The architecture of transaction networks: a comparative analysis of hierarchy in two sectors

Abstract

Many products are manufactured in networks of firms linked by transactions, but comparatively little is known about how or why such transaction networks differ. This paper investigates the transaction networks of two large sectors in Japan at a single point in time. In characterizing these networks, our primary measure is "hierarchy," defined as the degree to which transactions flow in one direction, from "upstream" to "downstream." Our empirical results show that the electronics sector exhibits a much lower degree of hierarchy than the automotive sector because of the presence of numerous inter-firm transaction cycles. These cycles, in turn, reveal that a significant group of firms have two-way "vertically permeable boundaries": (1) they participate in multiple stages of an industry's value chain, hence are vertically integrated, but also (2) they allow both downstream units to purchase intermediate inputs from and upstream units to sell intermediate goods to other sector firms. We demonstrate that the 10 largest electronics firms had two-way vertically permeable boundaries while almost no firms in the automotive sector had adopted that practice.

Hidden Structure: Using Network Methods to Map Product Architecture

“…Whether similar results are found in other settings is an important empirical question (Csermely et al, 2013). However, Luo et al (2012) demonstrate that a core-periphery structure existed in the supply chain network of the Japanese electronics industry in the mid-1990s. And a recent study by Lagerstrom et al (2014) finds a core-periphery structure in the enterprise architecture of a large financial services organization.…”

“…Luo et al (2012) use DSMs and a measure of hierarchy to compare supply networks in the Japanese auto and electronics industries. Cataldo et al (2006) and Gokpinar, Hopp and Iravani (2007) show that teams developing components with higher levels of coupling require increased amounts of communication to achieve a given level of quality.…”

Community Structure of a Large-Scale Production Network in Japan

“…Despite the fact that community detection was performed without using directional information of the orders, some of the relations between the communities were notably biased in direction. Recently, economists (Acemoglu et al 2012;Atalay et al 2011;Cainelli et al 2012;Luo et al 2012) have also begun to recognize the importance of explicitly taking interfirm links into account when seeking to understand economic issues. These issues include the heterogeneity of firms, such as the fact that their size tends to follow a power-law distribution, the origin of business cycles, and the possibility of a chain-reaction in firm bankruptcies.…”

Bottlenecks, Modules and Dynamic Architectural Capabilities

“…Thus, in many industries, intermediate markets and firms with "vertically permeable" boundaries have replaced purely vertically integrated firms (Jacobides, 2005;Jacobides and Billinger, 2006;Luo et. al.…”

“…Also in systems where throughput is a key determinant of cost, excessive modularization can slow down the flow and increase inventories needed for adequate buffering (Zhou, 2014). Finally, some technologies are more amenable to modularization than others: for example, electronic chips are highly modular, whereas automobile parts must often be co-designed in order to work together in the same vehicle (Whitney, 2004;Luo et. al, 2012).…”