Concluding Remarks

It seems to us that the theory of the firm, and especially work on what determines the boundaries of the firm, has become too narrowly focused on the hold-up problem and the role of asset specificity. Think of arraying the set of coordination and motivation problems that the firm solves along one dimension of a matrix, and the set of instruments it has available along the other. Put the provision of investment incentives in Column 1 and ownership-defined boundaries in Row 1. Let an element of the matrix be positive if the corresponding instrument is used to solve the corresponding problem, and zero otherwise. So there is certainly a positive entry in Row 1, Column 1: ownership does affect incentives for investment. We have argued, however, that both the first column and the first row have many other positive elements; ownership boundaries serve many purposes and investment incentives are provided in many ways.

Admittedly, most of the evidence we have offered in support of this claim is anecdotal and impressionistic. Our stories are largely based on newspaper reports, case studies, and our own consulting work, and they are not the sort of systematic evidence one would ideally want. Nevertheless, we think that of the significant organizational change that seems to be taking place, only a small part can be easily understood in terms of traditional transactions cost theory in which hold-up problems are resolved by integration. Many of the hybrid organizations that are emerging are characterized by high degrees of uncertainty, frequency, and asset specificity, yet they do not lead to integration. In fact, high degrees of frequency and mutual dependency seem to support, rather than hinder, ongoing cooperation across firm boundaries. This issue deserves to be explored in future work.[22]

It is also questionable whether it makes sense to consider one transaction at a time when one tries to understand how the new boundaries are drawn. In market networks, interdependencies are more than bilateral, and how one organizes one set of transactions depends on how the other transactions are set up. The game of influence is a complicated one and leads to strategic considerations that transcend simple two-party relationships.

The property rights approach, with its emphasis on incentives driven by ownership, may be a good starting point for investigating these new hybrid structures. These appear to be emerging in response to, among other things, an increase in the value of entrepreneurship and the value of human capital, both of which are features that the property rights approach can in principle model. But this approach also needs to expand its horizon and recognize that power derives from other sources than asset ownership, and that other incentive instruments than ownership are available to deal with the joint problems of motivation and coordination. We do not believe that a theory of the firm that ignores contracts and other substitutes for ownership will prove useful for empirical studies. The world is replete with alternative instruments and, as always, the economically interesting action is at the margin of these substitutions.

[22]See Halonen (1994) for a first modeling effort along these lines.

Inventing the Organizations of the 21st Century
Inventing the Organizations of the 21st Century
ISBN: 026263273X
EAN: 2147483647
Year: 2005
Pages: 214
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