Theories of the Firm-Market Boundary
Academy of Management Annals, 2011
64 Pages Posted: 17 May 2011 Last revised: 31 May 2011
Date Written: May 15, 2011
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Micro-Foundations for Strategy: A Goal-Framing Perspective on the Drivers of Value Creation
Microfoundations of Management: Behavioral Strategies and Levels of Rationality in Organizational Action
Aspirations, Innovation, and Corporate Venture Capital: A Behavioral Perspective
By Vibha Gaba and Shantanu Bhattacharya
Information Aggregation, Matching and Radical Market-Hierarchy Hybrids: Implications for the Theory of the Firm
By Teppo Felin and Todd Zenger
By Jay B. Barney and Teppo Felin
Antecedents and Consequences of Organizational Change: ‘Institutionalizing’ the Behavioral Theory of the Firm
Cognition and Governance: Why Incentives Have to Take the Back Seat
Corporate Structure and Performance Feedback: Aspirations and Adaptation in M-Form Firms
By Vibha Gaba and John Joseph
Enhancing Mental Models, Analogical Transfer, and Performance in Strategic Decision Making
By Michael Shayne Gary, Robert E. Wood, ...