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

Abstract

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

Margaret Dalziel, Xiangyang Yang, Simon Breslav, Azam Khan, Jianxi Luo

Journal of Enterprise Transformation 2018

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, those 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.LINK