While a positive link between information and communication technology (ICT) and firm performance is well documented, the exact channel remains unclear. We propose an innovative link: ICT fosters product and process innovations by facilitating employee participation and outsourcing. Employee participation is enhanced by horizontal employee communication and ICT training, whereas outsourcing is spurred by easier communication between firms and costs savings. Our results from a large and representative data set of firms in Germany show that ICT use is associated with an increase in both types of flexibility, accordingly. The implications for innovation activities differ, however, employee participation is strongly positively associated with product and process innovations. In contrast, outsourcing allows firms to 'buy' innovations in the short run, but reduces innovative capacity in the long run.
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