To assess the robustness of the scenarios, the Working Group posed several questions. The first was: Are they feasible? A primary determinant of feasibility is the likely economic viability of the organizational forms the scenarios describe.
Questions about the underlying economics of business enterprises touch on a series of profound and complex issues: Why do certain firms grow large or stay small? What are the critical advantages of size? Are these advantages inherent, or are they tied to conditions unique to certain industries or certain stages of economic development? Economists and business historians have long wrestled with these questions. The fundamental insight behind much of their work has been that while the same transaction can either be internalized within a firm or take place through separate entities exchanging in the marketplace, the arrangement which typically emerges under a given set of circumstances is the one which results in the lowest overall costs.
The Small Companies/Large Networks scenario envisions a world in which external transactions will be much cheaper and more efficient than they are today. The result is expected to be an organizational environment rich in external transactions, where the advantages of speed and flexibility so overshadow those of scale that almost no large, permanent organizations exist. The Virtual Countries world, by contrast, is one in which the advantages of scale which have driven the growth of large organizations in the past are assumed to continue, and indeed, to be amplified significantly—so much so that the number of external transactions will be quite limited, with most of the value chain for the production of goods and services retained inside the core firm and the family of suppliers which will together make up the "extended enterprise" of the large conglomerates.
The seminal work on this subject in economics is Coase (1937). Williamson (1975) revisited the questions originally posed by Coase and triggered a wave of work on this set of issues. A good review of economists' work in this area is Holmstr m and Tirole (1989). Though he approaches the question from a different perspective, the business historian Alfred Chandler attributes the rise of the modern corporation largely to the "internalization"—for the purpose of achieving economies of various sorts—within large firms of functions formerly performed by small firms transacting in arm's-length fashion in the marketplace; see Chandler (1977).