The Scope of Financial Institutions: In-Sourcing, Outsourcing, and Off-Shoring

Abstract:     
Based on the seminal paper by Ronald Coase and subsequent work by Oliver Williamson, Oliver Hart and others, explanations for the existence of firms typically hinge upon the advantages of internal coordination over the purchase of market services. In recent years, the standard theory of the integrated firm has given way to a concern about the relative advantages of in-sourcing over outsourcing, recognising that the scope of the firm is a strategic matter. The issue of in-sourcing versus outsourcing has been accompanied by a concern about the geographical scope of the firm: whether the outsourcing of tasks and functions is close-at-hand or offshore. In this paper, we begin with reference to Ronald Coase and the literature that has followed in his wake and suggest, in the first instance, a way of conceptualising the tasks and functions of firms which rely upon firm-specific strategic assets including human capital, governance and decision-making procedures, and the information systems that underpin decision-making. The objects of our analysis are financial institutions like pension funds, sovereign wealth funds, and investment management institutions. To the extent that the cost of services is important, these types of financial institutions have sought to discount these costs by outsourcing, even offshoring. At issue is the viable geographical reach of this type of institution. In large part, our analysis is conceptual and theoretical rather than directly empirical. Nonetheless, it is based on a set of case studies and fieldwork and the implications to be drawn thereof.

Number of Pages in PDF File: 20

Keywords: Financial institutions, coordination, in-sourcing, outsourcing, offshoring

JEL Classification: D02, D21, G23, G32

working papers series