Information Technology and Industrial Structure of the Economy

We investigate the possibility that information technology changes the industrial structure of the economy in a significant way by affecting both scale and scope economies. The primary hypothesis is that the rapid growth of information technology has two opposing effects to the firm size. Information technology not only reduces external transaction costs and stimulates inter-firm transactions, but also economizes on internal production and coordination costs. Relatively large enterprises tend to grow faster while the proportion of smaller firms tends to increase also. Although the average size of small and medium sized firms decreases, the number of firms with accompanying industry variety increases very rapidly. We call this polarization effect of information technology and expect to see in developed economies. To examine our hypothesis we use crosscountry time series panel data on the size of establishments in the member countries of the OECD. We measure the IT variable using the commonly employed variables such as ratio of IT investments to GDP. The polarization hypothesis is largely confirmed and the remaining task is whether there exists threshold level in the size of establishment in each industry such that those firms above the level tend to grow bigger, and below the level grow smaller with an increasing number of differentiated competitors.