Empirical Research on Firms’ Boundaries

In an earlier message I referred to the Lafontaine and Slade survey paper "Vertical Integration and Firm Boundaries: The Evidence" which appeared in the Journal of Economic Literature, Vol. XLV (September 2007). Now the May 2008 issue of the Canadian Journal of Economics, contains a another review article covering the same area. Thomas Hubbard writes on the "Empirical Research on Firms’ Boundaries." Hubbard's aim is not to give a survey of the empirical literature in the normal sense but rather he tries to give sense of where he thinks the literature is, how it got there, and where it might go next. The four main points he makes in the essay are:

• A large share of the empirical literature has examined whether firms’ boundaries vary with the degree of asset specificity. Most papers in this literature find evidence that integration is more likely where asset specificity is higher, though many of them examine contexts where assets are large and long-standing and relationship-specific investments are accordingly large.
• A more recent literature, which emphasizes incentives and control, has examined contexts where relationship-specific investments are not as prominent. Variation in the contracting environment plays an important role in these studies. My general inference from this literature is that outsourcing implies strong, but not necessarily good, incentives. Whether outsourcing’s strong incentives are good incentives depends critically on the contracting environment and the interaction between asset ownership and the division of labor. The specific implications of this general conclusion thus depend on context-specific details.
• The empirical literature is long on examining the nature of firms’ boundaries in specific contexts and relating it to theory, but short on quantifying the effect of this organizational decision and on establishing general cross-industry patterns. More evidence on these fronts would usefully complement the theory-testing industry studies that have dominated the literature to date.
• Researchers have made important methodological advances, though not in the same sense as in other empirical fields where such advances are more rooted in econometrics. This progress has led researchers to establish strong ties between theoretical concepts, the applied context, and the data in the context of these industry studies. These advances have led to a more-or-less standard way of conducting and communicating theoretically motivated industry studies; advances in other dimensions are necessary for broader or more quantitatively oriented research to become equally developed.

The Hubbard paper can be usefully read along side the Lafontaine and Slade survey and this paper by Peter Klein.

(HT: Organizations and Markets)