Research Summary

The Role of IT in Firm Scope Choice: Diversification or Specialization?

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Description

The use of IT can have two, actually opposing, effects on product diversification depending on how technologies are used by the firm. On the one hand, some uses of IT can increase specialization because they allow customers to research and order products remotely, thereby expanding the customer base for a given product. In addition, use of networked technology may reduce the transaction costs associated with outsourcing aspects of production. These effects may allow a seller to more profitably specialize in a given product line. On the other hand, the use of IT can increase product diversification by reducing coordination costs associated with managing diverse product lines in-house. By using certain technologies, firms can improve procurement coordination, expand production oversight, and scale certain administrative business functions, achieving greater economies of scope in production.

Determining which effect will dominate on average is an empirical question. In this paper, we use internal microdata from the Annual Survey of Manufactures and its Computer Network Use Supplement as well as from the Census of Manufactures to measure the use of IT for different business functions (e.g., purchasing, logistics, communications) and to assess the impact of these uses on the degree of product diversification (using 6-digit and 10-digit NAICS product codes) for U.S. manufacturers. Preliminary evidence suggests a strong positive correlation between the use of networked IT and increased diversification. However, there appear to be important differences in how firms use IT – in particular, whether they use it to coordinate internally within the firm or to coordinate with external suppliers and customers. Applying IT to certain internal functions appears to be more associated with specialization.