Assets versus Activities
| Richard Langlois |
At the risk of injecting some substance into my posts, let me raise an issue in the economics of organization that I have been thinking about recently.
There has been much discussion in the literature about the differences between the transaction-cost and capabilities views of organization, something that Nicolai and I, among many others, have written about. But another division might be between asset theories and activity theories. Asset theories are of course the province of the mainstream economics of organization. In this literature, one typically defines vertical integration as joint ownership of productive assets, and integration typically arises because of hazards from cooperating without joint ownership. Activity theories come from the literatures on product design and modularity. Here the issue is how tasks (or activities) ought to be designed given the structure of the production process. In this literature, the logic of integrality versus modularity provides clues to which activities out to be “outsourced.” Perhaps the best example of this kind of thinking is by Baldwin and Clark. I have also tried to think about the issues in a paper that will be coming out in Organization Studies. In many ways, this approach harkens back to Adam Smith.
But how do the two approaches fit together? This is a good question, and one that need more research. In an interesting paper given at the 2005 DRUID summer conference, Mari Sako confronted the two approaches by looking at the organization of automobile supplier parks around the world. What she found is that the two accounts of integration seem to be orthogonal to one another. In her case studies, “modular product architecture is indeed associated with greater outsourcing of tasks, but task outsourcing is not necessarily associated with the disintegration of asset ownership. If anything, a high degree of task outsourcing goes hand-in-hand with integrated asset ownership in modular consortia.”
This result would seem to be consistent with a sophisticated (indeed, rather daunting) analysis by Sharon Novak and Birger Wernerfelt. They use data from the automobile industry to test the idea that outsourcing of tasks is driven by the minimization of adjustment costs within and between firms. Not surprisingly, perhaps, they find that tasks are more likely to be undertaken within the same firm the more frequently adjustments are needed between the tasks. As they put it, the firm is a low variable-cost but high fixed-cost way to govern adjustments. So, as in Sako, you might want to integrate assets when you’re governing tasks needing frequent adjustment; but what you outsource depends on the modular structure of production, that is, on which tasks don’t need to be adjusted frequently.