Capabilities, Transaction Costs, and Firm Boundaries: An Integrative Theory

Abstract

While the literature on firm boundaries has been greatly influenced by transaction cost economics, strategy scholars often emphasize the importance of capabilities considerations in these decisions. This has led to a debate that, we suggest, has generated more heat than light. We argue that the two sets of considerations are in fact so intertwined dynamically that treating them as independent, competitive explanations is fundamentally misleading. We offer a theoretical synthesis of transaction cost and capabilities approaches to firm boundaries that seeks to overcome each approach’s limitations, and provides a unified and logically consistent understanding of boundary decisions.

Keywords: capabilities, transaction costs, resource-based view, firm boundaries

JEL Classification: D23, L14, L22, L21, L33