Production Chain Organization in the Digital Age: Information Technology Use and Vertical Integration in U.S. Manufacturing

Abstract

Advances in information technology (IT) may affect the organizational design of production. Exploiting the rapid diffusion of the internet in the U.S., we assess the sensitivity of production chain organization to this innovation in IT access and use. Extending theories of the firm that recognize the importance of downstream transfers (selling, as opposed to sourcing) and plural governance in organizational design, we predict IT-driven shifts in downstream vertical integration. In a detailed panel of Census Bureau data for over 5,600 manufacturing plants, we observe the extent of a production unit’s downstream transactions within the firm, alongside concurrent sales to external customers-–a mix we refer to as plural selling. Our main finding is that the use of the internet for external coordination precipitated a significant decline in downstream vertical integration across the manufacturing sector. Instrumental variables estimation points to a causal relationship but also heterogeneous treatment effects. Key drivers of plural organization, such as complementarities and constraints across differently-governed transactions, help explain such heterogeneity, as does concurrent use of internal production-management IT. Ours is the first study to leverage a plural governance framework and large-scale micro data to understand how U.S. production chain organization shifted in response to this rapid and far-reaching technological change.

Keywords: information technology, vertical integration, internet, firm boundaries, organizational design, plural governance

JEL Classification: L220, L6, O330