Mergers Along the Global Supply Chain: Information Technologies and Routine Tasks
| Published date | 01 April 2018 |
| Author | Sergi Basco,Martí Mestieri |
| DOI | http://doi.org/10.1111/obes.12165 |
| Date | 01 April 2018 |
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©2017 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 80, 2 (2018) 0305–9049
doi: 10.1111/obes.12165
MergersAlong the Global Supply Chain: Information
Technologies and Routine Tasks*
Sergi Basco† and Mart´
i Mestieri‡
†Universidad Carlos III, Getafe, Spain (e-mail: sergi.basco@uc3m.es)
‡Northwestern University, Northwestern, Evanston, USA (e-mail: marti.mestieri@north
western.edu.)
Abstract
This paper empirically analyses how the adoption of Information Technologies (IT) has
changed the organization of global supply chains. We focus on international mergers,
which are a growing and important component of foreign direct investment. We use data
on North–South mergers and acquisitions (M&As). We show that the effect of IT adoption
on the number of vertical M&As is decreasing with the routine intensity of the industry.Our
interpretation is that the IT revolution enabled new monitoring mechanisms. This allowed
Northern headquarters to better monitor suppliers, especially those in less routine-intensive
industries –which were harder to monitor before.
I. Introduction
The Information Technologies (IT) revolution has changed the organizationof the fir m.1It
has been argued that IT have allowed headquarters to better monitor suppliers, as the next
quote from the New York Times (19 March 2011) illustrates.
“…supply lines are longer and far more complex than in the past. The ability to manage
these complex networks, experts say, has become possiblebecause of technology – Internet
communications, RFID tags and sensors attached to valued parts, and sophisticated software
for tracking and orchestrating the flow of goods worldwide.”
This paper provides a first attempt to empirically study how the adoption of these IT
has affected the international organization of the supply chain of Northern firms. We focus
on Mergers and Acquisitions (M&As), which are an important and growing fraction of
JEL Classification numbers: F23, F14, D23, L22.
*A previous versionof this paper was circulated under the title ‘Deconstructing Inter national Mergers:Infor mation
Technologiesand Routineness’. We thank DaronAcemoglu, Pol aNTR`as,Paula Bustos, Nicholas Bloom, Alessandro
Bonatti, Thomas Chaney, Rosario Crin`o, Arnaud Costinot, Klaus Desmet, Gino Gancia, Francine Lafontaine, Mar
Reguant, SteveTadelis and seminar participants at MIT, TIGER Forum, ToulouseSchool of Economics and UC3M,
the editor and two anonymous referees for useful comments and suggestions. Basco acknowledgesfinancial suppor t
from the Spanish Ministry of Science and Innovation, grant MDM 2014-0431. Mestieri acknowledges financial
support from the Agence Nationale de la Recherche. The remaining errors are our own.
1See, for example, Bloom et al. (2014) for an empirical analysis of the impact of ICT technologies on the
organization of Northern firms. The fall in communication costs has also expanded the range of jobs that are being
offshored. See, among others, Blinder (2006), Crin`o (2010), Ebenstein et al. (2014) and Oldenski (2011).
Mergers along the global supply chain 407
foreign direct investment (FDI).2More broadly, the paper contributes to the analysis of
the effect of IT on the organization of the firm, by exploiting international variation in IT
adoption.
The starting premise of our paper is that contractual frictions play an important role in
the organization of global supply chains.This is a well documented fact in the international
trade literature.3We focus on monitoring problems as the source of contractual frictions.
In line with our emphasis on monitoring, the World Investment Report (UNCTAD, 2013)
identifies communication and information flows, which allow better monitoring and coor-
dination, as key elements for effective governance of global supply chains.
To investigate how the IT revolution has affected M&As, we develop a task-based
model of organizational choice of upstream production with agency problems.Tasks differ
on how closelythey follow tight and standardized procedures. Standardized tasks are easier
to monitor.We assume that the IT revolution reduces the monitoring costs in an industry by
expanding the set of tasks that can be easily monitored. This is consistent with the findings
of Baker and Hubbard (2003) for the trucking industry, Bloom et al. (2013) for a survey
of US manufacturing plants and the growing international trade literature highlighting the
importance of IT in facilitating a finer ‘slicing’ of the global supply chain. Following the
international trade literature, we consider that the level of IT infrastructure is a country
characteristic and, thus, exogenous to firms’ choice.4
The expansion in monitorable tasks generated by the IT revolution causes a relatively
higher fall in monitoring costs of previously harder-to-monitor industries.This delivers the
most salient prediction of our model: harder-to-monitor industries receive relatively more
M&As with the IT revolution.The testable implication of this complementarity result is that
countries abundant in IT infrastructure receive relativelymore M&As in harder-to-monitor
industries.5
Togive empirical content to the notion of hard-to-monitor industries, we use the routine
task index developed byAutor and Dorn (2009). An industry is defined as routine-intensive
when the average task performed in that industry requires relatively tight and standard-
ized procedures. Accordingly, we argue that it is more difficult to monitor production in
industries with less standardized tasks.
We focus our empirical analysis on vertical North–South M&As within the manufac-
turing sector.The reason is that, as emphasized, among others, in Antr`as (2003) andAntr `as,
Desai and Foley (2009), agency problemsare more severe when a supplier is located in the
2According to UNCTAD (2000), Table I.1, the ratio of the value of global cross-border M&As to the value of
global FDI is about 80%. Moreover, the value of completed cross-border M&As rose from less than $100 billion in
1987 (which represented 72% of the total value of FDI inflows) to $720 billion in 1999 (which represented 83% of
the total value of FDI inflows).
3See Antr`as (2014) for a survey of theoretical and empirical papers emphasizing the role of contractual frictions
on the international organization of production.
4See, for example, Baldwin (2012), Basco and Mestieri (2013) and Antr`as and Chor (2013).
5Our model considers two organizational forms: M&A and ‘O-organtization’. O-organizations embed the better
alternative to mergers between arm’s length contracting and greenfield investments. We choose this simple classifi-
cation to emphasize that our focus and results (both theoretical and empirical) are on the effects of IT on mergers
across industries. It would be interesting to study also the effects of IT on the choice across different organizational
forms (e.g. greenfield vs. M&As). Unfortunately, comparable comprehensivecross-countr y data of the type, weuse
for mergers are not available for other organizationalmodes.
©2017 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
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