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Capabilities, Transaction Costs, and Firm Boundaries

Published on Nov 1, 2012in Organization Science3.26
· DOI :10.1287/orsc.1110.0736
Nicholas Argyres21
Estimated H-index: 21
(WashU: Washington University in St. Louis),
Todd R. Zenger31
Estimated H-index: 31
(WashU: Washington University in St. Louis)
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Abstract
Although the literature on firm boundaries has been greatly influenced by transaction cost economics, strategy scholars often emphasize the importance of capabilities considerations in these decisions. This has led to a debate that, we suggest, has generated more heat than light. We argue that the two sets of considerations are in fact so intertwined dynamically that treating them as independent, competitive explanations is fundamentally misleading. We offer a theoretical synthesis of transaction cost and capabilities approaches to firm boundaries that seeks to overcome each approach's limitations and provides a unified and logically consistent understanding of boundary decisions.
  • References (76)
  • Citations (112)
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References76
Newest
Published on Oct 1, 1960in The Journal of Law and Economics
Ronald H. Coase36
Estimated H-index: 36
This paper is concerned with those actions of business firms which have harmful effects on others. The standard example is that of a factory the smoke from which has harmful effects on those occupying neighbouring properties. The economic analysis of such a situation has usually proceeded in terms of a divergence between the private and social product of the factory, in which economists have largely followed the treatment of Pigou in The Economics of Welfare. The conclusions to which this kind o...
Published on Dec 1, 2008in Strategic Management Journal5.57
Jackson A. Nickerson26
Estimated H-index: 26
(UW: University of Washington),
Todd R. Zenger31
Estimated H-index: 31
(WashU: Washington University in St. Louis)
An economic theory of the firm must explain both when firms supplant markets and when markets supplant firms. While theories of when markets fail are well developed, the extant literature provides a less than adequate explanation of why and when hierarchies fail and of actions managers take to mitigate such failure. In this article, we seek to develop a more complete theory of the firm by theorizing about the causes and consequences of organizational failure. Our theory focuses on the concept of...
Published on Oct 24, 2008in Columbia Law Review2.22
Ronald J. Gilson28
Estimated H-index: 28
(Columbia University),
Charles F. Sabel36
Estimated H-index: 36
(Columbia University),
Robert E. Scott20
Estimated H-index: 20
(Columbia University)
Rapidly innovating industries are just not behaving the way theory expected. Conventional industrial organization theory predicts that when parties in the supply chain have to make transaction-specific investments, the risk of opportunism will drive them away from contracts and toward vertical integration. Despite the conventional theory, contemporary practice is moving in the other direction. Instead of vertical integration, we observe vertical disintegration in a significant number of industri...
Published on Sep 1, 2008in Strategic Entrepreneurship Journal2.96
Kirsten Foss23
Estimated H-index: 23
(NHH: Norwegian School of Economics),
Nicolai J. Foss72
Estimated H-index: 72
(NHH: Norwegian School of Economics)
To add insight in new value creation, opportunity discovery should be integrated with strategic management theory. Based on the resource-based view and the economics of property rights, we build a framework that accomplishes this. Our key argument is that property rights and transaction costs are important antecedents of opportunity discovery. We identify two mechanisms that establish this influence and examine alternative ways in which knowledge, transaction costs, and property rights influence...
Published on Jul 1, 2008in Academy of Management Review10.63
Claudio Wolter2
Estimated H-index: 2
(CMU: Carnegie Mellon University),
Francisco Veloso22
Estimated H-index: 22
(CMU: Carnegie Mellon University)
We analyze how transaction cost economics and competence arguments determine vertical organization boundaries when firms react to innovation. Existing perspectives and empirical evidence have been ambiguous because of conflicting tensions between the two frameworks and simplistic views of innovation. Using Henderson and Clark's (1990) innovation categories and a careful review of both theories, we show that it is possible to reach a consistent set of predictions on vertical integration and to re...
Published on May 1, 2007in Strategic Organization3.11
Nicholas Argyres21
Estimated H-index: 21
(BU: Boston University),
Vai-Lam Mui12
Estimated H-index: 12
(Monash University)
This article studies how organizations can choose dissent regimes that encourage organization members to express dissent in ways that provide the organization with informational benefits while minimizing the hazards associated with opportunistic behavior by members in the dissent process. Using a game-theoretic model, we demonstrate how logic-based and balanced rules of engagement can change various members' cost—benefit calculus in deciding whether to express dissent and thereby enable an organ...
Published on Feb 1, 2007in Strategic Organization3.11
Joseph T. Mahoney40
Estimated H-index: 40
,
Anita M. McGahan33
Estimated H-index: 33
(BU: Boston University)
The Strategic Management field has matured over the last decade. We now face a number of critical issues that, taken together, suggest that now is the time to take hold of new ideas for explaining and predicting organizational performance. First, our courses--once among the most exciting and innovative in the business school curriculum--are waning at some flagship schools. We need to revitalize our teaching effectiveness through new materials and pedagogy. Second, the theoretical base in our fie...
Published on May 1, 2006in Strategic Management Journal5.57
Richard Carter1
Estimated H-index: 1
,
Geoffrey M. Hodgson53
Estimated H-index: 53
(University of Hertfordshire)
‘The definitive version is available at www3.interscience.wiley.com '. Copyright John Wiley & Sons [Full text of this article is not available in the UHRA]
Published on Dec 1, 2005in Strategic Management Journal5.57
Michael G. Jacobides19
Estimated H-index: 19
(LBS: London Business School),
Lorin M. Hitt35
Estimated H-index: 35
(UPenn: University of Pennsylvania)
Focusing on proving or disproving Transaction Cost Economics has led to a relative neglect of some key drivers of vertical scope, such as differences in productive capabilities (as opposed to capabilities of governance). We consider how productive capability differences can shape vertical scope through gains from trade. Using highly detailed data from the mortgage banking industry, we find productive capabilities to be a key determinant of the make-vs.-buy decision. Our analysis also suggests fi...
Published on May 1, 2005in Strategic Management Journal5.57
Michael G. Jacobides19
Estimated H-index: 19
(LBS: London Business School),
Sidney G. Winter56
Estimated H-index: 56
(UPenn: University of Pennsylvania)
This paper proposes that transaction costs and capabilities are fundamentally intertwined in the determination of vertical scope, and identifies the key mechanisms of their co-evolution. Specifically, we argue that capability differences are a necessary condition for vertical specialization; and that transaction cost reductions only lead to specialization when capabilities along the value chain are heterogeneous. Furthermore, we argue that there are four evolutionary mechanisms that shape vertic...
Cited By112
Newest
Quang “Neo” Bui (RIT: Rochester Institute of Technology), Ezekiel Masao Leo (RIT: Rochester Institute of Technology), Olayele Adelakun4
Estimated H-index: 4
(DePaul University)
Abstract Effectively managing Information Technology outsourcing (ITO) requires integration of conceptually distinct and sometimes contradicting factors. For instance, ITO “best practices” for cost reduction can inhibit a firm’s innovativeness. To address these challenges, we build on governance and capability perspectives and employ a set-theoretic approach to examine ITO practices in 27 firms. Our exploratory study reveals four distinct ITO configurations, of which three lead to positive outco...
Published on Mar 8, 2019in Journal of Economic Surveys2.76
Emmanuel Raynaud1
Estimated H-index: 1
(Université Paris-Saclay),
Paula Sarita Bigio Schnaider (Escola de Administração de Empresas de São Paulo), Maria Sylvia Macchione Saes5
Estimated H-index: 5
(USP: University of São Paulo)
Why do firms concomitantly rely on more than one organizational arrangement to procure/distribute a given input/product? In this paper, we systematically review and discuss the extensive path undergone by the literature exploring this issue: the so-called plural forms.We address two main questions: how to explain the coexistence (and often the prevalence) of plural forms in many types of businesses? Are plural forms stable or a transitory phenomenon? We describe the most prominent motivations id...
Published on Jul 15, 2019in Strategic Management Journal5.57
Mo Chen (UMD: University of Maryland, College Park), Aseem Kaul8
Estimated H-index: 8
(UMN: University of Minnesota),
Xun (Brian) Wu (UM: University of Michigan)
We introduce and examine the concept of inter-temporal coordination costs, i.e., the reduction in a firm’s ability to adapt within businesses as a result of its attempts to capture synergies across businesses. Using a modified NK model of search across two landscapes, we show that these costs have an inverted-U relationship with the relatedness between landscapes, and this relationship is moderated by complexity. We further extend the model to examine entry into new markets, and use it to define...
Published on May 28, 2019in Industry and Innovation3.16
Huasheng Zhu (BNU: Beijing Normal University), Peng-Fei Li5
Estimated H-index: 5
(HEC Montréal)
AbstractThe paper addresses the structure-agency dilemma of interactive learning in innovation systems, namely the structuration process of how macro-conditions shape micro-actions of firms and the agency process of how firms react to macro-structures. We argue organizational boundaries of firms are an important dimension to tackle the structure-agency dilemma of interactive learning. Specifically, we propose the structuration process can occur through a boundary-stabilizing mechanism while the ...
Published on May 15, 2019in The Review of Austrian Economics
David S. Lucas2
Estimated H-index: 2
,
David S. Lucas1
Estimated H-index: 1
(SU: Syracuse University)
In this issue, Elert and Henrekson offer an important and promising framework through which Austrian scholars to contribute to the study of entrepreneurship and innovation. I suggest a way to build upon their framework: incorporating insights from public choice. While Elert and Henrekson downplay self-interest in their institutional analysis, public choice offers important insights about the formation of public policies that affect innovation activity. Without this, a gap exists among the identi...
Published on Nov 1, 2018in Accounting Organizations and Society3.15
Leslie G. Eldenburg14
Estimated H-index: 14
(UA: University of Arizona),
Richard A. Price5
Estimated H-index: 5
(OU: University of Oklahoma),
Francisco J. Román3
Estimated H-index: 3
(GMU: George Mason University)
Abstract Because of changes in tax regulations and increased political pressure, firms are reconsidering their practices of shifting manufacturing operations offshore to lower wage countries. Although outsourcing has been well researched, few studies examine managerial practices that influence offshore operations. We investigate the effects of choices regarding labor, suppliers, and outsourcing that influence firm longevity in the maquiladora industry in Mexico. We argue that firms are exposed t...
Published on Apr 11, 2019in Construction Management and Economics
Peter Galvin (ECU: Edith Cowan University), Peter Galvin3
Estimated H-index: 3
(ECU: Edith Cowan University),
Stephane Twyoniak9
Estimated H-index: 9
(U of O: University of Ottawa)
As construction-oriented public sector agencies have outsourced more and more of their construction-related activities, they have often suffered from an inability to provide appropriate oversight due to degraded capabilities. This had led to calls for these agencies to rebuild capabilities across different technical areas. A firm’s boundary choices—make, buy, ally and dual modes (make and buy simultaneously)—may impact the ability of a firm to maintain and even build new capabilities, and in thi...
Published on Apr 1, 2019in Strategic Management Journal5.57
Jiao Luo6
Estimated H-index: 6
(UMN: University of Minnesota),
Aseem Kaul8
Estimated H-index: 8
(UMN: University of Minnesota)
We adopt a comparative institutional approach to examine the most efficient way of dealing with market failure. We develop a typology of market failures based on the extent of externalities and information asymmetries and define the distinct transaction costs associated with each type. We then consider the relative efficacy of alternate governance forms in dealing with these costs, arguing that enforcement costs are lowest under the state, assurance costs under collectives, and fiduciary costs u...
Published on Mar 1, 2019in Strategic Management Journal5.57
Nicholas Argyres21
Estimated H-index: 21
(WashU: Washington University in St. Louis),
Joseph T. Mahoney40
Estimated H-index: 40
(UIUC: University of Illinois at Urbana–Champaign),
Jackson A. Nickerson26
Estimated H-index: 26
(WashU: Washington University in St. Louis)
Research Summary Shocks, whether they derive from shifts in demand, supply, regulation, or innovation, can create the need for competitive repositioning by industry participants when they disrupt established sources of competitive advantage. Such situations can therefore create a canonical strategic problem: whether, where, and how to (re‐)position following an industry shock. In this paper, we explore the role of comparative adjustment costs in determining competitive advantage in dynamic envir...
Published on Mar 1, 2019in Journal of Management9.06
Theodore A. Khoury8
Estimated H-index: 8
(PSU: Portland State University),
Erin G. Pleggenkuhle-Miles2
Estimated H-index: 2
(UNO: University of Nebraska Omaha),
Jorge Walter14
Estimated H-index: 14
(GW: George Washington University)
Licensing has become the central form of interfirm technology transfer and commercialization in the market for inventions. However, despite the large representation and growth of this business model, the resolution of key contractual provisions is still regarded as idiosyncratic, and little is known about how experience with prior relationships or bargaining power position affects contract outcomes. In an attempt to further understand how these transactions unfold, we present and test a theoreti...
View next paperThe Co-evolution of Capabilities and Transaction Costs: Explaining the Institutional Structure of Production