Can we design an industry classification system that reflects industry architecture?
Journal of Enterprise Transformation
Margaret Dalziel, Xiangyang Yang, Simon Breslav, Azam Khan, Jianxi Luo
January 2018
40 pages.
Interdependencies amongst firms with complementary capabilities lead to the emergence of stable patterns of inter-firm 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 inter-industry inter-dependencies 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 inter-firm networks. And third, that roles within demand-based sectors are the redundant feature of inter-industry relations that allow us to describe the economy simply. We support our arguments with visualizations of over 53,000 of the largest inter-firm transactions in the U.S. economy between 1976 and 2010.