The evolution of the boundaries of the firm: Transaction cost alignment and organizational survival in the early American automobile industry

This dissertation relies on the integration of transaction cost economics and organizational ecology theory to address questions related to the evolution of the boundaries of the firm. What determines initial choice of organizational form and how do firms organizationally respond to change? Specifically, are firms in a population as likely to adhere to transaction cost reasoning in the vertical integration decision? How much do additional firm characteristics such as size or market niche affect the choice? If the choice is aligned initially, then are firms that become misaligned with shifting environmental conditions more likely to fail than those that remain aligned? Do the competing mortality risks from undertaking core structural change vs. remaining misaligned differ and, if so, by how much?; These issues of whether governance matters, how it evolves, and how mistakes are penalized require an appreciation for organizational details as well as population dynamics. I address these issues by combining an equilibrium-based theory of the firm (transaction cost economics) with a theory that is explicitly designed to address dynamic organizational phenomena (organizational ecology theory).; Adaptation is central to both, but the two work at different levels. Transaction cost economics works at the level of the transaction whereas organizational ecology works off of aggregate performance. Thus, this study examines the evolution of governance by incorporating transaction cost predictions about alignment into ecological models of organizational mortality. Data on make-or-buy decisions for major components in the US automobile industry are analyzed. The effects of structural inertia on the ability of firms to switch between modes of governance (e.g., from contracting to integration, choice of governance at time of entry on firm performance, and changes in suppliers on firm survival) are also examined. Understanding this process of evolution could improve our understanding of how the make-or-buy decision evolves, which sourcing strategies are more or less viable, and how governance choices affect firm survival. This study adds to the vertical integration and adaptation literatures by offering an unusual longitudinal analysis and integration of theoretical perspectives.