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Scale without mass: business process replication and industry dynamics

  • Erik Brynjolfsson
  • Andrew McAfee
  • Michael Sorell
  • Feng Zhu

In the mid-1990s, productivity growth accelerated sharply in the U.S. economy. In this paper, we identify several other changes that have occurred during the same time and argue that they are consistent with an increased use of information technology (IT) in general and enterprise IT in particular. Case studies and econometric evidence demonstrate that IT has enabled firms to more rapidly replicate improved business processes throughout an organization, thereby not only increasing productivity but also market share and market value. We develop a simple model that shows how IT-enabled business process replication will also increase both turbulence and concentration at the industry level. We then document a substantial increase in turbulence starting in the 1990s, as measured by the average intra-industry rank change in sales, enterprise value, and other metrics. In particular, we find that IT-intensive industries account for most of this increase in turbulence, especially after 1996. In addition, we find that IT-intensive industries became more concentrated than non IT-intensive industries after 1996, reversing the previous trend. The combination of increased turbulence and concentration, especially among IT-intensive industries, is consistent with an increasingly Schumpeterian style of competition. We conclude that the improved ability of firms to replicate business innovations is linked not only to productivity increases, but also to changes in the nature of business competition itself.

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Volume (Year): (2007)
Issue (Month): Nov ()
Pages:

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Handle: RePEc:fip:fedfpr:y:2007:i:nov:x:13
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  1. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
  2. Diego A. Comin & Thomas Philippon, 2006. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Chapters, in: NBER Macroeconomics Annual 2005, Volume 20, pages 167-228 National Bureau of Economic Research, Inc.
  3. Nicholas Bloom & John Van Reenen, 2007. "Measuring and Explaining Management Practices Across Firms and Countries," The Quarterly Journal of Economics, MIT Press, vol. 122(4), pages 1351-1408, November.
  4. Romer, Paul, 1994. "New goods, old theory, and the welfare costs of trade restrictions," Journal of Development Economics, Elsevier, vol. 43(1), pages 5-38, February.
  5. Comin, Diego & Mulani, Sunil, 2009. "A theory of growth and volatility at the aggregate and firm level," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1023-1042, November.
  6. Brynjolfsson, Erik. & Hitt, Lorin M., 1995. "Paradox lost? : firm-level evidence on the returns to information systems spending," Working papers 3786-95., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Kevin J. Stiroh, 2001. "Information technology and the U.S. productivity revival: what do the industry data say?," Staff Reports 115, Federal Reserve Bank of New York.
  8. Timothy F. Bresnahan & Erik Brynjolfsson & Lorin M. Hitt, 2002. "Information Technology, Workplace Organization, And The Demand For Skilled Labor: Firm-Level Evidence," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 339-376, February.
  9. Erik Brynjolfsson & Lorin M. Hitt, 2003. "Computing Productivity: Firm-Level Evidence," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 793-808, November.
  10. Erik Brynjolfsson & Lorin M. Hitt, 2000. "Beyond Computation: Information Technology, Organizational Transformation and Business Performance," Journal of Economic Perspectives, American Economic Association, vol. 14(4), pages 23-48, Fall.
  11. Erik Brynjolfsson & Haim Mendelson, 1997. "Information Systems and the Organization of Modern Enterprise," Working Paper Series 200, MIT Center for Coordination Science.
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