Computers & Firm Size

Robin Hanson (
Fri, 15 Aug 1997 15:47:15 -0700 (PDT)

For those tied to the notion that computers will make firms smaller,
the following paper argues that the situation is lots more complex. Robin

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

U.S. Department of Commerce
U.S. Department of Commerce

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Paper ID: Department of Commerce WP ESA/OPD 97-2
Date: March 1997

Contact: David N. Beede
Postal: U.S. Department of Commerce, Economics and
Statistics Administration, Office of Policy
Development, Office of Business and Industrial
Analysis, Mail Stop H4878, Washington, DC
Phone: (202) 482-1225
Fax: Not Available
ERN Ref: I/O:WPS97-159

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
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