Testing Altermative Theories of The Firm: TRANSACTION COST, KNOWLEDGE-BASED, AND MEASUREMENT EXPLANATIONS FOR MAKE-OR-BUY DECISIONS IN INFORMATION SERVICES. Laura Poppo and Todd Zenger, 1998
Jan 19, 2016
Testing Altermative Theories of The Firm:
TRANSACTION COST, KNOWLEDGE-BASED, AND MEASUREMENT EXPLANATIONS FOR MAKE-OR-
BUY DECISIONS IN INFORMATION SERVICES.
Laura Poppo and Todd Zenger, 1998
TCE—Boundary Choice
• TCE argues and empirically finds that boundary choices are driven largely by the specificity of assets involved in an exchange. (Shelanski and Klein, 1995)
Criticisms
• Knowledge-based theory
• Property right and agency theory
• Others
Knowledge-based theory of the firm
• The link between asset specificity and boundary choices has little to do with opportunistic behavior and failed market.
• Specificity of activity will enhance the efficiency but not trigger the market failure.
Property rights and agency theory
• Internalizing an activity avoids costly measurement and contracting cost.
Others
•Markets and hierarchies are points on a continuous spectrum and that the same exchange conditions which hinder market performance also hinder the performance of hierarchical exchanges.
Contribution• Fill the void by developing and testing competing hypotheses from the transaction-cost, agency and measurement literature.
•Methodology
• Sample Selection
ModelFirm
Performance
Exchange Attributes
Make-Buy Choice
Market Performance
α 𝑥
β 𝑥=αx+e
=βx+µ
Hypotheses
Data Collection
• Key informants
• Director of Top Computer Executives
• Response rates are particularly low
Data Collection•Mail surveys: 3000 names
• 181 responses and 152 usable
• Telephone Surveys: 300 names
• 11% complete
Core Sample
•Nine IS functions across 152 companies for a total sample of 1368 information service exchanges.
Test Bias
• Compared the industries and the geographic locations represented in the sample to the population.
• Early-returned, Late-returned, and Non-respondents
Dependent measures
• Exchange performance
• Boundary choice
Independent measures• Firm-specific assets
•Measurement difficulty
• Technological uncertainty
• Skill set
• Economies of scale
• Firm size
Results--performance
•Maximum likelihood estimates of the effects of asset specificity, measurement difficulty, technological uncertainty, scale, skill set, and firm size on the performance of both internal and out sourced services.
Results-performance• Managers become less satisfied with the cost, quality and
responsiveness of outsourced activities as these activities become more firm-specific.
• When IS managers could not easily measure the performance of an outsourced activity, they were less satisfied with its cost.
• There is no support that managers were less satisfied with the performance of activities characterized by higher levels of technological chance for either outsourced or internal activities.
• Internal demand for an activity had a strong positive effect on satisfaction with the performance of internalized activities.
• Increases in skill set size had a significant positive effect on managers’ perceptions of cost, quality, and responsiveness performance for outsourced exchanges.
Predictions on governance performance
Theoretical Perspective
IVs TCE KBV Property rights Classical agencyInstitutional agency Other
Asset specificityMarkets perform poorly
Firms perform well Markets=Firms
Output measurement
Markets perform poorly Markets=Firms
Firms perform poorly
Technological uncertainty
Markets perform poorly
Firms perform poorly
Economies of scale
Firms perform well
Skill set Markets outperform firms
Results Theoretical Perspective
IvsTCE KBV Property rights
Classical agency
Institutional agency Other
Asset specificity
Markets perform poorly
Firms perform well Markets=Firms
Output measurement
Markets perform poorly Markets=Firms
Firms perform poorly
Technological uncertainty
Markets perform poorly
Firms perform poorly
Economies of scale
Firms perform well
Skill set
Markets outperform firms
Results—Boundary choice• The presence of firm-specific assets encourages
internalization.
• Increases in measurement difficulty consistently discouraged outsourcing for only one dependent measure, the percentage of the activity which was outsourced.
• Managers were less likely to reject the outsourcing alternative if the information services required extensive skills.
• Technological chance did not appear to affect outsourcing decisions.
• Firms possessing internal scale sufficient to enjoy economies of scale were more likely to provide services in-house and were more likely to have rejected the outsourcing alternative.
Predictions on governance choice
Theoretical Perspective
IVs TCE KBVProperty rights
Classical agency
Institutional agency Other
Asset specificity Integrate Integrate
Output measurement
Boundary doesn't matter Integrate
Technological uncertainty Integrate Outsource
Economies of scale Integrate
Skill set Outsource
Results
Theoretical Perspective
IVs TCE KBVProperty rights
Classical agency
Institutional agency Other
Asset specificity Integrate Integrate
Output measurement
Boundary doesn't matter Integrate
Technological uncertainty Integrate Outsource
Economies of scale Integrate
Skill set Outsource
Discussion• Increasing asset specificity leads to the diminishing
effectiveness of market governance.
• Knowledge-based explanation of boundary choice requires contingent reasoning.
• Corroborates the role of measurement difficulty as a determinant of governance performance in both markets and hierarchies.
• Clear support for the theoretical arguments that hierarchies and markets possess discretely different sets of governance tools.
• Not informative on the role that technological uncertainty has on governance performance and optimal boundaries.