DP16493 Hyperspecialization and Hyperscaling: A Resource-based Theory of the Digital Firm

Author(s): Gianluigi Giustiziero, Tobias Kretschmer, Deepak Somaya, Brian Wu
Publication Date: August 2021
Keyword(s): digital firms, firm resources, opportunity costs, scalability, scale and scope
JEL(s): L22, L23, L25
Programme Areas: Organizational Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16493

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 digital economy.