IDEAS home Printed from https://ideas.repec.org/a/inm/ororsc/v22y2011i1p141-157.html
   My bibliography  Save this article

Firm Size and Industry Structure Under Human Capital Intensity: Insights from the Evolution of the Global Advertising Industry

Author

Listed:
  • Andrew von Nordenflycht

    (Faculty of Business Administration, Simon Fraser University, Vancouver, British Columbia V6C 1W6, Canada)

Abstract

Although existing literature assumes that the human capital intensity of professional services leads to small and flimsy firms, several professional services feature large, long-lived firms. To develop insights about firm size and industry structure in human capital intensive industries, I analyze the structure and evolution of the advertising industry. Drawing on a range of quantitative and qualitative evidence, I develop two hypotheses regarding the industry's structure and consolidation: (1) size differentiation , in which firm size and industry structure are connected to the size distribution of clients' projects, and (2) financial intermediation , in which the industry's consolidation is ascribed to organizational innovations that mitigate transaction costs between external investors and ad agency owners. I then discuss the applicability of these two hypotheses to other professional services. The analysis suggests several new insights about the value of capital, the nature of demand, and the nature of assets in human capital intensive industries.

Suggested Citation

  • Andrew von Nordenflycht, 2011. "Firm Size and Industry Structure Under Human Capital Intensity: Insights from the Evolution of the Global Advertising Industry," Organization Science, INFORMS, vol. 22(1), pages 141-157, February.
    • Handle: RePEc:inm:ororsc:v:22:y:2011:i:1:p:141-157
    DOI: 10.1287/orsc.1090.0518
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/orsc.1090.0518
    Download Restriction: no
    File URL: https://libkey.io/10.1287/orsc.1090.0518?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, August.
    2. Doogar, Rajib & Easley, Robert F., 1998. "Concentration without differentiation: A new look at the determinants of audit market concentration," Journal of Accounting and Economics, Elsevier, vol. 25(3), pages 235-253, June.
    3. Mohammad Arzaghi & Ernst R. Berndt & James C. Davis & Alvin J. Silk, 2008. "Economic Factors Underlying the Unbundling of Advertising Agency Services," NBER Working Papers 14345, National Bureau of Economic Research, Inc.
    4. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(1), pages 3-13.
    5. Alvin J. Silk & Ernst R. Berndt, 1993. "Scale and Scope Effects on Advertising Agency Costs," Marketing Science, INFORMS, vol. 12(1), pages 53-72.
    6. Thomas N. Hubbard, 2009. "Specialization, Firms, and Markets: The Division of Labor within and between Law Firms," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 25(2), pages 339-371, October.
    7. Schmalensee, Richard & Silk, Alvin J & Bojanek, Robert, 1983. "The Impact of Scale and Media Mix on Advertising Agency Costs," The Journal of Business, University of Chicago Press, vol. 56(4), pages 453-475, October.
    8. Lerner, Josh, 1995. "Venture Capitalists and the Oversight of Private Firms," Journal of Finance, American Finance Association, vol. 50(1), pages 301-318, March.
    9. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-583, June.
    10. Dow, Gregory K. & Putterman, Louis, 2000. "Why capital suppliers (usually) hire workers: what we know and what we need to know," Journal of Economic Behavior & Organization, Elsevier, vol. 43(3), pages 319-336, November.
    11. Raghuram G. Rajan & Luigi Zingales, 1998. "Power in a Theory of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(2), pages 387-432.
    12. West, Douglas, 1988. "Multinational Competition in the British Advertising Agency Business, 1936–1987," Business History Review, Cambridge University Press, vol. 62(3), pages 467-501, October.
    13. Sullivan, Mary W, 2002. "The Effect of the Big Eight Accounting Firm Mergers on the Market for Audit Services," Journal of Law and Economics, University of Chicago Press, vol. 45(2), pages 375-399, October.
    14. Baker, George P, 1992. "Beatrice: A Study in the Creation and Destruction of Value," Journal of Finance, American Finance Association, vol. 47(3), pages 1081-1119, July.
    15. Pankaj Ghemawat & Tarun Khanna, 1998. "The Nature of Diversified Business Groups: A Research Design and Two Case Studies," Journal of Industrial Economics, Wiley Blackwell, vol. 46(1), pages 35-61, March.
    16. Banker, Rajiv D. & Chang, Hsihui & Cunningham, Reba, 2003. "The public accounting industry production function," Journal of Accounting and Economics, Elsevier, vol. 35(2), pages 255-281, June.
    17. Alvin J. Silk & Charles King III, 2008. "Concentration Levels in the U.S. Advertising and Marketing Services Industry: Myth vs. Reality," Harvard Business School Working Papers 09-044, Harvard Business School.
    18. George J. Mailath & Andrew Postlewaite, 1990. "Workers Versus Firms: Bargaining Over a Firm's Value," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(3), pages 369-380.
    19. Jensen, Michael C & Meckling, William H, 1979. "Rights and Production Functions: An Application to Labor-managed Firms and Codetermination," The Journal of Business, University of Chicago Press, vol. 52(4), pages 469-506, October.
    20. Craswell, Allen T. & Francis, Jere R. & Taylor, Stephen L., 1995. "Auditor brand name reputations and industry specializations," Journal of Accounting and Economics, Elsevier, vol. 20(3), pages 297-322, December.
    21. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    22. Raghuram G. Rajan & Luigi Zingales, 1998. "The Governance of the New Enterprise," CRSP working papers 487, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    23. R. Glenn Hubbard & Darius Palia, 1999. "A Reexamination of the Conglomerate Merger Wave in the 1960s: An Internal Capital Markets View," Journal of Finance, American Finance Association, vol. 54(3), pages 1131-1152, June.
    24. Garicano, Luis & Hubbard, Thomas N, 2007. "Managerial Leverage Is Limited by the Extent of the Market: Hierarchies, Specialization, and the Utilization of Lawyers' Human Capital," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 1-43, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jay J. Janney & Steve Gove, 2017. "Firm Linkages to Scandals via Directors and Professional Service Firms: Insights from the Backdating Scandal," Journal of Business Ethics, Springer, vol. 140(1), pages 65-79, January.
    2. Nicholas Argyres & Todd R. Zenger, 2013. "Dynamics of organizational structure," Chapters, in: Anna Grandori (ed.), Handbook of Economic Organization, chapter 12, Edward Elgar Publishing.
    3. Zorn, Michelle L. & Norman, Patricia M. & Butler, Frank C. & Bhussar, Manjot S., 2017. "Cure or curse: Does downsizing increase the likelihood of bankruptcy?," Journal of Business Research, Elsevier, vol. 76(C), pages 24-33.
    4. Yu Li & Yan A. Zhang & Wei Shi, 2020. "Navigating geographic and cultural distances in international expansion: The paradoxical roles of firm size, age, and ownership," Strategic Management Journal, Wiley Blackwell, vol. 41(5), pages 921-949, May.
    5. Abhinav Gupta & Forrest Briscoe & Donald C. Hambrick, 2017. "Red, blue, and purple firms: Organizational political ideology and corporate social responsibility," Strategic Management Journal, Wiley Blackwell, vol. 38(5), pages 1018-1040, May.
    6. Castaldi, Carolina, 2018. "To trademark or not to trademark: The case of the creative and cultural industries," Research Policy, Elsevier, vol. 47(3), pages 606-616.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sharon Horsky & Steven C. Michael & Alvin J. Silk, 2008. "The Internalization of Advertising Services: An Inter-IndustryAnalysis," Harvard Business School Working Papers 09-007, Harvard Business School.
    2. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    3. José María Liberti & Mitchell A. Petersen, 2018. "Information: Hard and Soft," NBER Working Papers 25075, National Bureau of Economic Research, Inc.
    4. Bernard Baudry & Virgile Chassagnon, 2012. "The vertical network organization as a specific governance structure: what are the challenges for incomplete contracts theories and what are the theoretical implications for the boundaries of the (hub," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 16(2), pages 285-303, May.
    5. Arnoud W. A. Boot & Radhakrishnan Gopalan & Anjan V. Thakor, 2008. "Market Liquidity, Investor Participation, and Managerial Autonomy: Why Do Firms Go Private?," Journal of Finance, American Finance Association, vol. 63(4), pages 2013-2059, August.
    6. de Fuentes, Cristina & García Benau, María Antonia & Pucheta Martínez, María Consuelo & Ruiz Barbadillo, Emiliano, 2015. "El éxito de los procesos de fusión en el mercado de auditoría: el caso de PriceWaterhouseCoopers," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 18(1), pages 55-67.
    7. Virgile Chassagnon, 2011. "The Network Firm as a Single Real Entity: Beyond the Aggregate of Distinct Legal Entities," Journal of Economic Issues, Taylor & Francis Journals, vol. 45(1), pages 113-136.
    8. Cécile Cezanne & Laurence Saglietto, 2016. "Human Capital-Intensive Firms and 4PLs: A Specific Partnership," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 12(1), pages 61-83, February.
    9. Krishna B. Kumar & Raghuram G. Rajan & Luigi Zingales, "undated". "What Determines Firm Size?," CRSP working papers 496, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    10. David B. Audretsch & Erik E. Lehmann & Lawrence A. Plummer, 2009. "Agency and Governance in Strategic Entrepreneurship," Entrepreneurship Theory and Practice, , vol. 33(1), pages 149-166, January.
    11. Martin G. H. Wu, 2006. "An Economic Analysis of Audit and Nonaudit Services: The Trade†off between Competition Crossovers and Knowledge Spillovers," Contemporary Accounting Research, John Wiley & Sons, vol. 23(2), pages 527-554, June.
    12. W. Bentley MacLeod, 2013. "On Economics: A Review of Why Nations Fail by D. Acemoglu and J. Robinson and Pillars of Prosperity by T. Besley and T. Persson," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 116-143, March.
    13. Alvin J. Silk & Charles King III, 2008. "Concentration Levels in the U.S. Advertising and Marketing Services Industry: Myth vs. Reality," Harvard Business School Working Papers 09-044, Harvard Business School.
    14. Yin He & Bin Li & Yunhua Tian & Lijun Wang, 2016. "Does Foreign Venture Capital Provide More Value-added Services to Initial Public Offering Companies in China?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 24(2), pages 90-106, March.
    15. David Martimort & Flavio Menezes & Myrna Wooders & ELISABETTA IOSSA & DAVID MARTIMORT, 2015. "The Simple Microeconomics of Public-Private Partnerships," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 4-48, February.
    16. Dirk Sliwka, 2001. "On the Costs and Benefits of Delegation in Organizations," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 157(4), pages 568-590, December.
    17. Zemsky, Peter & Adner, Ron, 2003. "Disruptive Technologies and the Emergence of Competition," CEPR Discussion Papers 3994, C.E.P.R. Discussion Papers.
    18. Nathan H. Miller, 2008. "Competition When Consumers Value Firm Scope," EAG Discussions Papers 200807, Department of Justice, Antitrust Division.
    19. Kim, Jongwook & Mahoney, Joseph T., 2008. "A Strategic Theory of the Firm as a Nexus of Incomplete Contracts: A Property Rights Approach," Working Papers 08-0108, University of Illinois at Urbana-Champaign, College of Business.
    20. Ansgar Richter & Susanne Schrader, 2017. "Levels of Employee Share Ownership and the Performance of Listed Companies in Europe," British Journal of Industrial Relations, London School of Economics, vol. 55(2), pages 396-420, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ororsc:v:22:y:2011:i:1:p:141-157. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.