2009年04月15日

Theories on the corporate boundary decision

(English only... draft)

  Discussions of the organizational boundaries, most recently outsourcing decisions, are a central phenomenon that has been viewed through multiple theoretical lenses. The theories on the existence of the firm are classified into two major streams: Transaction Cost Economics and the Resource Based View. However, recent developments suggest that a number of other theories, such as institutional theory and contingency theory, should also account for the decisions.
 
 

  Transaction Cost Economics (TCE) argues that firm exist because they are more effective than markets in using price mechanisms to discover relevant information and to negotiate contracts (Coase, 1937). Firms are more effective than the markets because they control the opportunism associated with the specificity of assets, and have lower costs that result from “haggling” in certain conditions (Williamson, 1975). They provide monitoring facilities, which prevent “shirking” or the non fulfilment of contractual conditions (Alchian and Demsetz, 2003). In fact, the discussion of “why firms exist” has a direct connection with the discussion of “where the boundaries should be”. TCE views that firm boundaries depend on the bureaucratic costs associated with the decision to take a transaction out of the market and organize it internally (Williamson, 1999). Therefore, firms will make a choice between these two governance mechanisms based on which will yield the minimum costs (Barney and Hesterly, 1996). In this view, integration may be the result of; the need for superior monitoring or measurement that can be done in-house (Barzel, 1981); the need to increase the incentive alignment through integrated ownership (Hart, 1995); the inability to educate the outside suppliers about desired properties (Silver, 1984); and so on. Although the core argument is based primarily on the numeric calculation of the costs comparison, TCE specifies the conditions under which an organization should manage an economic exchange internally within its boundaries (Williamson, 1975, Williamson, 1985). It, in fact, enhances our understanding of whether it is more appropriate to in-source or out-source an activity (Stratman, 2008).


  In contrast, the Resource Based View (RBV) argues that firms exist because they have unique, often historically dependent, abilities to accumulate specific resources that lead to differential levels of firm performance (Reed and DeFillippi, 1990). In this view, a firm is an entity endowed with a broad set of capabilities and resources (Penrose, 1959). Its ability to obtain and defend a specific set of physical, financial, human or organizational resources determines the competitiveness of the firm (Wernerfelt, 1984). Historically determined, socially embedded, and tacit capabilities and resources bind the firm in the market (Barney, 1991, Conner, 1991, Peteraf, 1993). Therefore, the firm’s attempts to increase its productive capabilities and to leverage its comparative advantage may be a key determinant of the make-or-buy decision (Jacobides and Hitt, 2005). The boundary decision may be the result of the distinction between core and non-core activities (Prahalad and Hamel, 1990). Inter-organizational collaboration can be employed to access and develop complementary resources that contribute to competitive advantage (Barney, 1991). The outsourcing decision will be influenced by the ability of an organization to invest in developing a capability and sustaining a superior performance position relative to its competitors (Langlois and Robertson, 1995).


  The Knowledge Based View is an extension of RBV to the extent that it focuses upon knowledge as the most strategically important resource (Conner and Prahalad, 1996, Grant, 1996). In this view, knowledge is considered as an active process that is mediated, situated, provisional, pragmatic and contested (Blackler, 1995). A common argument in much of this literature is that firms exist to protect and generate knowledge and to economize on the exchange of knowledge rather than to attenuate opportunism (Nickerson and Zenger, 2004). The boundary decision of the firm is one of the applications of this theoretical perspective. For example, Grant (1997) argued that markets are usually inefficient in transferring knowledge, except where knowledge is embodied within a product and, therefore, the vertical integration decisions of the firm depend upon the need for knowledge transfer. Also, Kogut and Zander (1992) described how the make or buy decision will depend upon the current knowledge level, learning capability, expectation of the value of the knowledge, and the required speed for obtaining the knowledge. Further, Foss (1996)  claimed that firm boundaries can be determined by capability differences, such as the inability to communicate knowledge or higher information costs.


  There are number of other theoretical lenses that assist our understanding of the firm’s boundary decision. However, institutional theory and contingency theory may be the most important theories in understanding the influence of the indirect or detailed external factors that TCE and RBV/KBV does not emphasize in their core arguments.


  Firstly, Institutional theory explains the importance of the legitimacy of the organizational structure and the strategy of the firm. It is based on the non-economic logic that drives human actions, and explains that, within a specific field, organizations gradually become homogenous in terms of their structures, practices and even strategies, because of their expectations in the wider social environment (DiMaggio and Powell, 1983). Although RBV and KBV focus on the firm’s rational and strategic decision to maximize its competitive advantage, institutional theory can incorporate the possibility that the external actors surrounding it may intentionally or unintentionally navigate a firm. Ang and Cumming (1997) provide examples of such an influence. They found that Federal regulator influence and peer influence affected the information system outsourcing of smaller banks, indicating the institutional effects on the strategic decision of the firm. The rational calculation of the costs and the firm’s strategy to increase its competitive advantage may not always lead the firm’s strategic direction.


  Moreover, Contingency theory explains the firm’s proactive reaction to the dynamics of the external environment. It adopts the same standpoint to the institutional theory that the influence of the external environment is a key determinant. This approach is based on the assumption that performance is a consequence of the fit between several organizational attributes (e.g., strategy, structure, culture) and environmental characteristics (e.g., dynamism, complexity, munificence) (Tosi Jr and Slocum Jr, 1984). It attempts to explain the pervasive influence of the environment on organizational strategies, structures, and processes (Pennings, 1987, Pennings, 1992). The influence of exogenous factors on the development of competitively internal environmental capabilities is the area where RBV has been absent until recently. Researchers, such as Aregon-Correa and Sharma (2003), have explicitly attempted to incorporate the concept of contingency theory and proposed the “Contingent Resource-Based View”. There is an increasing need for the analysis of the exogenous factors that influence the strategy and structure of the firm.


  The corporate boundary decision has been studied by the two major streams of research: TCE and RBV. However, studies suggest that other theoretical perspectives, such as institutional theory and contingency theory, may supplement the incomplete arguments of TCE and RBV.
 

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