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Does Information Technology Lead to Smaller Firms?

  • Erik Brynjolfsson

    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142)

  • Thomas W. Malone

    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142)

  • Vijay Gurbaxani

    (Graduate School of Management, University of California, Irvine, California 92717)

  • Ajit Kambil

    (New York University, New York, New York 10012)

Many changes in the organization of work in the United States since 1975 have been attributed to the increased capabilities and use of information technology (IT) in business. However, few studies have attempted to empirically examine these relationships. The primary goal of this paper is to assess the hypothesis that investments in information technology are at least partially responsible for the important organizational change, the shift of economic activity to smaller firms. We examine this hypothesis using industry-level data on IT capital and four measures of firm size, including employees and sales per firm. We find broad evidence that investment in IT is significantly associated with subsequent decreases in the average size of firms. We also find that these decreases in firm size are most pronounced two to three years after the IT investment is made.

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File URL: http://dx.doi.org/10.1287/mnsc.40.12.1628
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 40 (1994)
Issue (Month): 12 (December)
Pages: 1628-1644

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Handle: RePEc:inm:ormnsc:v:40:y:1994:i:12:p:1628-1644
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