Production knowledge and its impact on the mechanisms of governance

A framework is developed outlining how production knowledge and capabilities influence firm boundaries by impacting the transaction costs of markets and hierarchies. A central implication of the framework is that at lower levels of these capabilities the transaction costs of markets decline at a fas...

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Bibliographic Details
Published inJournal of management and governance Vol. 17; no. 2; pp. 261 - 281
Main Author Shyam Kumar, M. V.
Format Journal Article
LanguageEnglish
Published Boston Springer US 01.05.2013
Springer Nature B.V
Subjects
Accounting/Auditing
Business and Management
Costs
Economics
Entrepreneurs
Hierarchy
Industrial Organization
Knowledge
Management
Market theory
Outsourcing
Production costs
Production economics
Sociology
Transaction costs
Vertical integration
Transaction cost economics
Resource based view
Capabilities
Vertical integration
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Summary:A framework is developed outlining how production knowledge and capabilities influence firm boundaries by impacting the transaction costs of markets and hierarchies. A central implication of the framework is that at lower levels of these capabilities the transaction costs of markets decline at a faster rate than the costs of hierarchy, while at higher levels of these capabilities the transaction costs of hierarchy decline at a faster rate than the costs of markets. The discriminating role of production capabilities arises because markets and hierarchies utilize different types of control (prices and output control versus authority and behavior control), and hence require different levels of knowledge to be efficient. The analysis suggests firms often maintain some production knowledge when contracting for various inputs since it not only reduces transactional hazards in markets, but also because in comparative institutional terms, initial gains in knowledge make markets more efficient than internal organization. In addition, the analysis suggests that there would be a U shaped relationship between the propensity to integrate vertically and the extent of production capabilities as opposed to a monotonically increasing relationship. I find support for the U shaped relationship in a cross sectional sample of 1553 manufacturing firms.
Bibliography:ObjectType-Article-2
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ISSN:1385-3457
1572-963X
DOI:10.1007/s10997-011-9175-4