How Firm Strategies Influence the Architecture of Transaction Networks

Lecture / Panel
For NYU Community

Jianxi Luo

Postdoctoral Associate, Massachusetts Institute of Technology


In the context of business ecosystems, hierarchy is an architectural property that refers to the degree to which transactions proceed in a single direction, from “upstream” to “downstream.” It is often assumed that a unidirectional flow of goods in a value chain implies a corresponding hierarchy in the transaction networks of firms participating in the chain. However, this is an untested hypothesis: in fact, little is known about whether hierarchy varies across transaction networks, and, if so, what causes such variation. In this study, we apply network based methods to define and measure the degree of hierarchy in interfirm transaction networks in two industry sectors in Japan: automotive and electronics. Our empirical results show that the electronics sector exhibits a much lower degree of hierarchy than the automotive sector due to the existence of numerous interfirm transaction cycles. Transaction cycles in turn can arise when a subset of firms adopt the strategy of vertically permeable boundaries. Such firms are vertically integrated in the sense of participating in multiple stages of the value chains, but their internal upstream units also sell into and downstream units buy from intermediate markets. Our comparative analysis suggests that firms elect the strategy of vertically permeable boundaries when they face low transaction costs and high rates of product innovation, but at the same time believe there are knowledge complementarities between different stages of the value chain. Vertically permeable boundaries allow such firms to take advantage of cross-division knowledge complementarities while maintaining the competitiveness of upstream units through their participation in intermediate markets.

About the Speaker

Jianxi Luo is a postdoctoral associate at  Massachusetts Institute of Technology (MIT), sponsored by MIT-Singapore University of Technology and Design Collaboration. He holds a PhD (2010) in Technology Management and Policy from MIT, a MS (2004) and a BS (2001) in Mechanical Engineering from Tsinghua University, China. Dr. Luo is an affiliated researcher with the International Motor Vehicle Program (IMVP) since 2005, and a current visiting scholar at Columbia Business School in New York City. He also held a visiting scholar appointment at Judge Business School of the University of Cambridge in the United Kingdom, in summer 2005. Dr. Luo’s research focuses on the management of innovation and technology. His current work concerns how firms respond to external innovations in the business ecosystem and pioneer innovations in house. His research has emphasized the theories and methods from complex system studies in understanding organization, operations, strategy and innovation, and has contributed new understanding on the boundaries of the firm from the perspective of technology innovation. Dr. Luo has brief working experience with Toyota Motor North America, World Economic Forum, and Environment Defense Foundation, in countries including China, the U.S., Japan, the U.K. For research and consulting, he has visited more than 30 industrial companies and organizations. Dr. Luo founded and operated a boutique consulting firm focusing on helping international firms enter the Chinese automotive markets, and co-founded a C2C startup aimed at disrupting the mainstream online recruiting business. In addition, Dr. Luo established the MIT Economic and Talent Forum at MIT in 2005, served as the co-president from 2005 to 2006, and continues to serve as a member of the advisory board. He is also the recipient of Mercedes-Benz Fellowship, CIMC  Fellowship, and Alfred A.H. Keil Fellowship for Wiser Uses of Science and Technology.