Determinants and Management of make-and-buy: Potential TCE Explanations

Abstract

Over the last two decades, the standard approach to analyze the choice of organizational governance forms has been transaction cost theory (Leiblein, 2003). Under the assumption that economic actors are boundedly rationale, opportunistic, and risk neutral, TCE argues that the efficiency of an organizational arrangement depends on the three characteristics of the underlying transaction: (1)asset specificity, (2)uncertainty, and (3) the frequency of the transaction (Williamson, 1975/1985). In case of high levels of asset specificity, uncertainty, and frequency of the given transaction, hierarchy is considered to be the efficient institutional arrangement, while market exchange proves best when an un-or little specific transaction is carried out rarely with only few elements of uncertainty. This distinction of institutional arrangements traces back to preliminary reasoning by Coase, who has treated economic institutions as dichotomous and mutually exclusive, since market and hierarchy were conceptualized as two ends of a continuum (Coase, 1937). Williamson subsequently extended the view of either market or hierarchy to a tripartite either-or categorization, including additionally hybrid forms of organization (Williamson, 1985). He argues that an intermediate specific, but frequently repeated transaction shall be organized in a hybrid form such as a cooperation or strategic alliance to accomplish the transaction cost minimizing and hence most efficient organizational mode. His perspective, still, implies that different organizational arrangements are located at distinct stages of a one-dimensional continuum and are therefore considered to be mutually exclusive. Thereby, the underlying assumption is that the governance modes market, hierarchy, or hybrids are substitutes (Pies, 1993:222) that are subjects to a discrete choice.