• 13 Feb 2007
  • Working Paper

Electronic Hierarchies and Electronic Heterarchies: Relationship-Specific Assets and the Governance of Interfirm IT

by Andrew McAfee, Marco Bettiol & Maria Chiarvesio

Executive Summary — Scholars have long been interested in the impact of information technology on the organization of work. As Andrew McAfee and colleagues argue in this study, the appropriate governance mechanism for an IT-facilitated collaboration depends on the type of IT being deployed: When an enterprise technology is required, so is an electronic hierarchy. The paper explores the issue of relationship specificity of IT assets, proposes a categorization of information technologies based on their levels of relationship specificity, and uses data from more than forty Italian industrial districts to test three hypotheses around governance of interfirm IT. These districts typically have close ties, both horizontal and vertical, and have historically worked in close collaboration with each other. Key concepts include:

  • When an enterprise technology is required, so is an electronic hierarchy.
  • Future research could reveal if there is a general pattern in relationship-specific investments and how entities other than powerful incumbent firms can successfully build electronic hierarchies.
  • Future research could also help define the full spectrum of IT-based interactions and the appropriate governance mechanisms for each.

Author Abstract

This paper uses concepts from the theory of the firm and MIS research to argue that some types of information technology (IT) will be deployed only within hierarchical governance structures. This argument introduces a contingency into the 'electronic markets hypothesis,' which holds that greater use of IT is unidirectionally associated with reduced use of hierarchies. We revisit the assumption that interfirm IT is never a relationship-specific asset. While many types of interfirm IT are highly redirectable others are not, and become relationship-specific assets once configured for a particular context; these assets are referred to here as enterprise information technologies. Because complete contracts over IT assets are not possible, relationship specificity is an important consideration; scholarship on the theory of the firm yields a consistent prescription that when assets are relationship specific and contracts incomplete, the single decision-making authority of a hierarchy is optimal. The paper therefore argues that when enterprise IT is required, so is an electronic hierarchy: a collaboration in which one member has all required decision rights over jointly used IT. This contingent theory yields three hypotheses, which are tested using data gathered from firms in Italian industrial districts. Because of this paper's focus on governance rather than price-setting, electronic hierarchies are contrasted not with electronic markets, but instead with electronic heterarchies.

Paper Information