Information technology and firms' organizational scope and structure

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2007

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The dissertation consists of three essays that explore the relationship between information technology and firms' organizational and governance structure. The first essay examines how information technology (IT) moderates the impact of firms' assets on the level of vertical integration and horizontal diversification. The empirical analysis suggests that IT is associated with a decrease in vertical integration in firms with more tangible assets. The analysis also indicates that IT is associated with a greater increase in horizontal diversification in firms with more intangible assets. The general implication of this essay is that firms with more tangible assets may use IT to become more vertically specialized, whereas firms with more intangible assets may deploy IT to become more horizontally diversified. The second essay uses a moral hazard model to examine the relationship between environmental uncertainty and decentralization in IT governance. It is shown that this relationship is determined by a trade-off between the need for processing local information and the moral hazard problem. The trade-off results in an inverted-U-shaped relationship between environmental uncertainty and decentralization in IT governance. The increase in environmental uncertainty first increases and then decreases the likelihood of adopting decentralized IT governance, and thus decentralized IT governance is not likely to be desirable when the external environment is either highly stable or highly turbulent. An empirical study using a sample of 455 business sites of Fortune 1000 companies validates the theoretical results. The third essay presents an analytical model to examine the design and management of partner relationships in IT service. The firm hires a manager to manage the partner relationship. However, the firm has to decide whether to delegate the design of the relational contract with the partner, to the manager. We find that when the firm and the manager have asymmetric information about the manager's inclination to maintain a long-term partner relationship for the firm, delegation in relational contracting can help the firm in screening the myopic manager from the farsighted manager.

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