There are many different kinds of information flow in an entity, up to down, down to up, and across. Each has its own importance. Generally, though, the flow of information in an organization affects the effectiveness of the organization for several reasons.
First, knowledge is power, and if certain kinds of information do not flow freely, up, down, and across, people perceive they are powerless and are not motivated to do well. Informal methods of communication spring up, often more gossip and speculation than useful communication, creating a kind of paranoia that always harms the entity.
Second, people cannot do their jobs properly without effective communication about their jobs, about their performance, and about changes and improvements. Top down communication is a necessity, as is lateral communication so that people can aid one another.
Third, communication from the bottom to the top makes an organization more effective because it gives the employee a feeling of empowerment and often provides valuable information that management can use to improve an organization.
There are other reasons that communication is important, but these three are central to effective business practice. Any entity that fails in one of the above ways is bound to be less effective and less productive.