The Digital Reorganization of Firm Boundaries: It Use and Vertical Integration in U.s. Manufacturing
Abstract: We investigate complementarities between external uses of information technology (IT) and firm boundary decisions following the diffusion of the commercial Internet. Using detailed plant-level data covering roughly 2,500 establishments from the U.S. Census of Manufactures, we focus on the decision to allocate production output to either downstream plants within the same firm or to external customers. Using a differences-in-differences design, we find that IT-enabled coordination with external supply chain partners is associated with a significant decline in downstream vertical integration. Our results are robust to extensive time-varying controls for both internal and external downstream demand, as well as instrumental variables estimation. In addition, we find that the upstream and downstream uses of digital coordination are complementary to each other; the magnitude of the effect is greatest when both suppliers and customers are granted greater visibility into the focal plant’s operations.
