Can we design an industry classification system that reflects industry architecture?

ABSTRACT

Interdependencies amongst firms with complementary capabilities lead to the emergence of stable patterns of interfirm relationships observed in global value chains and ecosystems. But current standard industry classification systems group industries into higher order aggregates based on similarity criteria, ignoring the complementarities that induce interdependence. We show how systems theory can be used to design an industry classification system that captures the interindustry interdependencies manifested by buy-sell transactions between firms. Our arguments are three. First, that we can improve upon currently available industry classification systems by clearly identifying criteria for grouping industries into higher order aggregates such as sectors. Second, that a top level grouping based on demand will divide the economy into sectors in a manner that is consistent with global value chains and other configurations of interfirm networks. And third, that roles within demand-based sectors are the redundant feature of interindustry relations that allow us to describe the economy simply. We support our arguments with visualizations of over 53,000 of the largest interfirm transactions in the U.S. economy between 1976 and 2010.

KEYWORDS:

• industry classification systems
• industry architecture
• interindustry relations
• systems-based design
• transactions data

Acknowledgements

We would like to thank Carliss Baldwin and Michael Jacobides for guidance and inspiration and Xingyu Li, Yingzhe Chen, Vivi Wu, and Chris Forrest for assistance with data preparation. This research was supported by the Social Sciences and Humanities Research Council of Canada.

Notes

1 The average, across the 35 years of our dataset, of the ratio of the total value of the transactions in our dataset to US GDP (not seasonally-adjusted), is 1.96. But estimates of GDP consider only the value-added by each contributor to the economy, while our transactions values represent both the value added plus the value of inputs (which may be zero). Thus it is likely that our transactions represent less that 2% of the total value of all transactions in the economy.

Additional information

Funding

Social Sciences and Humanities Research Council of Canada [435-2013-1129].