The Impact Mechanism Of Information Technology On Firm Vertical Boundaries

From 1880s to 1940s, the enterprise organization structure of vertical integration contributed to economy developments of the nations such as America, England and Germany. During the time between two world wars, the internationalization of market and the development of economy offered more available sale channels and the supply sources of raw material for supplier; therefore, enterprise possessing its own goods sources and sale channels could not reduce cost. Lots of vertical integration enterprise began to disintegrate. The enterprises took out the investment in the aspect of goods sources, and took out the partial investments in sale channel (Chandler, 1990). The phenomenon of vertical integration to disintegration became more common in 1980s; enterprises not only took out the investment in the goods and sales, and stripped off some production links.Chandler (1990) thought that the phenomenon resulted from the changing of technology and market. Transaction cost economists explain the changes of organization from institutional cost angle. They think that the institutional cost of integration organization form is high; low cost of specialized production organization form taking place of high cost of integration organization form is the trend of institutional structure of production. Transaction cost theory based on assets specificity, think that assets specificity, transaction frequency and uncertainty determine the nature of transaction, different transaction must be coincide with different transaction coordinative mechanism. Enterprise capability theory analyzing this phenomenon from knowledge and the resource angle, think that enterprise will outsourcing some link on value chain under the restraint of certain knowledge and resource in order to maintain its core capability.During the course of enterprise disintegrating, IT begins to appear and develop promptly, and get extensive application. In 1950s, IT was used to replace some handwork operations. IT application has raised the working efficiency of some enterprise departments substantially. In 1960-70s, IT is applied step by step on the management control of enterprise. Since 1990s, the role of IT is increasing in organization transform, promotes enterprise changing on the core behaviors such as product, market and supply. IT application has not only changed production management course and raised productivity, but also had great influence on the transaction cost of coordinated tool for transaction such as market and enterprise, raised enterprise core competition capability, and then affect the changing of enterprise integration boundary.The purpose of this paper is to explain the impact mechanism of IT application on the evolution of firm vertical boundaries by means of transaction cost theory and enterprise ability theory, and to offer a basis for the enterprise adjusting firm boundary to get competitive advantage under IT condition in our country.When analyzing the impact of IT on firm vertical boundary, one should know actually what the firm vertical boundary is. The study based on the theory of Hodgson (2002), Wu Jiong, Hu Pei,Ren Zhi'an (2002)etc, which have thrown away the two assumptions of firm boundary theory: firm boundary is not subject to the criterion of registration and taxpayer; firm must be independent each other. Firm boundary includes vertical boundary and horizontal boundary. Firm boundary can be divided into legal boundary and extend boundary from the angle of whether the firm is an independent taxpayer. Therefore, firm boundary has four kinds of form: firm vertical legal boundary, firm vertical extend boundary, firm horizontal legal boundary and firm horizontal extend boundary. Firm vertical extend boundary reflect the relationship of enterprise and the competitive cooperative relationship between value chain or the same type enterprise across estate. Firm horizontal expansion boundary reflects the cooperative and competition relationship between the same type firms based on certain interests. Firm horizontal legal boundary shows the business activities border of an independent legal entity, enterprises have to pay taxes and other related obligations and enjoy the related rights. Firm vertical expansion boundary reflects competition and cooperation relationship between upstream and downstream firms on the value chain.On the one hand, IT application reduces the opportunism behavior in transaction, raises the reason of trade sides, reduces market transaction cost, and causes market form to change from directly transaction market to the electronic market based on IT. On the other hand, IT also plays a big role in causing enterprise organization pattern to change, causes enterprise organize to be fatten , network and flexible. Information technology not only has a significant impact on the coordination of trading, but also affects the production process; improve productivity, lower production costs. Information technology improves the management efficiency, sensitivity and organizational learning, and promotes product diversification, enhances the firm ability.In the perspective of transaction cost theory, the application of information technology reduce uncertainty and the assets specificity, prompt transaction pattern changing to the market and hybrid form; In order to maintain its core competencies, enterprises give up some link of the value chain to strengthen its core competencies. The interact influence of firm vertical boundary, enterprise organizational behavior and firm ability constitutes a cycle. Under both forces there is a trend of vertical legal boundary shrinking and vertical expand boundary expanding.Finally, the study analyzes the changing of firm boundary based on the evolution of transaction cost and firm capability. The study introduced evolution theory based on the natural selection, introduced the theory of enterprises entry and exit, tries to build an interaction evolution mechanism of enterprise capacity, transaction cost, firm boundary in a long run, in order to reflect relationship between the change of firm boundary and the evolution of industry organization.