Competitive Environment and the Relationship Between IT and Vertical Integration
Authors: Ray, Gautam; Wu, Dazhong; Konana, Prabhudev
Journal: Information Systems Research (2009)
<jats:p> The information systems (IS) literature suggests that by lowering coordination costs, information technology (IT) will lead to an overall shift towards more use of markets. Empirical work in this area provides evidence that IT is associated with a decrease in vertical integration (VI). Economy-wide data, however, suggests that over the last 25 years the average level of VI has, in fact, increased. This paper studies this empirical anomaly by explicating the moderating impact of two measures of competitive environment, demand uncertainty, and industry concentration, on the relationship between IT and VI. We examine firms included in 1995 to 1997 InformationWeek 500 and the COMPUSTAT database. Consistent with the IS literature, the analysis suggests that IT is associated with a decrease in VI when demand uncertainty is high or industry concentration is low. However, contrary to the IS literature, IT is found to be associated with an increase in VI when industry concentration is high or demand uncertainty is low. Furthermore, as demand uncertainty increases, less vertically integrated firms invest more in IT, while as industry concentration increases, more vertically integra…