Abstract
Recent research asserts that interdependency among a firm's activities-- when the efficacy of how a firm conducts one or more productive activities depends on how the firm conducts other activities -- is fundamental to our understanding of business competition. In particular, researchers have argued that the potential for interdependencies among productive activities affects the distribution of firm profits withinan industry (Lenox, Rockart, & Lewin 2006). However, despite extensive theoretical modeling efforts,almost no empirical work has been reported that tests for an effect of interdependency on profitability. In this paper, we present what we believe is the first large, cross-industry empirical analysis of the effect of interdependencies on the distribution of profits. We use
survey data to measure interdependencies systematically across a wide number of industries, thus addressing the primary obstacle to incorporating interdependencies in larger-scale empirical work. We find evidence consistent with previous theoretical work: average profitability peaks at moderate levels of interdependency; the dispersion of profits among firms within industries increases with interdependency; and industries with greater interdependencies have a more positively skewed performance distribution. The overall explanatory power of interdependencies is found to be similar to that of patent protection and industry growth rates.(Keywords: Interdependencies, NK Model, Industry profitability)
Management Science publications that present the model that served as the motivation for the empirical paper: