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The Architecture of Transaction Networks: A Comparative Analysis of Hierarchy in Two Sectors


Jianxi Luo


Singapore University of Technology and Design

Carliss Y. Baldwin


Harvard Business School, Finance Unit

Daniel Whitney


Massachusetts Institute of Technology (MIT) - Center for Technology, Policy, and Industrial Development (CTPID)

Christopher L. Magee


Massachusetts Institute of Technology

January 30, 2012

Industrial and Corporate Change, Forthcoming
Harvard Business School Finance Working Paper No. 11-076

Abstract:     
Many products are manufactured in networks of firms linked by transactions, but comparatively little is known about how or why such transaction networks differ. This paper investigates the transaction networks of two large sectors in Japan at a single point in time. In characterizing these networks, our primary measure is “hierarchy,” defined as the degree to which transactions flow in one direction, from “upstream” to “downstream.” Our empirical results show that the electronics sector exhibits a much lower degree of hierarchy than the automotive sector because of the presence of numerous inter-firm transaction cycles. These cycles, in turn, reveal that a significant group of firms have two-way “vertically permeable boundaries”: (1) they participate in multiple stages of an industry’s value chain, hence are vertically integrated, but also (2) they allow both downstream units to purchase intermediate inputs from and upstream units to sell intermediate goods to other sector firms. We demonstrate that the 10 largest electronics firms had two-way vertically permeable boundaries while almost no firms in the automotive sector had adopted that practice.

Number of Pages in PDF File: 36

Keywords: transactions, networks, vertical integration, hierarchy, industry architecture, innovation

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Date posted: February 1, 2011 ; Last revised: June 16, 2012

Suggested Citation

Luo, Jianxi and Baldwin, Carliss Y. and Whitney, Daniel and Magee, Christopher L., The Architecture of Transaction Networks: A Comparative Analysis of Hierarchy in Two Sectors (January 30, 2012). Industrial and Corporate Change, Forthcoming; Harvard Business School Finance Working Paper No. 11-076. Available at SSRN: http://ssrn.com/abstract=1752369 or http://dx.doi.org/10.2139/ssrn.1752369

Contact Information

Jianxi Luo (Contact Author)
Singapore University of Technology and Design ( email )
20 Dover Drive
Singapore, 138682
Singapore
Carliss Y. Baldwin
Harvard Business School, Finance Unit ( email )
Boston, MA 02163
United States
Daniel Whitney
Massachusetts Institute of Technology (MIT) - Center for Technology, Policy, and Industrial Development (CTPID) ( email )
77 Massachusetts Ave
Room E40-243
Cambridge, MA 02139
United States
(617) 253-6045 (Phone)
Christopher L. Magee
Massachusetts Institute of Technology ( email )
77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States
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