The Architecture of Transaction Networks: A Comparative Analysis of Hierarchy in Two Sectors
Singapore University of Technology and Design
Carliss Y. Baldwin
Harvard Business School, Finance Unit
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
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
Date posted: February 1, 2011 ; Last revised: June 16, 2012
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