The Flattening Firm and Product Market Competition: The Effect of Trade Costs and Liberalization

Abstract

It has been documented that firm hierarchies are flattening. CEO span of control has increased significantly over time while the number of levels in the hierarchy has declined. In this paper, we establish a causal effect of foreign competition (using changes in trade costs and trade liberalization) on various characteristics of organizational design. We exploit a unique panel dataset of large US firms with detailed information on firm hierarchies and managerial positions over the period 1986-1999. We find that globalization leads to flatter firms: (i) firms reduce the number of positions between the CEO and division managers, and (ii) increase the number of positions reporting directly to the CEO. We also find that competition increases performance-based pay for division managers and affects the reporting relationships of senior officers including Chief Financial Officers and Legal Counsel. The results are generally consistent with the explanation that intensified competition increases the value of innovation and quick decision making, causing multidivisional firms to redesign their organizations to be more adaptive to local information while simultaneously coordinating activities across divisions.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 7 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.