Firm Organization in the Digital Age: It Use and Vertical Transactions in U.s. Manufacturing

Chris Forman (Cornell University)
Kristina McElheran (University of Toronto )

Abstract: We investigate whether manufacturing plants change the degree to which they outsource downstream value-chain activities in the wake of advances in information technology (IT). Using U.S. Census Bureau data for over 5,500 establishments over ten years, we observe whether production is destined for further transformation within the same firm or is sold to external value chain partners. We also directly observe how plants are using general-purpose IT for different types of coordination. Exploiting the technology shock of the commercial internet in the mid-1990s, we compare pre-internet transaction patterns to post-internet ones at a given plant as a function of changes in IT use. Controlling for time-varying plant and firm characteristics – including changes in the ownership of establishments throughout the firm - our results show that externally-focused coordination over the internet was associated with a significant increase in market-based exchange. Moreover, this comes at the expense of internal vertical transfers and is consistent with a causal relationship between IT use and firm re-organization over time. To the extent that firm boundaries depend on the volume and locus of economic activity – and not just the number of units a firm owns – this has profound implications for the organization and size of firms in the digital age.

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