The Shrinking Hand: Why Information Technology Leads to Smaller Firms

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1 Th paper can e downoaded wthout charge from the Soca Scence Reearch Network eectronc rary at: It ha een puhed n reved form n The Internatona Journa of the Economc of Bune, Vo. 19, No. 2, Juy 2012, pp The Shrnkng Hand: Why Informaton Technoogy Lead to Smaer Frm Jean-Jacque Roa Inttut d Etude Potque de Par jj.roa@orange and Juen Hanoteau EUROMED Management & DEFI, Ax-Maree Unverty [email protected] Atract We expan the frm downzng trend of the recent decade y the new aundance of nformaton the ICT revouton. Producton procee dffer n ther nformaton requrement: whe decentrazed producton y mean of market exchange nformatonntenve, e nformaton per unt of output needed n the herarchcay ntegrated producton of frm, and the nformaton/output rato decreang n frm ze. We formuate a quantty of nformaton theory of the frm emodyng thee dfference and derve a Coae-Rycznk effect for the aggregate economy, whch predct a decreang empoyment hare of arge frm and an ncreang hare of ma one when the aggregate quantty of nformaton ncreae. Pane data regreon and other evdence provde upport for th hypothe. Key Word: Frm Sze; Downzng; Informaton Technoogy. JEL cafcaton: D23, G30, K40, L20.

2 There ome deate aout whether IT w, over the ong run, ead to arger or maer frm. It too eary to have a cear anwer on th queton, ut we can dcu a few key effect. (Lazear and G 2009, p.218). 1. Introducton 1.1 The re and decne of the ve hand For mot of t coure, the twenteth century ha een the trumph of the Chanderan Ve Hand of the arge corporaton, over the Inve Hand of the market, and more generay the contnuou re of a herarchca nttuton, whether prvate frm or puc ureaucrace. However, at the very tme when Chander (1977) ceerated the trumph of the gant frm and the managera economy, new force were actuay reverng the prevou trend and herarche were fragmentng, repaced y maer one and more market tranacton. 1 The frt twenteth century, , durng whch herarche kept ncreang n ze, thu foowed, nce the md-1970, y a econd twenteth century, characterzed y contractng herarche and expandng market, accordng to a trend that png over the frt decade of the twenty-frt (Roa, 2006). 2 The frt organzatona revouton wa due, accordng to Chander, to a major ncreae of frm throughput. That rapd ncreae n the rate of producton created a contro proem (Benger, 1986) a far a producton growth wa not matched y a comparae growth of nformaton, requred for coordnatng thee enormou new producton and dtruton fow. The hgher throughput rate wa otaned y recoure to arger managera herarche, a tradtona nformaton-avng devce (Coae, 1937; 1 See the reference n Brynjofon et a. (1994). The maer frm ze ut one apect of the organzatona revouton, aongde the vanhng of congomerate, a hft to outourcng, and e we defned frm tructure and urred oundare uch a thoe of network frm. 2 Greenwood and Yorukogu (1997), and Jovanovc and Roueau (2005) jutfy the date of 1974 a the egnnng of the IT revouton. 2

3 Benger, 1986). 3 Herarchca organzatona tructure reduce communcaton cot ecaue they mnmze the numer of communcaton nk requred to connect mutpe economc actor, a compared wth decentrazed tructure (Maone 1987; Radner 1993). In th perpectve the econd organzatona revouton of the at quarter century the antchanderan revouton due to the new aundance of nformaton, not mpy n aoute eve, ut reatve to the ncreae of producton fow. Th reatve nformaton hypothe capae to expan oth organzatona revouton: the Chanderan one of the egnnng of the frt twenteth century, a we a the current ant-chanderan one of the egnnng of the econd twenteth century. Producton houd e ntegrated nto arger herarche when nformaton ecomng reatvey carce, whe t can e decentrazed n maer frm and more market tranacton when nformaton ecome reatvey aundant, a further expaned eow. The current organzatona era not o much defned y a Vanhng Hand, a Lango (2003) cam, nce frm are not dappearng atogether n the proce, ut on the contrary mutpy a they ecome maer. Th new trend more apty defned a uherng ndutra organzaton nto a Shrnkng Hand or Shrnkng Herarche era. Two man expanaton of that organzatona revouton are uggeted n the terature and preenty domnate the fed: the IT hypothe, and the market expanon-frm pecazaton hypothe The IT hypothe It we undertood nce Coae (1937) that the raon d être of the frm to uttute a centrazed decon-makng mechanm to a hgh tranacton cot market mechanm. Snce 3 See ao poteror terature modeng oth frm and market a nformaton proceng entte (Arrow, 1973; Garath, 1977; Hayek, 1945). 3

4 nformaton cot are a arge part of tranacton cot, a new aundance of nformaton houd expand market and contract frm. Indeed, Brynjofon et a. (1994) note that the organzatona and the nformatona revouton happened mutaneouy, 4 and Brynjofon and Htt (2000, p. 24) convenenty ummarze the hypothe: The fundamenta economc roe of computer ecome cearer f one thnk aout organzaton and market a nformaton proceor (Garath, 1977; Smon, 1976; Hayek, 1945). Mot of our nttuton and ntuton emerged n an era of reatvey hgh communcaton cot and mted computatona capaty. Informaton technoogy, defned a computer a we a reated dgta communcaton technoogy, ha the road power to reduce the cot of coordnaton, communcaton, and nformaton proceng. Thu, t not urprng that the mave reducton n computng and communcaton cot ha engendered a utanta retructurng of the economy. The majorty of modern ndutre are eng gnfcanty affected y computerzaton. But Brynjofon et a. (1994) acknowedge, n ne wth Coae (1937), that mot nventon w change oth the cot of managng and the cot of ung the prce mechanm. Whether the nventon tend to make frm arger or maer w depend on t reatve effect on thee two et of cot. For ntance, f the teephone reduce the cot of ung the prce mechanm more than t reduce the cot of managng, then t w have the effect of reducng frm ze and vce vera f t reduce the cot of managng more. It foow that the evouton of frm ze ecome a pror ndetermnate wth repect to nformaton technoogy n genera. It a depend on the pecfc charactertc of each nformaton-augmentng technoogy. In that cae, no genera rue can nk the aundance of nformaton to the choce of one proce over the other, and thu to the determnaton of average frm ze, and a cae y cae anay of each pecfc technoogca nnovaton requred. Thu, a etter undertandng of the theory of the frm and a more forma theory of the reatonhp etween IT and frm tructure are needed for more defntve hypothe tetng (Brynjofon et a. 1994, p. 1643). They further note that: our fndng that IT reated to the decne n frm ze may hed ght on another apect of the current retructurng of the Wetern econome: the recenty-dcovered eneft of focu y frm. Becaue dverfcaton typcay modeed a a repone to market faure, t woud e nteretng to ae whether IT ha heped enae the emergng trategy of ncreaed focu y ncreang the reatve effcency of product and capta market. 4

5 Another hortcomng of the current IT hypothe that athough t recognze that many of the pat century mot uccefu organzatona practce refect the htorcay hgh cot of nformaton proceng, t doe not try to expan the frt organzatona revouton that favored the growth of gant frm, depte the fact that nformaton nnovaton were not carce (the teegraph, teephone, rado). Thee nformaton technooge then had apparenty an effect on frm ze dametrcay oppoed to that of recent IT nnovaton. The dffcuty of fndng a common expanaton for the two oppote organzatona revouton what motvate, n part, the effort of the market-expanon theort, notay Lango (2003), and Lamoreaux, Raff and Temn (2002) The market expanon-frm pecazaton hypothe Lango (2003) roaden the pcture of the utanta organzatona change of the recent IT revouton y extendng the anay to frt market revouton of the end of the nneteenth century. On h readng of Chander, the Ve Hand the repone of une nttuton to the dramatc ncreae n popuaton and per capta ncome n the US after the cv war, couped wth the equay dramatc fa n tranportaton and tranacton cot attendant on the raroad, the nand water network, and the teegraph. Thee change requred a etter coordnaton of fow, otaned y vertca and atera ntegraton. Regardng the econd market revouton the preent one he note that t precey an unmakng of Chander revouton, ( ) a dramatc ncreae n vertca pecazaton a thoroughgong de-vertcazaton. H ac argument ree on ncreae n popuaton and n ncome and on the reducton of technoogca and ega arrer to trade, whch drve to the Smthan proce of the dvon of aor, away eadng to fner pecazaton of functon and ncreaed coordnaton through market, much a Ayn Young (1928) camed ong ago 5

6 The proem here that a ame roadenng of market and fang cot of tranport and communcaton, whch determned herarchca ntegraton y the end of the nneteenth century, entaed, at the end of the twenteth century, exacty oppote conequence: hrnkng frm. Lango tre to ove th ncontency y argung that the atter, downzng, trend expaned y new nttuton growng out of thck market that reduce the cot of exchange. Th however more a decrpton or a narratve than a non amguou expanaton aed on theory. A the cae for the IT hypothe, a ame technoogca change apparenty can n one cae determne a arger frm ze, and n another context caue a maer one. Lamoreaux, Raff and Temn (2002, p.56) are we aware of that dffcuty. They oerve that nce the eary nneteenth century, the decne n tranportaton and communcaton cot ha een amot contnuou, nduced notay y the deveopment of raroad and teegraph durng the frt market revouton, and y the computer era durng the econd market revouton. Depte th undrectona and amot near trend, the degree of herarchca organzaton ha foowed a hump-haped pattern over tme. Ther expanaton ree on the expanon of the market whch cont of two component, the geographca extent of the market, and ncome per capta,.e. the extenve and the ntenve margn of the market ze, whch oth mpact the ocaton and organzaton of frm. They ugget that when tranportaton cot are hgh, actvty oca and conequenty ma n cae. When thee cot decne, producton can e concentrated n pecfc ocaton and n arger frm. In addton, conumer preference ao affect frm ze and organzaton. Poor conumer demand ac, tandard good, and focu on prce. Rng per capta ncome hft the demand toward dverfed good, whch (omehow) mpy greater frm pecazaton and outourcng, uttutng ong term reatonhp for vertca 6

7 and atera ntegraton. The hypothe paue ut unproven and the author do not deveop a theory of the frm to comfort ther aerton. To um up, oth hypothee uffer from erou weaknee. They fa hort of expanng, wthn a ame theoretca framework, the Chanderan and the ant-chanderan organzatona revouton. They are dmar, however, n ther repectve theoretca trength. Whe the IT hypothe acay amguou wth regard to the mpact of nformaton on the comparatve cot of managng and of market exchange, t neverthee aed on a generay accepted, Coaan, theory of the frm. On the other hand, the market expanon- frm pecazaton hypothe negect the fact that market expanon endogenou wth repect to tranacton (tranport and nformaton) cot. It thu dffcut to conder market ze a an ndependent expanatory factor. 5 Moreover, the nk etween market ze and frm ze weak n theory: The market ze may not e the prncpa contranng factor on frm pecazaton (Becker and Murphy, 1992) and moreover frm pecazaton coud ead to arger a we a to a maer frm ze (Baumo et a, 2003) 6. Even more damagng to the hypothe, a thorough anay of frm ze dynamc n a genera equrum mode, a deveoped y Luca (1978), even concude that the average frm ze houd ncreae wth per capta ncome, contrary to the concuon of the market expanon theory. And the Luca propoton comforted y h emprca tet on the perod up to the md Gven that aymmetry n the theoretca foundaton of the two hypothee, we concude that a reearch trategy tryng to further deveop the IT hypothe n order to otan unamguou concuon regardng the mpact of an ncreae of nformaton nnovaton on frm ze more promng. It houd ao e capae of expanng oth the ncreang frm 5 Oner and Sche (2000) ndeed how that ncreaed growth rate of the 1990, and therefore wordwde expanon of the economy and market-goazaton, are a reut of ICT, not an ndependent caue. 7

8 ze of the frt organzatona revouton, and the decreang frm ze of the end one, a we ugget eow. 7 In the next ecton, we preent evdence on the extence of a genera trend toward maer frm ze. In the thrd ecton, we deveop a quantty of nformaton theory of frm ze that can account for the two organzatona revera and contratng era of the Ve Hand and of the Shrnkng Hand, whe the man caua factor, nformaton and market expanon, oth proceeded n a ame drecton throughout the perod. We how that what matter not the deta of nformaton aymmetre n varou contract (the Wamon pecfc aet proem) nor the reatve effect of nformaton on the cot of managng and cot of market, ut the evouton of the overa quantty of nformaton avaae n the economy, reatve to producton eve. Th ecaue nformaton a factor n the producton of management, and management a cu good that ao a factor of producton of the frm. When nformaton cot fa, the cot of managng fa, and ma frm, whch are reatvey management-ntenve compared to arge one, ecome more compettve reatve to the atter. The fourth ecton preent a forma mode of that theory. In the ffth ecton, we fnd emprca upport for our theory ung an nternatona and cro ector pane of the ze dtruton of frm. The at ecton preent our concuon. 2. The evdence on hrnkng frm ze There a arge ut dparate terature on whether a hrnkng n the average ze of frm occurred durng the at decade (Pore and Sae, 1984; OECD, 1985; Sengenerger, 7 In th paper, we concentrate the anay on frm ze, a the varae to e expaned, ecaue t nked to other organzatona change (vertca and atera dntegraton, refocung, re-pecazaton, outourcng, uttuton of computer to aor, vanhng congomerate, uttuton of ong term contractua reatonhp to herarchca reatonhp), and ecaue of data avaaty. 8

9 Loveman and Pore, 1990; Lchtenerg, 1990; Monnkhof, and van Ark, 1996; Feentra, 1998; Badwn, Jarmn, and Tang, 2002, Trau, 2003). It generay concudng to the reaty of that effect, ut reyng on oder data or data wth a mted coverage n term of ector or geographca cope. 8 We ue n th paper a roader and more up to date dataae. Accordngy, t neceary to check frt the pertence of the prevouy oerved trend of hrnkng frm ze n our roadened ampe. Fgure 1 preent, for the three arget European countre and the USA, the evouton of the average ze of enterpre n manufacturng ndutre, over the perod The ze meaured a the numer of empoyee. In European countre, a downward trend apparent nce the 70 (1977 n our data), reverng the former trend toward arger ze, dverfcaton and congomerate growth whch apparent n the evouton from to For the USA, data for the perod vndcate the decne that Baumo et a. (2003, p.100) oerved for a frm and a ndutre etween 1967 and Fgure 1. Average numer of empoyee for frm wth 20 empoyee or more (A manufacturng ndutry) [nert here] Tae 1 preent the reut of a tet of dfference n mean ze etween the two perod and , for 27 u-ector of the manufacturng ndutre (ISIC 3 8 Baumo et a. (2003, p. 1) fnd mxed evdence for the US ervce ector wth upzng a we a downzng. Do et a. (2008) oerve downzng n Europe ut not n the cae of the US, where ma frm hare n tota manufacturng empoyment decreaed etween 1972 and 1997 (and even 2003) wherea the hare of the arget frm ncreaed. They make a mar oervaton for Japan etween 1975 and Note however that thee reut uffer from a a n the data.. For Japan, the dtruton of manufacturng empoyment gven y zecae of etahment, not of frm (cf. Monnkhof and Van Ark, 1996). The upzng of the arget etahment can coext wth the downzng of the arget frm f the former have fewer ut arger etahment. There a mar proem wth ther data on US. 9 They otan thee oervaton for ndutry ung aternatvey data from the US ureau of the cenu and the Standard & Poor COMPUSTAT dataae. 9

10 and 4-dgt eve) of France, Germany and Unted Kngdom. The reut confrm the trend. The p-vaue reported at the ottom of the tae ndcate that we can reject the hypothe that average frm ze n the perod wa ower than n the perod Tae 1. Tet of dfference n mean ze, acro perod, Fr, Ger, UK. [nert here] The next four fgure 2a, 2, 2c & 2d preent the evouton of the average frm ze for manufacturng u-ector n the UK, France, Germany and the USA. The ze generay ncreaed etween 1962 and 1977 ut a majorty of ector ceary how a downward trend after the evente (1977): 91% of the ector n France n our ampe, 91% n UK, 75% n Germany and 71% n the USA. The evouton doe vary dependng on the ector. For exampe, n the u-ector offce and computng equpment, the average ze of frm ha decreaed y 93% n France, 77% n Germany and 67% n UK etween 1977 and There are ome excepton uch a the drug and medcne u-ector n whch frm contnued to grow after 1977 y 60%, 48.5% and 1.7% repectvey n the three countre mentoned aove. Fnay, for ome ector, evouton have dverged from one country to another. In the raroad equpment u-ector, the average ze ha een ncreang y 15% n Germany ut decreang y 17% n France and y 72% n the UK. Fgure 2a, 2, 2c, 2d. Average numer of empoyee (frm wth 20 empoyee or more) [nert here] Snce the md 1970, the manufacturng ector ha contracted n the four countre tuded. Between 1977 and 2000, manufacturng empoyment, a a proporton of tota 10

11 empoyment, ha decreaed y % n France, % n Germany and % n the UK. It ha dropped y % n the USA etween 1992 and The evouton ha ao dffered, nde countre, etween arge and ma frm (tae 2). The numer and the average ze of the arget frm have decreaed gnfcanty etween 1977 and 2000 n France, Germany and UK, a n the USA etween 1992 and Durng the ame perod, the numer of ma frm (20-99 empoyee) ha ncreaed n France and n Germany and contracted n UK and n the USA, ut at a ower rate than n the cae of arget frm. The drop n the numer of ma frm wa certany expaned n part y the overa contracton of the manufacturng ector whch ha een tronger n UK than n other the countre. The average ze of ma frm ncreaed n Germany and remaned qua contant n the US. It ha decreaed n France and n UK, ut here agan, the percentage much ower than n the cae of the arget frm and ha to e rought n parae wth the genera contracton n the manufacturng ector. Tae 2. Evouton n the numer and n the average ze of frm, per ca of ze [nert here] Fact thu do eem rather uncontrovera: a downzng trend repaced, after 1977, the prevouy upzng one. It due moty to the decreae of empoyment n the hgher dece and ncreae of empoyment n the ower dece. Th confrm prevou tude. In the cae of UK, France, Germany and Itay, Do et a. (2008) ndcate ceary that the arget frm accounted for a decreang hare of tota manufacturng empoyment durng the 90. In the cae of ma frm, ther hare remaned qute tae or ncreaed, dependng on the country. 11

12 Th eg the queton of whch are the determnant of frm ze that can expan that great organzatona revera of the ate twenteth century, reatve to the prevou Chanderan era of arge frm domnance nce the ate nneteenth century. 3. A quantty of nformaton theory of frm ze The theory that we propoe ncude a determnng roe for nformaton, n conformty wth the Coaan framework, a far a the more ovou of the tranacton cot that determne the choce etween the market (the prce mechanm) and the herarchca coordnaton y frm, the cot of dcoverng what the reevant prce are (Coae 1937, ecton 3) that, the cot of nformaton. 10 Th theory ret on a ere of key aumpton: 1. The manager the frm utmate fxed factor of producton. He produce management,.e. coordnaton, wth h own nformaton a the man nput n that producton. Wth no nformaton, there no management, and therefore, no producton. 2. He tranform h prvate nformaton aout the envronment nto a cu good wthn the frm, a ervce that can e apped to varou producton eve through the uance of order and ther dupcaton down the herarchca pyramd eve. Indeed, th amount of nformaton ought ony once for the whoe frm, and ued and repcated at w y the manager through h drectve and order tranmtted to h uordnate, whatever ther numer. Each uordnate comne the nformaton he receve from h mmedate uperor (and thu ndrecty from the top manager) wth h own competence, to produce drectve for h own uordnate n a Roen-type cacade mutpyng the effcency of uordnate y that of the manager (Roen 1982). Th made poe y vrtue of the cote dupcaton 10 A more deveoped and expct anay preented n Roa (2000, 2006). 12

13 of nformaton and ntructon wthn the frm (Roa, 2006), or y the reue of nformaton (Lango 2003). 3. Frm of varou ze operatng n a ame ector need aout the ame amount of nformaton on ther une envronment, the conumer, the aor force, and the ntermedate product upper. A a conequence, maer frm are more nformatonntenve than arger one, ecaue they have to pread th nformaton cot on maer output. Ther nformaton/output rato hgher. 4. Moreover, for a gven eve of overa producton, maer, more pecazed frm rey more on market exchange, ecaue market and frm are rva mode of producton (Coae 1937). Thu an addtona need for nformaton generated n an economy of ma frm. The market (decentrazed) mode of producton ree on more tranacton than the herarchca mode. The atter, a noted y Coae, repace a arge numer of atera contract etween ndvdua upper of nput and other producer y a maer numer of contract etween of few n-houe upper and a centra party, the entrepreneur or manager n order to reduce tranacton cot. 5. Snce maer frm are more nformaton-ntenve, the fa of the cot of nformaton make them more compettve v-à-v arger one. 11 By the Rycznk theorem, the ector of ma frm ung more of the now cheaper factor (nformaton) grow, wherea the ector of arge frm, ung e of t, contract. A Coae-Rycznk theorem thu otan that expan the evouton of organzaton (Roa, 2006, p. 243). Moreover, wth a ower cot of nformaton (a hgher quantty), arge frm w downze and/or dappear whe ma frm w upze, and new ma frm w enter the economy. And the revere true for a hgher cot of nformaton. There thu oth a numer of frm, and a ze of frm, effect of 11 There are, of coure, other determnant of dfference n frm ze. Luca (1978) expan the ze dtruton y the dtruton of managera taent n the popuaton, the mot taented entrepreneur managng the arger frm. Roen (1982) deveop a mode of the nterna economc of uch a frm n whch the taent (human capta) of the top manager enhance that of ntermedate manager at each herarchca eve. More taented manager enhance the effcency of ntermedate manager more than e taented one do. 13

14 the organzatona change. A reducton of tranacton (nformaton) cot thu exert a dfferenta effect on dfferent ze cae of frm, not a unform one acro a cae. 6. A the cot of nformaton fe y 99.9 percent nce the ncepton of the IT revouton (Jovanovc and Roueau, 2005) 12, the compettve advantage of maer frm ha een growng conderay, and th expan a arge hft n the ze dtruton of frm. Smaer frm are thu ae to mutpy and attract empoyee from the arge frm. The fgure 3 how the contnuou and mportant decne n the reatve prce of ICT equpment n the US over the perod Fgure 3. Reatve prce of ICT equpment , USA [nert here] To um up, one may concude that the overa quantty of nformaton ha a non amguou negatve effect on centrazaton and frm ze. For a gven overa producton eve, an ncreaed quantty of nformaton ncreae the compettve advantage of maer, nformaton-ntenve, frm. A decreae of nformaton avaaty (ncreang tranacton cot) ncreae the compettve advantage of arger frm. Th ao true of a growng producton economy: ncreang producton fow requre an ncreaed ue of nformaton (the Chander tory regardng the at quarter of the XIXth century). If the avaaty of nformaton doe not ncreae n tep wth the producton eve, herarche w expand to mtgate the ncreang cot of the nformaton factor. On the contrary they w hrnk f nformaton expand more rapdy than producton. A a coroary, th theory can expan the Chanderan revouton. The nformaton avaaty grew, due to nnovaton uch a the teegraph, teephone, typewrter, and other 12 They undercore the extraordnary decne n computer prce nce 1960 (up to the end of the 1990) compared to earer technooge. Whe the eectrcty and the automoe ndexe fa y a factor of 10, the computer ndex fa y a factor of

15 (Benger, 1986), ut at a eer rate than producton dd, thu rang the reatve carcty of nformaton and t reatve cot, and eadng to an ncreaed optma frm ze (gant dverfed corporaton, trut, congomerate). On the contrary, the recent ICT revouton ha ncreaed the quantty, and decreaed the cot, of nformaton much more than t raed output. The growng nformaton/output rato ed to a hrnkng of the ve hand and the return of the nve hand. Thu a ame theory expan oth organzatona revouton. Moreover th mode can account for the mutaneou decreae of the arge frm hare of empoyment and ncreae of the ma frm hare, whe the mpe comparon of the cot of nformaton n management and n the prce mechanm coud ony forecat a genera decreae (or ncreae) of the ze of a frm. The key to th reut that ntead of focung attenton on the dfferenta mpact of each IT nnovaton on the cot of market exchange and on that of managng, we concentrate the anay on the dfferenta nformaton factor ntenvene of maer and arger frm, and hence on the Coae-Rycznk effect of the ncreang reatve aundance of nformaton. Some more precon n the mode can e otaned from a forma preentaton. 4. A forma preentaton of the mode Conder two frm j = 1, 2 operatng n the ame product ector ut of dfferent ze, wth output x 1 and x 2 uch that x1 x2 (e.g. x 1= 1000 and x 2 = 500) and numer of empoyee L 1 > L 2 (e.g. L 1 = 1000 and L 2 = 500). We aume for mpcty that aor trcty proportona to output wth a one to one correpondence. 15

16 In order to run ther operaton, they need another factor of producton, nformaton. To make a ame product, dfferent frm need the ame knd of nformaton and n the ame quantty I 1 = I 2 (e.g. I 1 = I 2 = 10), whatever the output eve. The nput coeffcent are I j j for nformaton and x j L j j for aor. x j In our numerca exampe, 0, 1 01, 0, 02 and (aor proportona to output). Factor reatve ntenty gven y the rato j j. 1 0, 01 1 and n our cae, frm 1 more nformaton-ntenve than frm 2, The deveopment and dffuon of ICT (mcroproceor, computer, atete communcaton, moe phone), at a much owered prce, ha ed to a vaty arger quantty of nformaton avaae n ocety. One may how eay that n theory, th ncreaed aundance of the nformaton factor of producton favor the frm that are more nformatonntenve. Accordngy, maer frm 2 w ecome oth more compettve and more numerou reatve to arger frm Compettvene and the prce of nformaton. Let w, the unt prce of aor, e contant, p, the unt prce of good X, e contant (the aor market and the product market are compettve, no econome of cae), and z, e the unt prce of nformaton. The untary proft p w z. j j j Hodng every ee contant, the margna proft for a varaton of the prce of nformaton : j z j whch hgher for the maet frm. 16

17 Th reut hod f one conder a contnuum of frm ze n the economy, ntead of jut two ze, the vaue of j contnuouy decne wth the ze of the frm (n output or empoyment), and thu the margna proft for a varaton of the prce of nformaton ao decne wth ze. Large frm proft e from a fang prce of nformaton than maer one. In other term, the reatve cot (the dua of proftaty) of arge frm and ma frm are changed to the detrment of the arget. Whe a frm have reduced ther tota cot due to the ower prce of the nformaton nput, the gan much more mportant for the maer frm whch eneft therefore from an ncreaed compettvene reatvey to arger one. It foow that the arger the frm, the more vunerae from the competton of maer frm t w e, and epecay from the more ntene competton of the maet. Th houd reut n the repacement of the frm n the arget dece n the ze dtruton, for ntance, y more frm n the maet dece. Large frm have to cut ther ze much to face the new compettvene of maer frm. 4.2 Conequence on the average ze of frm. Conder that a product ector X compoed of K u-ector k, and each k correpond to dfferent ze-cae of frm. Each u-ector k thu compoed of n k frm j that are of the ame ze: x kj, L kj, and I kj are contant. The ze of frm characterzed ether y output or empoyment eve. The aggregate output n the product ector X uch that: X k X k x k, j kj. In the u-ector k, the aggregate output X k can ony ncreae wth the numer of frm n and uch that f k X k X k n k, 0 n k nk and 0. X 1 and n f k X k k 17

18 18 For eae of the preentaton, aume that there are ony two u-ector k,, the frt,, compoed of ma dentca frm and the econd,, of arge dentca frm. The tota quantte of nformaton and of aor ued n ector X are gven y the foowng reaton: 13 X X L X X I (1) Takng the tota dfferenta: dx dx dl (2) dx dx di Sovng for thee equaton, one get: dl di dx (3) dl di dx Note that n each cae, the gn of the parta dervatve depend on the denomnator and, n partcuar, on the dfference n u-ector reatve factor ntenty:. In the cae of ma frm that are more nformaton-ntenve than arger one,, a prevouy hown, and one can read the parta dervatve from (3) and uch that: 0 1 I X 13 The foowng mode adapted from the Rycznk theorem demontraton n Dxt Norman (1998, p.11-13).

19 X I 1 0 Th reut can e defned a a Coae-Rycznk theorem: An exogenou ncreae n the quantty of nformaton w ead to a deveopment of u-ector nk X and a contracton of u-ector X, and gven our aumpton that 0, th w ead to X a dfferent dtruton of frm among ca ze and to a decreae n the overa average ze of frm. Th can expan the oerved correate of the downzng trend: de-ayerng of the frm herarche, outourcng, pnoff, re-pecazaton and refocung, end of congomerate, a we a the ncreaed demand for hghy quafed aour and decreaed demand for unquafed aour, whe the ector of the maer frm expand, a charactertc evouton of the recent decade that other theore do not expan. k 5. Emprca tet The aove theory purport to unamguouy expan oth htorca perod of expandng ve hand and of hrnkng hand y the changng reatve avaaty of nformaton n producton. Whe t ymmetrc and houd e teted mutaneouy on oth perod, ovouy adequate data are not avaae for the chanderan era, frt for ack of a we deveoped data coecton apparatu, and econd ecaue the evouton of the varou nformaton augmentng nnovaton ha not een recorded n ong term ere of prce and quantte. 19

20 We thu have to tet the theory on the current nformaton revouton era ony. Gven, however, the ymmetry of the theory we fee that f the reut vndcate our hypothe for th truncated ampe, they houd ao vadate the theory for oth the expandng and the hrnkng hand cae. 5.1 Methodoogy and varae defnton In order to meaure the ze of frm, one can aternatvey ue gro output, vaue added or the numer or the eve of empoyment (Kumar et a., 1999). The at one preferae for our purpoe, a coordnaton cot, the purpoe of th paper, are nked to the numer of empoyee, not to ther productvty. We compute the average numer of empoyee per enterpre, for enterpre wth 20 empoyee or more n an ndutra u-ector. We have data for 27 manufacturng u-ector (ISIC 3 and 4-dgt eve). Unt 1990, data are from Monnkhof and van Ark (1996). For the more recent year, data are from Eurotat (Structura Bune Stattc dataae). For France, data are for 1977, 1990, 1996, 2000 and For Germany, 1967, 1977, 1990, 2000 and For the Unted Kngdom, 1968, 1977, 1990, 1996, 2000 and For USA, data are from the US Cenu of manufacture, for the year 1992, 1997, 2000 and A the varou ource ue dfferent cafcaton (NAICS, NACE, ISIC rev. 2), a data were converted to the ame tandard cafcaton ISIC. To ae the eve of nformaton and communcaton technooge and the cot of nformaton tranmon, we ue two knd of varae. Frt, the numer of man teephone ne per 100 hatant n a country, an ndcator avaae over a ong perod and for evera countre. Data are taken from the Word Teecommuncaton Indcator dataae (Internatona Teecom Unon) and they range from 1965 to Second, we ue Jorgenon (2001) ong term ere on prce of ICT equpment and of computer. ICT 20

21 Prce are taken reatve to US GDP prce and oth are normazed to one n Smary, we conder the reatve prce of computer a the rato etween computer prce and GDP prce. Data are ony avaae for the USA and are aumed to e good proxe for other countre. We expect a potve correaton etween thee prce etmate and frm ze, a a ower prce of ICT equpment woud foter acce to nformaton. But we fee that the reatve prce of ICT equpment, a roader varae than the reatve prce of computer (ee the defnton of thee varae n Jorgenon 2001), much more reevant a a proxy for the prce and avaaty of nformaton. Due to data avaaty, our emprca anay proceed n two tep correpondng to two dfferent ampe. The frt one cover France, Germany and the UK, over the perod 1967 to 2004, wth exogenou varae that are moty countrywde. The econd ampe cover a horter perod of tme (1990 to 2004) ut ncude the USA and more ector eve expanatory varae. A we ue data at the ector eve, for evera countre and for evera year, we conduct pane etmaton. 5.2 Frt ampe: France, Germany, UK, In th frt tep, the average ze of frm and the market ze are oerved at the ector eve wherea a other varae are countrywde. Our mode ntend to meaure the reatonhp etween the eve (reatve prce) of ICT equpment n the economy and the average ze of enterpre for a gven manufacturng ector, n a gven country and for a gven year, whe controng for market ze, foregn competton, prce of nvetment, human capta and ndutry-pecfc effect. The ac regreon mode : Sze j,z,t = α + β ICT j,t- + γmarket j,z,t + ρinv j,t + δhumcap j,t + µtrade j,t + ε t (4) 21

22 where Sze j,t the og of average frm ze n country j, ector z and year t; ICT j,t- ether: ) The og of the numer of teephone man ne per 100 hatant n country j and perod t or, ) The prce of ICT equpment or of computer reatve to GDP prce, n country j and year t- wth =0,1,2 or 3. Foowng Kumar et a. (1999), Market j,z,t the og of tota empoyment n a u-ector z a a proxy for t market ze n country j, at perod t. Data are from the ame ource a for frm ze, except that ome mng vaue were competed ung the OECD STAN dataae. Th the cae of France and Germany, for toacco and O and refnere, and the year 1996 for Germany. HUMCAP j,t the average choong year of popuaton aged over 25, taken from the Barro ad Lee (2000) dataet. It ued a an ndcator of human capta. If t determnate taent for managng, we may expect a potve correaton wth enterpre ze. INV j,t the nvetment prce eve n country j at perod t, and accordng to Brynjofon et a. (1994), t houd dcourage une expanon and ead to decne n frm ze. Data are from Penn Word Tae. TRADE j,t the degree of trade openne of country j at perod t, (export pu mport dvded y GDP) and data are from the Penn Word Tae. It ued a an ndcator of foregn competton that ead to downzng accordng to Brynjofon et a. (1994) and to Baumo et a. (2003). Fnay, ε t the error term. We ntroduce a ector fxed effect n the pane etmaton procedure n order to contro for potenta factor that woud not change over tme. The tae 3a preent the correaton matrx for thee varae. Tae 3a. Correaton matrx. Frt ampe: Fr, Ger, UK, [nert here] 22

23 We conder that heterokedatcty a potenta proem gven that the ze of the twenty even ector vare gnfcanty n our data et. Foowng Brynjofon et a. (1994), we ove th dffcuty ung the weghted eat quare correcton technque. Each oervaton on a ector weghted y the ze of the ector, a proxed y a ector hare n tota empoyment (emp). In order to do o, we frt computed the average empoyment hare (EMP) over the 27 ector (for each country, each year) and mutped each varae y t correpondng rato (emp/emp). Th procedure correctng for heterokedatcty whe provdng effcent parameter etmate. Kumar et a. (1999) ugget that market ze, meaured y empoyment, can e endogenou. Indeed, ome externa factor nfuencng the ze of frm coud affect a ector tota empoyment a we. To avod th proem, we ntrument market ze wth the og of popuaton and of rea GDP, oth taken from the Penn Word Tae, and we conduct weghted Intrumenta Varae (IV) regreon. In what foow, we preent the reut of OLS and then IV regreon, ung the dffuon of teephone ne and the reatve prce of ICT equpment and of computer a aternatve expanatory varae. Reut The Tae 4 preent the reut of weghted OLS regreon wth ector fxed effect. The frt four coumn correpond to pecfcaton of the mode ung the numer of man teephone ne a expanatory varae. The frt one report reut of the fu mode. The etmated coeffcent for trade openne and human capta are not gnfcant. The correaton matrx (Tae 3a) revea that thee two varae are trongy and gnfcanty 23

24 correated together and wth our meaure of ICT prce and eve of equpment. For th reaon, we excude thee two varae from the next regreon. The next three coumn dffer wth the year (t, t-1, t-2) at whch the varae numer of teephone ne wa oerved. Th aow u to account for a potenta ag n the nfuence of teecommuncaton equpment dffuon on frm ze. We ue ony one of thee aternatve meaure at a tme n order to avod proem of conearty. The etmated coeffcent for th varae negatve, a expected, and gnfcant. Over th ong perod, the deveopment of teecom equpment accompaned frm downzng. The potve and trongy gnfcant etmate for Market ze are conform to a cae effect a uggeted y Kumar et a (1999) and Baumo et a. (2003). However, th contradct the theoretca predcton y Lamoreaux, Raff and Temn (2002). We oerve a potve and gnfcant etmated coeffcent for nvetment prce. Th ugget that a ower cot of nvetment ha a downzng effect on frm due to a factor uttuton effect. The coumn (5) and (6) preent the reut of mar regreon ut ung the prce of computer and of ICT equpment a expanatory varae. We fnd potve and gnfcant etmated coeffcent for thee two varae, confrmng that a cheaper acce to nformaton and communcaton technooge favoured frm downzng. We ntroduce a country fxed effect n the anay n order to account for tructura dfference etween countre uch a nttutona factor. Kumar et a. (1999) ugget ndeed that the effcency of the judca ytem, the regme of patent protecton, the quaty of accountng tandard, the tatutory corporate taxe, and the eve of reguatory contrant may nfuence the ze of frm. 14 The coumn (7), (8) and (9) of tae 4 ndcate de reut of near OLS regreon wth the numer of teephone ne, ICT and computer prce a aternatve exogenou varae. The reut reman the ame. 14 They fnd emprcay that ony the judca effcency ha a cear correaton wth frm ze (Kumar et a. (1999, p23). 24

25 In a tet, not hown here, we ntroduced countre rea GDP per capta a an addtona expanatory varae n order to account for Luca (1978) aumpton. The etmated parameter negatve, contrary to expectaton, ut not gnfcant. Th varae trongy correated wth our meaure of ICT prce and eve of equpment. Tae 4. Effect of ICT equpment and prce on frm ze, Fr, Ger, , OLS etmate [nert here] The tae 5 preent the reut of IV regreon and they confrm our prevou reut. At the ottom of th tae, we report a ere of tet of underdentfcaton, of the reevance and weakne of ntrument, and of overdentfyng retrcton. They away ead u to conder our ntrument a vad and rout. The US reatve prce of ICT equpment have een decreang contnuouy nce the ate 1960 a hown on fgure 3. Th decne wa even more pronounced n the cae of the reatve prce of computer (Jorgenon, 2001). A we take thee US prce a expanatory varae for the four countre of our ampe, they may act a trend. In order to turn th proem, we have ntroduced a trend that key to capture th effect. Reut are preented on Tae 4, coumn (10) and (11) for OLS regreon, and on Tae 5, coumn (6), (7) and (8) for IV regreon. They ndcate that our prevou reut are rout to the ncuon of a trend. Tae 5. Effect of ICT equpment and prce on frm ze, Fr, Ger, UK, , IV etmate [nert here] 25

26 5.3 Second Sampe: France, Germany, UK, USA, In a econd tep of our emprca tudy, we conduct econometrc tet ung the prce of ICT equpment and of computer, reatve to GDP, and a dfferent et of expanatory varae oerved at the ector eve (3 or 4-dgt eve) eected foowng Kumar et a. (1999) and Baumo et a. (2003). Th enae u to mprove the pecfcaton of the mode. We ntend to tet a reduced form of the mode: Sze j,z,t = α + β ICTprce j,t + γmarket j,z,t + δwage j,z,t + υtrade j,z,t + Invetment j,z,t + CORRUPTION j,t + ε t (5) Wage the og of wage per worker and Invetment the og of nvetment per worker. Data are from the OECD STAN dataae and were defated ung repectvey the Producer Prce Index (manufacturng good, reference year 1999) and the Conumer Prce Index. A vaue were converted nto US doar. 15 We ue a corrupton percepton ndex a a meaure of the degree of rue enforcement n a country, a t mght affect frm ze a uggeted y Beck et a. (2002). It from Tranparency Internatona and avaae ack to It rankng from 1 (hgh eve of corrupton) to 10 (ow eve). For the year 1990 and 1992, we ue the corrupton ndex from the Potca rk ervce (PRS, ICRG) and we recaed. We aume that thee two dfferent ource are homogenou enough. We omt Human capta gven the proem of correaton prevouy raed. 16 Ony the prce of ICT equpment and the corrupton ndex are oerved at the country eve, wherea a the other are ector-eve. 15 When data were not avaae at the 3 (or 4) dgt eve, we took the correpondng one at the 2 (or 3) dgt eve. 16 The proem may e gnfcant etween human capta and wage a t we known that arger frm pay hgher wage (O and Idon, 1999a and 1999) and thu hre hgher human capta empoyee. 26

27 The data et cover 27 u-ector of the manufacturng ndutry, over the perod , for France, UK and USA (four year oerved) and Germany (three year oerved). The tae 3 preent the correaton matrx for thee varae. Tae 3. Correaton matrx. Second ampe: Fr, Ger, UK, USA, [nert here] Reut We tet the reaton (5) wth OLS and then IV regreon, wth ector fxed effect. We ue the ame weght a efore and the varae Market ntrumented ung the og of GDP and of the quared popuaton. The tae 6 preent the reut. Here agan, we fnd potve and trongy gnfcant etmate for the expanatory varae prce of ICT equpment and prce of computer, wth oth OLS regreon, coumn (1) and (2), and IV regreon, coumn (5) and (6), a predcted y our theoretca aumpton. Thee reut are rout to the ncuon of a trend n the cae of the reatve prce of ICT equpment (coumn (3) and (7)) ut not for the reatve prce of computer a hown y coumn (4) and (8). Our emprca reut confrm that market ze ao a determnant factor n th decon, and content wth predcton y the theoretca terature. However, our reut for nvetment per worker, wage, trade openne and corrupton are not away gnfcant n oth OLS and IV regreon, and houd e condered cautouy. In addton, the correaton matrx (tae 3) revea cro correaton etween expanatory varae, ncudng n partcuar wage, trade openne and corrupton. 27

28 Tae 6. Effect of ICT and computer prce effect on frm ze, Fr, Ger, UK, USA , OLS and IV etmate [nert here] We have conducted Woodrdge (2002) tet of autocorreaton n pane data for the two ampe, and n each cae, the F-tattc ead u to reject the nu hypothe of no era correaton (ee tae 7). Tae 7. Woodrdge tet of autocorreaton n pane data [nert here] Gven th dagnotc, we have conducted addtona regreon wth correated pane corrected tandard error, and excudng the correated expanatory varae. The reut are preented on coumn (12)-(14) of tae 4 and on coumn (9) and (10) of tae 6. They confrm the routne of our reut. 17 Fnay, a ere of tet conducted at the ector eve, not hown here ut avaae from the author, confrm our reut. They houd nonethee een conder cautouy a far a, for each tet, the ampe ze wa ma. Our emprca tet, conducted on two ampe and wth varou varae, confrm that a etter acce to nformaton, due to a ower prce of ICT equpment and of computer, ed to a downzng of frm n France, Germany, the Unted Kngdom and the Unted State. Th upport our aumpton on the roe of nformaton cot n the decon to nternaze veru outource actvte. 17 Note however that one way to correct for era correaton to adopt a dynamc tructure for the pane data (.e. ntroducng agged dependent varae a expanatory). We were not ae to do th ecaue of nuffcent oervaton. 28

29 6. Concuon The contractng frm ze and organzatona revouton of the at few decade, the new Shrnkng Hand era repacng the former Chanderan one of growng domnance of the Ve Hand, ha euded a cear expanaton n the terature. The man theoretca hypothee aout the caung factor whether the progre of nformaton technoogy ncreang the effcency advantage of market over frm (dependng on pecfc nnovaton n nformaton technoogy), or the undrectona ncreae of ncome and popuaton aowng an ncreaed pecazaton of frm and an ncreang conumer demand for more dverfed product, thu eadng to hrnkng equrum frm ze run nto erou dffcute. Ther predcton are theoretcay amguou, and they do not account for the overa evouton of re and decne of the ve hand over the coure of the twenteth century. A noted y Lamoreaux, Raff and Temn 2002), the hump haped trajectory of organzatona centrazaton (and frm ze) due to the two ucceve organzatona revouton of repectvey the ate nneteenth and ate twenteth century cannot e expaned n term of the undrectona ncreae of ncome per capta and popuaton, nor y the deta and pecfcte of the varou technoogca nnovaton that a contruted to decreae the cot of nformaton and communcaton, that have characterzed the modern perod nce the ate nneteenth century. We have preented n th paper a outon to the conundrum reyng on a quantty of nformaton theory of frm ze n whch the reatve growth of nformaton and output the key determnant of the compettve advantage of maer, nformaton ntenve frm, over arger frm that ue nformaton more parngy. We thu ypa the need to conder the prece mpact of tranacton cot reducng nnovaton on oth market and frm (Coae 1937), to derve a genera, ze reducng effect of an ncreae of the quantty (and decreae of the cot) of nformaton on average frm ze. 29

30 Our anay doe not rey on auxary and contetae hypothee regardng new nttuton that coud have ncreaed the market effcency (Lango 2003), or aout the effect of market expanon on frm pecazaton and ze, or on conumer demand for dverfed product eyond a pecfc ut unpecfed threhod (Lamoreaux, Raff and Temn 2002). It expan ao why the Luca theory that predcted a genera ncreae of average frm ze n a growng ncome per capta economy ha een dproved y uteror, pot 1970, evouton. Ung ndutra pane data on frm ze on four countre France, Germany, UK and USA for the 1967 to 2004 perod, we tet our nformaton growth hypothe a a major determnant of frm ze, ao ncudng other determnant found n the terature a normazng varae. Our fndng gve upport to our quantty of nformaton theory of the frm a expreed n a Coae-Rycznk theorem of organzatona choce and evouton. The hgher quantty and dramatc fa of the cot of nformaton reutng from the IT revouton ncreae the compettvene of ma frm reatve to the arger etahed frm, eadng to an expanon of the former hare n the economy tota empoyment. Moreover, a coroary of our theory that an ncreang avaaty of nformaton houd exert a dfferentated effect on ma and arge frm hare of tota empoyment, expandng the hare of ma frm and contractng that of arge one. We do not drecty tet th dtorton effect nce neceary data are not avaae throughout the perod. But emprca evdence n other work compate wth our predcton. Th nterpretaton further confrmed, partcuary, y the Baumo et a. (2003) data on the changng dtruton of frm ze wthn the manufacturng ector. They how that the two categore of maer frm, thoe enrong 1-19 and empoyee, have een upzng from 1977 to 1992, whe the arget ze category of 10,000 empoyee or more ha ceary een downzng. 30

31 We therefore concude that the overa degree of centrazaton of producton, a we a the frt (Ve Hand) and the econd (Shrnkng Hand) organzatona revouton, can e expaned y the changng reatve aundance of nformaton. Reference Arrow, K.J. (1973) Informaton and Economc Behavor, (Stockhom: Svanack & Nyman). Badwn, J.R. Jarmn, R.S. and Tang, J. (2002) The trend to maer producer n manufacturng: A Canada/U.S. comparon, Mcro Economc Anay Dvon Reearch paper, 003, Stattc Canada. Baumo, W.J., Bnder, A.S. and Woff, E.N. (2003) Downzng n Amerca: Reaty, Caue, and Conequence, (New York: Rue Sage Foundaton). Beck, T., Demrgfc-Kunt, A. and Vojav, M. (2002) Fnanca and ega contrant to frm growth. Doe ze matter?, The Word Bank Pocy Reearch Workng Paper Sere Becker, G.S. and Murphy, K.M. (1992) The dvon of aor, coordnaton cot, and knowedge, The Quartery Journa of Economc, 107(4), Benger, J. R. (1986) The Contro Revouton: Technoogca and Economc Orgn of the Informaton Socety, (Camrdge: Harvard Unverty Pre). Berger, P.G. and Ofek, E. (1995) Dverfcaton' effect on frm vaue, Journa of Fnanca Economc, 37(1), pp Bhagat, S., Shefer, A., and Vhny, R.W. (1990) Hote takeover n the 1980: The return to corporate pecazaton, Brookng Paper on Economc Actvty. Mcroeconomc, pp Brynjofon, E., Maone, T.W., Guraxan, V. and Kam, A. (1994) Doe nformaton technoogy ead to maer frm?, Management Scence, 40, pp

32 Brynjofon, E., and Htt, L.M. (2000) Beyond computaton: nformaton technoogy, organzatona tranformaton and une performance, Journa of Economc Perpectve, 14(4), pp Chander, A.D. (1962) Strategy and Structure: Chapter n the htory of ndutra enterpre, (Camrdge: MIT Pre). Chander, A.D. (1990) Scae and cope: the dynamc of ndutra captam, (Camrdge: The Beknap Pre). Coae, R. (1937) The nature of the frm, Economca, 4 (16), pp Dxt, A. and Norman V. (1980) Theory of Internatona Trade, (Camrdge: Camrdge Unverty Pre). Do, G., Gamardea, A., Grazz, M. and Orengo L.(2008) Technoogca revouton and the evouton of ndutra tructure: aeng the mpact of new technooge upon the ze and oundare of frm, Captam and Socety 3(1), pp.1-37 Feentra R.C. (1998) Integraton of trade and dntegraton of producton n the goa economy, Journa of Economc Perpectve, 12 (4), Garath, J. (1977) Organzatona Degn, (Readng, MA: Addon-Weey). Gordon, R.J. (2000) Doe the new economy meaure up to the great nventon of the pat?, Journa of Economc Perpectve, 14(4), pp Greenwood, J. and Yorukogu, M. (1997) 1974, Carnege-Rocheter Conference Sere on Puc Pocy, 51(4), pp Hayek, F. (1945) The Ue of knowedge n ocety, Amercan Economc Revew, 35(4), pp Htt, L.M. (1999) Informaton technoogy and frm oundare: Evdence from pane data, Informaton Sytem Reearch, 10(9), pp

33 Jorgenon, D.W. and Stroh (1999), Informaton Technoogy and the US economy, Amercan Economc Revew, 91(1), pp Jovanovc, B. and Roueau, P. L. (2005) Genera purpoe technooge, n P. Aghon and S. Durauf (ed.),, Handook of Economc Growth, Voume 1, Chapter 18, pp , (Amterdam: Eever). Kumar, K.B., Rajan, R.G. and Zngae, L. (1999) What determne frm ze?, NBER Workng Paper Lamoreaux, N.R., Raff, D.M.G., and Temn, P. (2002) Beyond market and herarche: Toward a new ynthe of amercan une htory, NBER Workng Paper Lango, R. (2003) The vanhng hand: The changng dynamc of ndutra captam, Indutra and Corporate Change, 12(2), pp Lazear, E. and G, M. (2009), Peronne economc n practce, 2 nd ed. (New York: Wey). Lchtenerg, F.R. (1990) Indutra de-dverfcaton and t conequence for productvty, Couma Unverty Workng Paper, January. Luca, R. (1978) On the ze dtruton of frm, Be Journa of Economc, 9, pp Maone, T.W. (1987) Modeng coordnaton n organzaton and market, Management Scence, 33(10), pp Monnkhof, E. and van Ark, B. (1996) Sze dtruton of output and empoyment, OECD Workng Paper 166. Oner, S.D. and Sche, D.E. (2000) The reurgence of growth n the ate 1990: I nformaton technoogy the tory?, Journa of Economc Perpectve, 14(4), pp O, W.Y. and Idon, T.L. (1999a) Frm ze and wage, n O. Ahenfeter and D. Card (ed.), Handook of Laor Economc,. pp (Amterdam, New York: North Hoand). 33

34 O, W.Y. and Idon, TL. (1999) Worker are more productve n arge frm, Amercan Economc Revew, 89, pp Pore, M.J. and Sae, C.F. (1984) The Second Indutra Dvde (New York: Bac Book). Radner, R. (1993) The organzaton of decentrazed nformaton proceng. Econometrca. 62, pp Roa, J.-J. (2006) The Second Twenteth Century: How the Informaton Revouton Shape Bune, State, and Naton (Stanford: The Hoover Pre), frt puhed n French n 2000 a: Le Second Vngtème Sèce (Par: Graet). Roen, S. (1982) Authorty, contro, and the dtruton of earnng, Be Journa of Economc, pp Sengenerger, W., Loveman G.W. and Pore, M.J. (1990) The Re-Emergence of Sma Enterpre: Indutra Retructurng n Indutra Countre (Geneva: ILO). Smon, H. A. (1976) Admntratve Behavor, 3 rd ed (New York: The Free Pre). Stock, J.H., and Yogo, M. (2005) Tetng for weak ntrument n near IV regreon, n D.W. Andrew and J.H. Stock (ed.), Identfcaton and Inference for Econometrc Mode: Eay n Honor of Thoma Rothenerg, pp (Camrdge: Camrdge Unverty Pre). Trau, F. (2003) Structura Macroeconomc Change and the Sze Pattern of Manufacturng Frm (Bangtoke: Pagrave MacMan). Wamon, O.E. (1975) Market and Herarche: Anay and Anttrut Impcaton: A Study of the Economc of Interna Organzaton (New York: The Free Pre). Woodrdge, J. M. (2002) Econometrc Anay of Cro Secton and Pane Data (Camrdge MA: MIT Pre). Young, A.A. (1928) Increang return and economc progre, The Economc Journa, 38, pp

35 Fgure 1. Average numer of empoyee for frm wth 20 empoyee or more (A manufacturng ndutry) France Germany UK USA Source: Monnkhof and van Ark (1996), Eurotat and US Cenu of manufacture. Fgure 2a, 2, 2c, 2d. Average numer of empoyee (Frm wth 20 empoyee or more) Erreur! Aucun nom de proprété n'a été fourn. Fgure 2a: Unted-Kngdom, Fgure 2: France, Dary product Beverage Texte Wearng appare, eather product Erreur! Aucun Paper product nom de proprété n'a été fourn. Dary product Prntng and puhng Beverage Indutra and other chemca Texte Drug and medcne Wearng appare, eather product Wood product Fgure 2c: Germany, Fgure 2d: USA, Source: Ruer and Monnkhof patc product and van Ark (1996), Eurotat and US ureau of the Cenu. Author cacuaton Wood product 2000 Pottery and Chna Paper product 2004 Ga Product Prntng and puhng Bac meta Indutra and other chemca Meta product Drug and medcne Machnery n.e.c. Ruer and patc product Offce and computng equpment Pottery and Chna Eectrca machnery Ga Product Rado, TV&comm equpment Bac meta Tranport equpment Meta product Shpudng and reparng Machnery n.e.c. Raroad equpment Offce and computng equpment Motor vehce Eectrca machnery Motorcyce and cyce Rado, TV&comm equpment Arcraft Tranport equpment Shpudng and reparng Raroad equpment 1992 Motor vehce Motorcyce and cyce 35 Arcraft

36 Fgure 3. Reatve prce of ICT equpment , USA 15,00 10,00 5,00 0, Source: Jorgenon (2001) Tae 1. Tet of dfference n mean ze, acro perod, Fr, Ger, UK. Perod Group Numer of oervaton Mean Std. Err Dfference dff = mean(0) - mean(1) t-tattc Ho: dff = 0 Degree of freedom Ha: dff < 0 Ha: dff 0 Ha: dff > 0 Pr(T < t) = Pr(T > t) = Pr(T > t) =

37 Tae 2. Evouton n the numer and n the average ze of frm, per ca of ze Larget frm, 500 empoyee Sma frm, empoyee Average ze % change Numer of frm % change Average ze % change Numer of frm % change Unted State % % -0.31% % Unted Kngdom % % -2.60% % Germany % -9.95% 2.81% 8.44% France % % -5.58% 5.36% Tae 3a. Correaton matrx. Frt ampe: Fr, Ger, UK, Frm ze Numer Prce of ICT Computer Market Invetment Trade teephone ne n t a equpment a prce a ze prce a openne a Frm ze Numer teephone ne n t a * Prce of ICT equpment a * Computer prce a 0.153* * 0.819* Market ze * 0.194* 0.137* Invetment prce a * * * Trade openne a * 0.720* * * * Human capta a * 0.660* * * * 0.804* *Sgnfcant at 5% eve. a denote varae meaured country wde. denote ector-eve varae Tae 3. Correaton matrx. Second ampe: Fr, Ger, UK, USA, Frm ze Frm ze Prce of ICT equpment a Computer prce a Market ze Invetment a Trade openne Prce of ICT equpment a 0.119* Computer prce a 0.118* 0.985* Market ze Invetment a Trade openne 0.162* * * * * Wage 0.356* * * * 0.119* Corrupton a * 0.367* * *Sgnfcant at 5% eve. a denote varae meaured country wde. denote ector-eve varae Wage 37

38 Tae 4. Effect of ICT equpment and prce on frm ze FR, UK, GER, , OLS etmate Correated pane corrected Tet Indutry fxed effect Indutry-country fxed effect Varae tandard error regreon (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) Numer teephone ne n t a ** ** ** (0.137) (0.028) (0.036) (0.049) Numer teephone ne n t-1 a ** (0.024) Numer teephone ne n t-2 a ** (0.029) Prce of ICT equpment a 0.095*** 0.101*** 0.185* 0.281*** (0.005) (0.001) (0.063) (0.000) Computer prce a 0.033** 0.033** 0.093* 0.091*** (0.018) (0.019) (0.054) (0.000) Market ze 0.598*** 0.612*** 0.608*** 0.607*** 0.463*** 0.489*** 0.637*** 0.457*** 0.495*** 0.419*** 0.471*** 0.395*** (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.927) (0.499) Invetment prce a 0.346*** 0.298*** 0.296*** 0.295*** 0.241** 0.253** 0.246*** 0.249*** 0.246*** 0.244*** 0.282*** 0.572** 0.722*** 0.728*** (0.000) (0.002) (0.001) (0.002) (0.028) (0.016) (0.006) (0.000) (0.000) (0.000) (0.000) (0.030) (0.000) (0.001) Trade openne a (0.581) Human capta a (0.826) Trend (0.338) (0.227) Contant *** *** *** *** ** *** * * *** 2.065*** 0.933** (0.007) (0.002) (0.003) (0.009) (0.183) (0.043) (0.002) (0.252) (0.064) (0.535) (0.054) (0.043) (0.003) (0.032) Oervaton Note: p-vaue are n racket. (1)-(11): tandard error are mut-way cutered foowng Cameron et a. (2006) and ung ther `cgmreg' routne n Stata. a denote varae meaured country wde denote ector-eve varae ***Sgnfcant at 1% eve. **Sgnfcant at 5% eve. *Sgnfcant at 10% eve.

39 Tae 5. Effect of ICT equpment and prce on frm ze, Fr, Ger, UK, , IV etmate. Varae (1) (2) (3) (4) (5) (6) (7) (8) Numer teephone ne n t a * *** (0.064) (0.008) Numer teephone ne n t-1 a *** (0.053) Numer teephone ne n t-2 a ** (0.050) Prce of ICT equpment a 0.074** 0.182*** (0.043) (0.000) Computer prce a * 0.052** (0.071) (0.013) Market ze 0.622*** 0.616*** 0.614*** *** 0.544*** 0.620*** 0.425*** 0.491*** (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) Prce of Invetment a 0.278** 0.276** 0.274** (0.034) (0.028) (0.027) (0.184) (0.181) (0.186) (0.119) (0.139) Trend 0.054*** 0.054*** 0.043* (0.009) (0.009) (0.051) Contant *** *** *** *** *** *** (0.000) (0.000) (0.000) (0.000) (0.000) (0.517) (0.122) (0.000) Oervaton Frt tage reut. Excuded ntrument: Rea GDP (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) Popuaton (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) Anderon-Run Wad F-tattc (tet of jont gnfcance of endogenou regreor) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) Keergen-Paap LM-tattc (underdentfcaton tet) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) Keergen-Paap Wad F-tattc (weak dentfcaton tet) Hanen J tet of overdentfyng retrcton, p-vaue Note: p-vaue are n racket. Standard error are ndutry cuter rout. Regreon are pane data-aed and ncude an ndutry fxed effect. For the Keergen-Paap Wad F-tattc, the Stock and Yogo (2005) crtca vaue at 10% of maxma IV reatve a a denote varae meaured country wde denote ector-eve varae ***Sgnfcant at 1% eve., **Sgnfcant at 5% eve., *Sgnfcant at 10% eve.

40 Tae 6. Effect of ICT and computer prce effect on frm ze Fr, Ger, UK, USA Correated pane corrected Tet OLS regreon IV regreon Varae tandard error regreon (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Prce of ICT equpment a 0.212** 0.738** 0.110** 0.449* 0.110*** (0.012) (0.026) (0.023) (0.079) (0.009) Computer prce a 0.072** ** *** (0.05) (0.376) (0.031) (0.508) (0.006) Market ze 0.217*** 0.227*** 0.179*** 0.221*** *** *** 0.369*** 0.434*** 0.282*** 0.304*** (0.001) (0.003) (0.003) (0.003) (0.000) (0.000) (0.001) (0.000) (0.000) (0.000) Invetment a * *** 0.095*** 0.092*** 0.094*** 0.053*** 0.056*** (0.114) (0.167) (0.088) (0.159) (0.004) (0.004) (0.005) (0.005) (0.000) (0.000) Trade openne 0.154** 0.165** ** *** 0.25*** (0.040) (0.038) (0.132) (0.033) (0.189) (0.185) (0.310) (0.186) (0.000) (0.000) Wage 0.388*** 0.384** 0.311* 0.373** (0.008) (0.013) (0.100) (0.023) (0.70) (0.708) (0.956) (0.707) Corrupton a (0.951) (0.658) (0.120) (0.783) (0.691) (0.873) (0.422) (0.878) Trend (0.103) (0.683) (0.190) (0.916) Contant 1.76*** 1.432*** * *** 1.586*** (0.000) (0.001) (0.109) (0.697) (0.863) (0.847) (0.081) (0.933) (0.000) (0.000) Oervaton Frt tage reut. Excuded ntrument: Rea GDP (0.000) (0.000) (0.000) (0.000) Popuaton ² (0.000) (0.000) (0.000) (0.000) Anderon-Run Wad F-tattc (tet of jont gnfcance of endogenou regreor) (0.000) (0.000) (0.000) (0.000) Keergen-Paap LM-tattc (underdentfcaton tet) (0.000) (0.000) (0.000) (0.000) Keergen-Paap Wad F-tattc (weak dentfcaton tet) Hanen J tet of overdentfyng retrcton, p-vaue Note: p-vaue are n racket. Standard error are ndutry cuter-rout. For the Keergen-Paap Wad F-tattc, the Stock and Yogo (2005) crtca vaue at 10% of maxma IV reatve a a denote varae meaured country wde denote ector-eve varae ***Sgnfcant at 1% eve., **Sgnfcant at 5% eve., *Sgnfcant at 10% eve

41 41 Tae 7. Woodrdge tet of autocorreaton n pane data Frt ampe: Fr, Ger, UK, Second ampe: Fr, Ger, UK, USA, Varae (1) (2) (3) (4) Varae (5) (6) Numer teephone ne n t a *** Prce of ICT equpment a 0.154*** (0.000) (0.128) (0.000) Prce of ICT equpment a 0.146*** Computer prce a.0486*** (0.000) (0.001) Computer prce a 0.035*** Market ze 0.349*** 0.387*** (0.000) (0.001) (0.000) Market ze 0.444*** 0.669*** 0.434*** 0.522*** Invetment a 0.076** 0.075** (0.000) (0.000) (0.000) (0.000) (0.029) (0.034) Invetment prce a 0.248*** *** 0.216*** Trade openne 0.187** 0.184** (0.001) (0.192) (0.000) (0.000) (0.011) (0.019) Trade openne a 0.586*** Wage (0.000) (0.285) (0.307) Human capta a 0.586* Corrupton a (0.091) (0.948) Oervaton Woodrdge tet, F-tattc Note: p-vaue are n racket. a denote varae meaured country wde denote ector-eve varae ***Sgnfcant at 1% eve. **Sgnfcant at 5% eve. *Sgnfcant at 10% eve (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) 41