifically Credit Default Swap (CDS), on the IT investments of target companies. Study 2 analyzes the optimal distribution strategy of a Software as a Service (SaaS) enterprise in a digital economy context. Finally, study 3 investigates the competition and cooperation strategies of two-sided e-commerce platforms in a vertically differentiated market. All three studies examine different aspects of financial innovation and digital economy, and each provides insights into how companies can leverage these innovations to improve their bottom lines. The findings from these studies demonstrate how digital innovation, particularly within the financial sector, is having a significant impact on various industries, such as IT, SaaS, and e-commerce, and how companies can adapt to these changes to improve their competitive advantage.
Rights: All rights reserved
Access: open access

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