Thursday, 14 August 2008

Human capital and the firm

When reading on the reasons behind the famous takeover of Fisher Body by General Motors I came across an issue I hadn't thought of before with regard to why vertical integration takes place. The claim is human asset specificity was important reason for the General Motors takeover. For example Freeland (2000) writes
Despite the importance of physical asset specificity in the Fisher case, issues of human asset specificity and knowledge acquisition played a much greater role in integration than has heretofore been recognized. General Motors's initial investment in Fisher occurred because the automaker wanted more than a source for car bodies-it wanted to capture the knowledge and human assets of the Fisher brothers while limiting competitors' access to that knowledge. The fact that GM management placed a higher priority on retaining the Fishers than on acquiring the physical assets of Fisher played a central role both in shaping the initial contract between the companies and in determining the subsequent course of events that eventually led GM to purchase Fisher. The Fisher case thus suggests that knowledge acquisition may play a crucial role in shaping the boundaries of the firm, an area in which additional research is needed.
Now my problems with this are two fold. 1) I don't see why an employment contract is any better at controlling human capital than a general contract between firms. Why can't whatever is written into one of these contracts be written into the other? And thus we should get the same outcome in each case. 2) If you really do want the human capital of certain people, why not just employ those people directly. Its not clear why you need to takeover a whole firm just to get the human capital of some of its employees.

Or am I missing something?
  • Freeland, Robert F. (2000). Creating Holdup through Vertical Integration: Fisher Body Revisited, Journal of Law and Economics, XLIII(1) April 2000.


Matt Nolan said...

Maybe elements of the human capital were tied down, so to make them firm specific (eg their previous employment contract prevented them from doing certain sorts of work in other firms in the future).

Also, potentially buying the company was a cheaper option because of firm loyalty held by the employees.

They are the two reasons I can think of off the top of my head :)

Paul Walker said...

Good thought. But in the case of Fisher Body, they were making bodies for a number of different car makers, so I don't think it was firm specific human capital. As to the second point my only concern would be the cost. I would think that it is cheaper to hire the people you want rather than buy the whole firm.