Theories of the Firm-Market Boundary

Academy of Management Annals, 2011

64 Pages Posted: 17 May 2011 Last revised: 31 May 2011

See all articles by Todd Zenger

Todd Zenger

University of Utah

Teppo Felin

University of Oxford - Said Business School

Lyda S. Bigelow

University of Utah - David Eccles School of Business

Date Written: May 15, 2011

Abstract

A central role of the entrepreneur-manager is assembling a strategic bundle of complementary assets and activities, either existing or foreseen, which when combined create value for the firm. This process of creating value however requires managers to assess which activities should be handled by the market and which should be handled within hierarchy. Indeed, for more than forty years, economists, sociologists and organizational scholars have extensively examined the theory of the firm’s central question: what determines the boundaries of the firm? Many alternative theories have emerged and are frequently positioned as competing explanations, often with no shortage of critique for one another. In this paper, we review these theories and suggest that the core theories that have emerged to explain the boundary of the firm commonly address distinctly different directional forces on the firm boundary - forces that are tightly interrelated. We specifically address these divergent, directional forces - as they relate to organizational boundaries - by focusing on four central questions. First, what are the virtues of markets in organizing assets and activities? Second, what factors drive markets to fail? Third, what are the virtues of integration in organizing assets and activities? Fourth, what factors drive organizations to fail? We argue that a complete theory of the firm must address these four questions and we review the relevant literature regarding each of these questions and discuss extant debates and the associated implications for future research.

Keywords: theory of the firm, firm boundaries, market failure, organization failure

JEL Classification: D23, L14, L22, L33, D72

Suggested Citation

Zenger, Todd R. and Felin, Teppo and Bigelow, Lyda S., Theories of the Firm-Market Boundary (May 15, 2011). Academy of Management Annals, 2011, Available at SSRN: https://ssrn.com/abstract=1843287

Todd R. Zenger (Contact Author)

University of Utah ( email )

David Eccles School of Business
1655 East Campus Center Drive
Salt Lake City, UT 84112
United States
801 585-3981 (Phone)
801 581-7939 (Fax)

Teppo Felin

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

HOME PAGE: http://sites.google.com/site/teppofelin2/

Lyda S. Bigelow

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
801-585-3471 (Phone)

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