Relative Industry Concentration and Customer-Driven IT Spillovers

We examine how one industry’s productivity is affected by the IT capital of its customers, and how this effect depends on the industries’ relative concentration. These customer-driven IT spillovers result from customers’ IT investment in various information systems that reduce transaction costs through information sharing and coordination, leading to more efficient production and logistics upstream. The magnitude of the IT spillovers depend on relative industry concentration as customers in a more concentrated industry relative to that of their suppliers are better able to retain the benefits from their IT investment. We model the customer-driven effects based on production theory, and empirically test the model using two industry-level datasets covering different and overlapping time periods (1987–1999 and 1998–2005), different scopes of the economy (manufacturing only versus all industries), and different levels of industry aggregation. We find that for an increase in a downstream industry’s IT capital, not only is there a significant increase in downstream industry output, but there are significant increases in upstream industry output. Moreover, the magnitude of the IT spillovers is related to relative industry concentration: a 1% decrease in a customer’s relative industry concentration increases the spillovers by roughly 1%. Thus, further increases in IT capital can be justified along the supply chain, and an industry’s relative concentration – possibly reflecting market power – in part determines the distribution of the productivity benefit.