-
Session 2: Organizational Economics조직관리론 2019. 3. 9. 11:45
Session 2: Organizational Economics
Dongil Jang
[1] How are the organizational boundaries determined? Williamson (1981) argues that organizations make ‘make-or-buy’ decisions based on the transaction costs. Due to the bounded rationality and the possibility of opportunism, transactions of buying and selling a good or service incur additional costs. And these costs lead to the suboptimal efficiency when contracts are not governed properly. First, each governance structure has its idiosyncratic cost of production and governance. Boundary decisions are made by comparing the marginal efficiency between them. Second, characteristics of the transaction mediates the cost of each structure. Above all, the author emphasizes the dimension of asset specificity and specify site, physical, and human asset specificity. Site specificity indicates the core technology of the firm (Thompson 1967) and the internalization of the focal commerce stage is considered natural. On the other hand, physical specificity denotes that inter-stage relation with the specialized investment. In this situation, relative cost of production and governance leads to the internal procurement. Lastly, human asset specificity focuses on the attribute of intra-stage activity. And the employment relations are settled depending on the firm-specificity and the meterability. # Since Williamson (1981) laid the foundation of the transaction cost economics (TCE), I focus on the summarization, in this paragraph. The subsequent literature is the achievements to communicate with the logics of the transaction cost. Therefore, following sentences will concentrate on figuring how they tried to communicate and on suggesting my opinions about them. At the conclusion, I attempt to present my own considerations on the TCE.
[2] How transaction costs impeded markets for biotechnology R&D? According to the economies of functional or vertical specialization, established firms with low R&D capabilities would progress their development project externally when technological change occurs. However, the puzzle in Pisano (1990) is that large companies place almost half of their R&D projects in-house. By examining 92 biotechnology R&D projects, he finds that ‘small-numbers-bargaining’ hazards lead to the internalization. In addition, organizations’ attributes as technological experience, business focus, and national origin significantly affect their boundaries. # The paper’s research design provides a fine basis for emphasizing the logics of TCE. If it were not for the transaction cost, the lack of R&D capability of established firms would lead more contracts with start-ups. By treating competitiveness in the market condition as a proxy for contractual difficulties, the author shows transaction cost logic promotes the integration. Also, results from other factors render interesting research topics. First, the dynamic effect of firm’s technical capabilities on the boundary decisions could be analyzed with longitudinal data (Pisano 1990: 171). In this paper, the probability of integration increases with more R&D project experience. The author interprets the outcome with the reduction of the production cost based on Coase (1937) and argues that associated experiences could lead the integration. However, high capabilities could also promote contracts. The technical knowledge would help clients to monitor the project thoroughly which lessens the uncertainty of the contract. Therefore, if this capability curtails more governance cost more than the production cost, contracts could be promoted. In this study, established firms and start-ups share the same industry domain although they have different focal capacities. On the other hand, boundary conditions bridging different areas would make an opposite outcome as the production cost will be surpassed. Second, variances between the national origins are also an important research issue. In my opinion this result would represent the differences of the contractual environment. For example, Japan’s low integration rate might be explained with its high emphasis on the trust between firms.
[3] Why firms facing similar contractual hazards rationally select different governance structures? Mayer & Salomon (2006) tries to solve this question by bridging the resource-based view (RBV) and the TCE. With Compustar’s 405 firm level and individual IT service contracts, independent effects and interaction effects of contractual hazards and technical capabilities are shown. The result proves that ‘Hold-up’, ‘Appropriability’, and ‘Observability’ risks promotes in-house decision. Also, weak capabilities significantly lead to outsourcing. More importantly, there is a joint effect, which is interpreted as the governance capability, between ‘Hold-up’ and strong capabilities. # By combining two different theories on organizational boundary, authors succeed in explaining the unexplained outliers in the previous perspectives. And governance capacity itself is an interesting concept which could be analyzed in different contexts. Compustar and its subcontractors share same functional domain even they belong to different entities.[1] Technical capabilities could enhance the governance capability in this case. On the other hand, contracts between organizations from distinct industries would have other sources of governance capability. For example, competent and reputed in-house lawyer or legal-counsel would reduce the occurrence of opportunism (Legal capability). Also, condensed organizational network which could sanction the ‘traitor’ severely would mitigate the contractual hazards (Network capability). In addition to the intended outcomes, the result of slack (Cyert & March 1963; Tan & Peng 2003) needs more attention. The effects of ‘Free cash flow’ and ‘Peak months’ is not significant but we could observe the consistent effect of ‘the ‘Project size’. Although this variable is not explicitly defined as slack, author’s explanation of its effect (Mayer & Salomon 2006: 950) implies its role as a proxy for slack. Also, the memorable point of this factor is the authors’ conflicting expectation toward the result. Even though its effect come out as a positive sign (promoting outsource), its result could be different in different condition. If the IT human resource capacity is properly controlled, its sign would be an opposite direction (promoting integration).
[!] TCE and bounded rationality. Lastly, I would like to suggest my own interest as a discussion topic.[2] One of TCE’s core assumption is the bounded rationality (March and Simon 1958, Cyert and March 1963). But its application does not go beyond inferring the existence of opportunism. Sometimes, its meaning is reduced to information asymmetry (Mayer & Salomon 2006: 945) accentuating the rationality of firms’ boundary decision. In my opinion, this can go further by integrating the dimension of satisficing (Simon 1956). Organizations in the world of TCE could manipulate their boundaries at will as if they have infinite resources to do so. However, some organizations don’t. For instance, entrepreneurs with limited capacities would have difficulties making in-house decisions. They often employ developers and designers as temporary workers and occasionally as subcontractors, even though they take part in as the builders of firm’s core competency. Also, start-ups change their main goals from exploration to the exploitation as the company grows (March 1991). The boundary change during this metamorphosis would not follow the static equilibrium supposed in TCE. I expect the growth would promote integration because of the enhanced capacity and the concretization of the core technology. Compared with the studies emphasizing the governance cost, this research would reveal how the dynamics of production cost reforms the governance structure.
References
Cyert, R. M., & March, J. G. (1963). “A behavioral theory of the firm.” Englewood Cliffs, NJ, 2: 169-187.
March, J. G. (1991). “Exploration and exploitation in organizational learning.” Organization science, 2: 71-87.
March, J. G., & Simon. H. A. (1958). “Organizations.” New York.
Mayer, K. J. and R. M. Salomon (2006). “Capabilities, contractual hazards, and governance: Integrating resource-based and transaction cost perspectives.” Academy of Management Journal, 49: 942-959.
Simon, H. A. (1956). “Rational choice and the structure of the environment.” Psychological review, 63: 129.
Tan, J., & Peng, M. W. (2003). “Organizational slack and firm performance during economic transitions: Two studies from an emerging economy.” Strategic management journal, 24: 1249-1263.
Thompson, J. D. (1967). “Organizations in action.” New York: McGraw-Hill.
Williamson, O. E. (1981). “The economics of organization: The transaction cost approach.” American Journal of Sociology, 87: 548-577
Pisano, G. P. (1990). “The R&D boundaries of the firm: An empirical analysis.” Administrative Science Quarterly, 35: 153-176.
[1] Therefore, the flow of this paper follows the logic of human asset specificity in TCE (Williamson 1981).
'조직관리론' 카테고리의 다른 글
Burt 1980 (0) 2019.03.14 Week 2 (0) 2019.03.12 Bidwell 2010 (0) 2019.03.09 Lo, Frias, & Ghosh 2012 (0) 2019.03.09 Mayer & Salomon 2006 (0) 2019.03.09