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

Industrial and Corporate Change, Forthcoming

Harvard Business School Finance Working Paper No. 11-076

36 Pages Posted: 1 Feb 2011 Last revised: 16 Jun 2012

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

Date Written: January 30, 2012

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.

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

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: https://ssrn.com/abstract=1752369 or http://dx.doi.org/10.2139/ssrn.1752369

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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