Organizing the Modern Firm in the Worldwide Market for Market Transactions

By Liesch, Peter W.; Buckley, Peter J. et al. | Management International Review, January 2012 | Go to article overview

Organizing the Modern Firm in the Worldwide Market for Market Transactions


Liesch, Peter W., Buckley, Peter J., Simonin, Bernard L., Knight, Gary, Management International Review


Abstract:

* To represent the modern world economy, we introduce the worldwide market for market transactions concept to enable us to model the organization of the firm.

* Outsourcing and offshoring are changing the nature of the firm, presenting internalization/externalization decisions for international managers, and producing unprecedented international relocation of economic activity.

* We engage with Williamson's (1996) challenge to address 'which transactions go where and why?' to explain the outsourcing--offshoring phenomenon.

* We offer a novel modelling approach to represent a firm of any scale and scope in this modern world economy. Propositions that frame our modelling approach are offered.

* We conclude that foreign involvement alongside foreign investment shapes the scale and scope of the firm as the internationalization of productive capabilities, coordinated through the worldwide market for market transactions, redefines the modern world economy.

Keywords: Worldwide market for market transactions * Firm organization * Externalization * Offshoring * Outsourcing

Introduction

The internationalization of productive capabilities (Jacobides and Hitt 2005) is redefining the modern world economy, presenting firms with new organizational configuration possibilities as the disintermediation of value chains is providing unprecedented opportunities for the outsourcing and offshoring of economic activity. Offshoring and outsourcing represent the global disaggregation of the firm's value chain, combining the comparative advantages of geographic locations with the competitive advantages of the firm. The interplay of comparative and competitive advantages determines the optimal location of value chain activities at the boundary of the firm (Mudambi and Venzin 2010). Alongside outsourcing and offshoring opportunities significant challenges are posed such as language and service quality requirements, integration and coordination of dispersed operations worldwide, and threats such as loss of critical capabilities and the hollowing out of the firm.

The outsourcing and offshoring phenomenon is determining the scope and scale of economic activity that remains within the firm (Penrose 1959; Pfeffer and Salancik 1978), profoundly affecting the landscape of international business and the nature of the international firm. Identified as "entrepreneurial behaviour which consists in casting other firms (partners) for different parts of its overall system of activities", impartition (outsourcing and offshoring) implies a global systems orientation and a strategic intent to configure the firm's production system and organizational structure (Barreyre 1988, p. 507). Taking-up Williamson's (1996, p. 51) observation that "each generic form of organization--markets, hybrids, hierarchies, bureaus--is defined by a distinctive syndrome of attributes", we address his proposition that scholars interested in organizational form should address "which transactions go where and why". We do so in an international context.

Outsourcing occurs when firms procure selected value-adding activities, including the production of intermediate goods or finished products, from independent suppliers--they choose to buy-in rather than to make in-house. Offshoring occurs when firms relocate value-adding activities to another country (Doh et al. 2009; Jain et al. 2008; Sako 2006). These trends can be represented along two dimensions, the location decision and the corporate boundary decision, with four distinct cases identified: in-house operations (domestic divisions), domestic outsourcing (domestic suppliers), captive offshoring (foreign affiliates) and offshore outsourcing (foreign suppliers) (e.g., Varadarajan 2009). Which option management chooses depends on a variety of factors, including the nature of the function or activity in question, its value contribution, rarity and imitability (Barney and Hesterly 2006), its transactions costs (Murray and Kotabe 1999), potential for knowledge leakage (Sampson 2004), and its contribution to overall global coordination costs borne by the firm (Contractor et al. …

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