Working Paper: CEPR ID: DP16493
Authors: Gianluigi Giustiziero; Tobias Kretschmer; Deepak Somaya; Brian Wu
Abstract: Digital firms tend to be both narrow in their vertical scope and large in their scale. We explain this phenomenon through a theory about how attributes of firms’ resource bundles impact their scale and specialization. We posit that highly scalable resource bundles entail significant opportunity costs of integration (versus outsourcing), which simultaneously drive “hyperspecialization” and “hyperscaling” in digital firms. Using descriptive theory and a formal model, we develop several propositions that align with observed features of digital businesses. We offer a parsimonious modeling framework for resource-based theorizing about highly scalable digital firms, shed light on the phenomenon of digital scaling, and provide insights into the far-reaching ways that technology-enabled resources are reshaping firms in the digitaleconomy.
Keywords: digital firms; scalability; opportunity costs; scale and scope; resource-based view
JEL Codes: L22; L23; L25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Highly scalable resource bundles (D30) | Significant opportunity costs for firms (D21) |
| Significant opportunity costs for firms (D21) | Decision to specialize rather than integrate (L23) |
| Resource allocation to a focal activity (E63) | Opportunity cost of not focusing on that activity increases (D29) |
| Opportunity cost of not focusing on that activity increases (D29) | Promotes hyperspecialization (D29) |
| Scalability (R12) | Drives specialization (Y80) |
| Specialization (Z00) | Fosters hyperscaling (D26) |
| Scalability (R12) | Critical value share a firm is willing to forego when outsourcing decreases (D21) |