Firm Organization in the Digital Age: IT Use and Vertical Transactions in U.S. Manufacturing

Abstract

We investigate whether the organizational design of manufacturing production is sensitive to important advances in information technology (IT) – and under what conditions. Using U.S. Census Bureau data for over 5,600 plants from 1992 to 2002, we observe both specific uses of IT and whether plants outsource downstream value-chain activities or keep them within the firm. Taking advantage of the sudden introduction of the commercial internet in the mid-1990s and within-plant changes over this period, we find that externally-focused coordination over the internet was associated with a significant net shift towards market-based exchange. The magnitude of the response depends, however, on the pre-existing organization of internal production processes – which varies widely not only across, but also within firms. Moreover, the effects vary by the particular application(s) of general-purpose internet technology. By studying vertical integration at the level of transaction flows and considering important features of how production is organized inside firms, we surface new facets of the relationship between IT and firm organization in an increasingly digital age.