A recent McKinsey report notes that the intensity with which firms employ Information and Communication Technologies (ICT) depends on four factors: (1) size of the firm; (2) supply chain complexity; (3) skill levels inside the firm; and finally (4) threat of competition.
Deployment of ICT facilitates reaches higher productivity levels inside the firm. The four determinants therefore seem reasonable as the firm-level literature shows that generally these four points are indeed factors that are strongly associated with greater firm performance. However, in my view, the second factor of supply chain complexity merits some elaboration and refinement, especially with regards to international trade.
It seems intuitive at first sight to think that ICT tools and instruments smoothen the supply chain network. And so, the more complex this network becomes the more this chain uses ICT to solve complex hold-up problems related to trade. This is because ICT allows for geographically dispersed production and management activities. However, the data tells something different: some supply chain trade, which requires greater ICT, may actually be related to lower supply chain complexity.
This can be seen by a measure that computes the “length” of the value chain by accounting for the number of production stages (Fally, 2012). The more stages of production involved, the lengthier the chain becomes, the more complex one can assume the supply chain is. The figure below plots the average of this indicator of supply chain complexity across a like-minded set of OECD economies for each sector on the vertical axis. The horizontal axis plots the ICT-intensity indicator from van der Marel et al (2016) to see for any meaningful pattern.
Source: US BEA; OECD TiVA. Sector numbers follow ISIC Rev 3.