scholarly journals Toward an integrated theory of the firm: The interplay between internal organization and vertical integration

2015 ◽  
Vol 37 (12) ◽  
pp. 2481-2502 ◽  
Author(s):  
Francisco Brahm ◽  
Jorge Tarziján
Keyword(s):  
Vertical Integration ◽  
Theory Of The Firm ◽  
Internal Organization ◽  
Integrated Theory

Transaction Cost Economics as a Theory of the Firm, Management, and Governance

2017 ◽  
Author(s):  
Mikko Ketokivi ◽  
Joseph T. Mahoney
Keyword(s):  
Transaction Cost ◽  
Vertical Integration ◽  
Transaction Cost Economics ◽  
Theory Of The Firm ◽  
Organization Design ◽  
Primary Objective ◽  
Organizational Response ◽  
Market Exchange ◽  
Manufacturing Firm ◽  
Relevant Alternatives

Which components should a manufacturing firm make in-house, which should it co-produce, and which should it outsource? Who should sit on the firm’s board of directors? What is the right balance between debt and equity financing? These questions may appear different on the surface, but they are all variations on the same theme: how should a complex contractual relationship be governed to avoid waste and to create transaction value? Transaction Cost Economics (TCE) is one of the most established theories to address this fundamental question. Ronald H. Coase, in 1937, was the first to highlight the importance of understanding the costs of transacting, but TCE as a formal theory started in earnest in the late 1960s and early 1970s as an attempt to understand and to make empirical predictions about vertical integration (“the make-or-buy decision”). In its history spanning now over five decades, TCE has expanded to become one of the most influential management theories, addressing not only the scale and scope of the firm but also many aspects of its internal workings, most notably corporate governance and organization design. TCE is therefore not only a theory of the firm, but also a theory of management and of governance. At its foundation, TCE is a theory of organizational efficiency: how should a complex transaction be structured and governed so as to minimize waste? The efficiency objective calls for identifying the comparatively better organizational arrangement, the alternative that best matches the key features of the transaction. For example, a complex, risky, and recurring transaction may be very expensive to manage through a buyer-supplier contract; internalizing the transaction through vertical integration offers an economically more efficient approach than market exchange. TCE seeks to describe and to understand two kinds of heterogeneity. The first kind is the diversity of transactions: what are the relevant dimensions with respect to which transactions differ from one another? The second kind is the diversity of organizations: what are the relevant alternatives in which organizational responses to transaction governance differ from one another? The ultimate objective in TCE is to understand discriminating alignment: which organizational response offers the feasible least-cost solution to govern a given transaction? Understanding discriminating alignment is also the main source of prescription derived from TCE. The key points to be made when examining the logic and applicability of TCE are: (1) The first phenomenon TCE sought to address was vertical integration, sometimes dubbed “the canonical TCE case.” But TCE has broader applicability to the examination of complex transactions and contracts more generally. (2) TCE could be described as a constructive stakeholder theory where the primary objective is to ensure efficient transactions and avoidance of waste. TCE shares many features with contemporary stakeholder management principles. (3) TCE offers a useful contrast and counterpoint to other organization theories, such as competence- and power-based theories of the firm. These other theories, of course, symmetrically inform TCE.

The Changing Nature of The Corporation and The Economic Theory of The Firm

2019 ◽  
pp. 538-562
Author(s):  
Nicolai J. Foss ◽  
Stefan Linder
Keyword(s):  
Economic Theory ◽  
Corporate Social Responsibility ◽  
Social Responsibility ◽  
Knowledge Economy ◽  
Theory Of The Firm ◽  
Current Understanding ◽  
Contemporary Theory ◽  
Internal Organization ◽  
Corporate Social

The economic theory of the firm has strongly influenced our current understanding of the raison d’être, functioning, and internal organization of organizations. Yet, organizations today operate under quite different conditions than the ones that prevailed when some of the foundations for the contemporary theory of the firm were laid (i.e., the 1930s to the 1970s). The unfolding knowledge economy and the growing pressure for corporate social responsibility promise to profoundly affect the nature of corporations. We discuss what the economic theory of the firm has to offer for understanding the challenges faced by corporations today, and where the knowledge economy and corporate social responsibility push the limits of the economics of organization.

scholarly journals Thinking about the Firm: A Review of Daniel Spulber's The Theory of the Firm

2011 ◽  
Vol 49 (1) ◽  
pp. 101-113 ◽  
Author(s):  
Oliver Hart
Keyword(s):  
Theory Of The Firm ◽  
Black Box ◽  
Firm Boundaries ◽  
Internal Organization ◽  
Direct Exchange ◽  
The Way

In this review, I describe how economists have moved beyond the firm as a black box to incorporate incentives, internal organization, and firm boundaries. I then turn to the way that the theory of the firm is treated in Daniel Spulber's book The Theory of the Firm: Microeconomics with Endogenous Entrepreneurs, Firms, Markets, and Organizations. Spulber's goal is to explain why firms exist, how they are established, and what they contribute to the economy. To accomplish this, Spulber defines a firm to be a transaction institution whose objectives differ from those of its owners. For Spulber, this separation is the key difference between the firm and direct exchange between consumers. I raise questions about whether this is a useful basis for a theory of the firm. (JEL D21)

The Property-Rights Approach

2015 ◽  
Author(s):  
Pol Antràs
Keyword(s):  
Property Rights ◽  
Vertical Integration ◽  
Theory Of The Firm ◽  
Unified Framework ◽  
Central Idea ◽  
Property Rights Theory ◽  
Influential Theory

This chapter turns to the property-rights theory of the firm, which arguably constitutes the most compelling and influential theory of the firm explaining in a unified framework both the benefits as well as the costs of vertical integration. The central idea of the property-rights approach is that internalization matters because ownership of non-human assets is a source of power when contracts are incomplete. More specifically, when parties encounter contingencies that were not foreseen in an initial contract, the owner of these assets naturally holds residual rights of control, and they can decide on the use of these assets that maximizes payoff at the possible expense of that of the integrated party.

The Modern Russian Institutionalism: Further Discussion

2010 ◽  
pp. 103-116 ◽  
Author(s):  
E. Popov ◽  
A. Sergeev
Keyword(s):  
Economic Theory ◽  
Knowledge Economy ◽  
Theory Of The Firm ◽  
Economic Modeling ◽  
Institutional Economic ◽  
Integrated Theory ◽  
The One ◽  
Institutional Traps ◽  
Rules Of The Game ◽  
Modern Russian

In the article the positive estimation of the paper on institutional methodology which was published in the 3rd issue of the journal in 2009 is given. In the discussion with A. Moskovsky the authors show that the term "institution" may have various definitions and argue in favour of the one proposed by D. North ("institutions as rules of the game"). The new institutional economic theory has a bigger potential for economic modeling than traditional institutionalism. The usefulness of "mathematical" institutionalism has been determined by the Russian researchers' elaborations of the institutional traps theory, institutional systems creation theory, knowledge economy theory and system-integrated theory of the firm.

scholarly journals Can Firms Be Both Broad and Deep? Exploring Interdependencies Between Horizontal and Vertical Firm Scope

2020 ◽  
pp. 014920632091229
Author(s):  
Francisco Brahm ◽  
Anne Parmigiani ◽  
Jorge Tarziján
Keyword(s):  
Construction Industry ◽  
Theory Of The Firm ◽  
Organizational Structures ◽  
Great Depth ◽  
Firm Boundaries ◽  
Industry Data ◽  
Internal Organization ◽  
Firm Scope

Firms can be horizontally diversified, with considerable breadth, or vertically integrated, with great depth. This study explores how breadth and depth affect each other as influenced by capability requirements and coordination demands. Using construction industry data, we assess the interdependence between contractors’ portfolios of building types (horizontal scope) and the extent of integration of the activities needed to complete each project (vertical scope). We find that vertical and horizontal scope have a negative interdependency only when contractors face managerial constraints due to coordination challenges. Further, we show that this effect can be mitigated through organizational structures that centralize key functions. Our findings highlight the importance of coordination in the theory of the firm, as we link firm boundaries to managerial coordination and internal organization.

Economics of identity and economics of the firm: why and how their three central questions overlap

2013 ◽  
Vol 9 (3) ◽  
pp. 363-379 ◽  
Author(s):  
BÉATRICE BOULU-RESHEF
Keyword(s):  
Social Context ◽  
Theory Of The Firm ◽  
Social Identities ◽  
Firm Boundaries ◽  
Internal Organization ◽  
Identity Based ◽  
Research Agendas ◽  
Collective Intentions

AbstractThis paper shows how the literature on identity can enhance the so-far underdeveloped appreciation of social context in the theory of the firm. While taking context into account, I explain why the literatures overlap in significant ways and I propose an analytical map which relies on and matches the three central questions of both literatures. The three central questions on identity – identification, individuation and multiple social identities – are coupled respectively with the three central questions on the firm – the nature of the firm, internal organization and firm boundaries. This identity-based extension of the economics of the firm contributes to the organization of the literature by extending the analysis of identity to questions that go beyond the primary question of identification. In doing so, it identifies two key research agendas: the role of internal organization in enabling individuation and the role of firm boundaries in enabling collective intentions.

Uncertainty, judgment, and the theory of the firm

2014 ◽  
Vol 11 (3) ◽  
pp. 623-650 ◽  
Author(s):  
NIKLAS L. HALLBERG
Keyword(s):  
Vertical Integration ◽  
Transaction Cost Economics ◽  
Theory Of The Firm ◽  
Governance Structures ◽  
Experimental Basis ◽  
Cognitive Representations ◽  
Decision Biases ◽  
Decision Supporting ◽  
Uncertain Future ◽  
Governance Choices

Abstract:The effects of a truly uncertain future are more far-reaching than what has traditionally been assumed in transaction cost economics (TCE). Uncertain governance choices require that agents exercise judgment in the absence of other means of estimating the payoffs associated with complex combinations of transaction attributes, contractual contingencies, and governance structures. Judgments are made on an experimental basis to incrementally improve actors’ heterogeneous cognitive representations of the contractual landscape. I argue that uncertain governance choices are subject to specific decision-biases that interact with the potentially corrective function of current organization and asymmetries in actors’ access to decision-supporting systems. These asymmetries may affect the contracting parties’ preferences over differential governance structures. Specifically, by overestimating individual unbiased rationality and disregarding how access to decision-supporting systems may affect governance choice, TCE runs the risk of underestimating the degree of vertical integration in actual firms.

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