Do Large Firms Become Smaller by Using Information Technology?

The relationship between information technology (IT) and a key organizational design variable, firm size, is an important area of study, particularly given the ongoing transition to an information-based economy. To better understand the more nuanced aspects of the relationship, this article formulated a bidirectional and time-lagged model that incorporates different perspectives from organizational theories and transaction cost economics. The authors' two models -- the bidirectional and one-year lagged model and the bidirectional and two-year lagged model -- were tested using nine-year panel data on IT spending, IT stock, coordination costs, firm size, and relevant control variables for 277 manufacturing firms. This study has taken an initial step by attempting to empirically examine dual causality and longitudinal effects between IT and firm size, and to reconcile different theoretical perspectives on the relationship between them. The authors hope this work can act as a catalyst for developing a better understanding of the complex relationship between IT and organizations, with the ultimate goal of offering robust prescriptions for successful structural change.