Economies Before Scale: Survival and Performance of Young Plants in the Age of Cloud Computing

74 Pages Posted: 7 Feb 2018

See all articles by Wang Jin

Wang Jin

Massachusetts Institute of Technology (MIT)

Kristina McElheran

University of Toronto - Strategic Management

Date Written: December 15, 2017

Abstract

Young firms are central to productivity and job growth in the United States, yet they fail at high rates. We examine how a recent rise in firms’ ability to access information technology as a service affected the survival and performance of young establishments in the U.S. manufacturing sector. Using detailed Census Bureau data, we track a large representative sample of plants from 2006 to 2014. We find that the ability to “rent” IT as needed – in particular, via cloud computing – was associated with significantly higher survival and growth among young plants. This contrasts with investments in traditional IT capital, which increased their likelihood of failure. Conditional on survival, young plants also exhibited much higher productivity than older plants from IT services expenditure. The effect was more important in IT-intensive and high-variance industries, consistent with a greater option value from reductions in the cost of experimenting with new IT. Also consistent with a learning-based mechanism, the effects are related more to age than to size, and apply to new establishments of existing firms. Our study provides the first empirical evidence that this emerging technology is changing how firms learn about their IT requirements and benefit from shared economies of scale before they achieve significant experience and scale of their own.

Keywords: entrepreneurship, cloud computing, productivity, information technology

Suggested Citation

Jin, Wang and McElheran, Kristina Steffenson, Economies Before Scale: Survival and Performance of Young Plants in the Age of Cloud Computing (December 15, 2017). Rotman School of Management Working Paper No. 3112901. Available at SSRN: https://ssrn.com/abstract=3112901 or http://dx.doi.org/10.2139/ssrn.3112901

Wang Jin

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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