The Impact Of Information Technology On Firms' Vertical Boundaries

The creation and application of Information Technology have been called the third technological revolution that followed the "steam revolution" in eighteenth century and the "electrical revolution" in nineteenth century, and so is an important motivator of the economy in twenty-first century. The application of information technology can create new efficiencies and opportunities, while decreasing transaction costs related to communication and coordination, thus impact firms' vertical boundaries.In practice, firms' decisions on whether to buy or to make embody firms' vertical boundaries. While these decisions are made according to the weight between inside costs (include production cost and transaction cost) and outside costs (include production cost and transaction cost).By affecting outside and inside costs and determinants of costs, information technology thus decides the change of firms' vertical boundaries. However, several middle variables mediate the impact of information technology meanwhile, which include environment, industry life cycle stage, characters of firm's organization structure and ways of dealing with information. With the mediation of these middle variables, information technology affects firms' vertical boundaries in different way and has different results in reality.As to firms operating in high-technological industry, information technology saves outside costs more obviously under the effect of middle variables, so firms perform more economic activities through market, thus leading to the decrease of firms' vertical boundaries in fact.In this paper, data are collected on listed companies in information technology industry. With these data, we conducted an empirical test of the relationship between information technology investments and firms' vertical boundaries, and the resultsindicate that there is a negative relationship between them. And the further analysis we conducted shows that the application of information technology will have a negative impact on firm's vertical boundaries in the short time, and a positive in the long run.