Make and Buy II

17 December 2006 at 11:34 pm Leave a comment

| Peter Klein |

We discussed earlier an emerging literature on dual sourcing or “make-and-buy” decisions. Why do firms simultaneously make a particular input and buy some quantity of this input on the open market? The CCSM featured another paper on this topic, Ranjay Gulati and Phanish Puranam’s “Complementarity and Constraints: Why Firms Both Make and Buy the Same Thing.” (Neither author could make it to Copenhagen, unfortunately, but Tobias Kretschmer gave a fine presentation on their behalf.) The paper presents a simple model in which firms choose plural sourcing because of external complementarities (to mitigate opportunistic behavior from an external supplier or to benchmark the supplier’s performance), capital constraints (that prevent the firm from internalizing all purchases of the input), exit costs (that prevent the firm from outsourcing as much as it would like), and other factors.

A general implication is that theories of optimal or first-best modes of organization may have limited explanatory power in a world of high transaction costs. Seemingly inefficient governance structures may be second-best solutions to capital constraints, regulatory barriers, bargaining problems, and other frictions. Understanding these constraints, and the processes of experimentation, learning, and adaptation that work around them, should be high on the organization theorist’s agenda.

Entry filed under: - Klein -, Strategic Management, Theory of the Firm.

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).