Information Technology's Impact on Firm Structure: A Cross-Industry Analysis

Abstract

Since the 1970s, economists have speculated on the effects of the proliferation of new computer and communications capabilities on business structure and performance. The present analysis explores information technology's (IT)relationship to employment and firm structure by examining how IT affects the relative size of employment at auxiliary units. The analysis treats auxiliary units--establishments where employees provide support services (mainly administrative) to production establishments--as a proxy for the highest administrative levels of the organizational hierarchy. Changes in the relative size of auxiliary employment give a broad indication of IT-related changes in firm structure. Statistical analyses of 46 industries show large variations across industries in the size, sign, and statistical significance of the elasticities of auxiliary unit employment shares with respect to IT capital stock shares. We find no economy-wide trends associated with IT. There is too much variation among industries to rely on estimates obtained from pooling industry data. For the most part, sectorial trends are scarce. Only in the transportation sector do the sign and statistical significance suggest that IT related changes are similar. Ultimately, the enormous variation revealed by our results suggests that one cannot make economy-wide generalizations about the effects of IT.

Nevertheless, our results, combined with other evidence,suggest that economies of scale--gained from using IT to reduce coordination and monitoring costs--influence firm size and structure. One reason why the effects of IT are so different across industries is variation in the firm size distribution across industries prior to the IT revolution: 1) For industries with a predominance of small firms, IT-related economies of scale may encourage growth in firm size and lead to an increase in the relative size of centralized back office establishments across the industry. This appears to have occurred in the retail trade industry. 2) In some industries where large firms predominate, IT may induce greater efficiency in back-office jobs, enabling firms to reduce back office employment relative to total employment. This appears to have occurred in some of the transportation industries. 3) In industries where IT primarily substitutes for production workers, auxiliary unit employment share is likely to rise because central administration office employment tends to change less than proportionately in response to changes in overall employment. This appears to have occurred in the primary metals industry.

JEL Classification: L22, L23, D23, D24, L72, L91