An Internet-Enabled Move to the Market in Logistics

Logistics outsourcing has increased with the commercialization of the Internet, implying a reduction in the corresponding transaction costs. The Internet-with its universal connectivity and open standards-radically enhanced information technology (IT) capabilities, and we hypothesize this has reduced external transaction costs relatively more than internal governance costs. Using transaction cost theory as a lens, we examine whether the commercialization of the Internet coincided with a move to the market in logistics-one of the most connected industries in the economy. We estimate the relationship between IT and outsourced logistics in a production function based on two data sets from 1987 to 2008. We find that the effects of IT on outsourced logistics have changed in the post-Internet era. After the commercialization of the Internet, an industry's own IT investment and outsourced logistics became complements, whereas they were not before. It suggests that because of the unique characteristics of the Internet as an enabler, IT reduced external transaction costs relatively more than internal governance costs. Consequently, industries favored the market form of the provision of logistics. We also find similar impacts of customers' IT investments on a focal industry's outsourced logistics. Previous studies argued that IT led to the shift from hierarchies to markets, or provided indirect evidence through measures of firm size or integration. Using a production theory model, our study provides systematic empirical evidence to support that the Internet enabled a move to the market in the provision of logistics.