DOES INFORMATION TECHNOLOGY LEAD TO SMALLER FIRMS

Many changes in the organization of work in the United States since 19 75 have been attributed to the increased capabilities and use of infor mation technology (IT) in business. However, few studies have attempte d to empirically examine these relationships. The primary goal of this paper is to assess the hypothesis that investments in information tec hnology are at least partially responsible for one important organizat ional change, the shift of economic activity to smaller firms. We exam ine this hypothesis using industry-level data on IT capital and four m easures of firm size, including employees and sales per firm. We find broad evidence that investment in IT is significantly associated with subsequent decreases in the average size of firms. We also find that t hese decreases in firm size are most pronounced two to three years aft er the IT investment is made.