Study On Theory Of Firm Scope

In his path-breaking 1937 article, Ronald Coase first identified the determinant of a firm's scope as an important research question. Although Coase's question initially attracted little attention, it has emerged over the last few decade years as a central issue in industrial organization. However many domestic scholars suppose that Coase has missed something important: according to the logical conclusion of his theory the scope of firm will tend to shrink nowadays as the transaction-cost has been reduced much less than before, but it is not consistent with the fact that the firm's scale is getting larger than ever. But the writer noticed that a formal definition of firm scope has been neglected so imprudently that neither the master pieces of papers on this subject nor the criticism put forward by domestic scholars has ever given a clear and exact definition of firm's scope, even more, most of them mixed the scope of firm with the scale of firm and most of the criticisms is based on this confusion. The writer believe that all the dispute on the subject of firm scope can be attributed to the unnecessary misunderstanding of Coase's original meanings about firm scope stemming from the absence of a formal definition of firm scope. So this study takes efforts to do some helpful work on the definition and determination of firm scope.After examining the several theories on the subject of nature of firm, itis not hard to agree on the correctness of Coase's point that the firm is and an alternative form of organizing transaction and get on the consensus that the firm and the market are two different systems in the light of generalized comprehension of transaction-cost: they are two nexuses of contracts with different kind of cost. So we can be sure of the existence of firm scope. This study adhere to the original meaning initiated by Coase in 1937 and clearly define the firm's scope as the scope including several speciale heterogeneous transactions organized under the same control and characterized by organized distribution of resources. The heterogeneity of transactions and the features of economies of scale and economies of scope conspire to manifest the difference between the scope of firm and the scale of firm. Firm scope describes the range of the special productive activity with which firm is involved and distinguishes the economic function of firm with that of market and firm scope outlines the space in which the firm subsists and develops and the ability to change the scope of firm provide more possibility of success for firm. So the change of firm scope is not merely a change of quantity, but also a change of quality.Based on the definition of firm scope given above, and considering the relative contrast between the cost of transaction and the cost of bureaucracy in the long run, we can arrive a conclusion in the way of Coase analyzing the dynamic change of firm scope that firm scope tend to shrink as the economy develops. But adverse to the criticism brought forward by many domestic scholars, the conclusion does not conflict with the fact that the modern corporation is much bigger than before when the definition of firm scope given in this study is taken into consideration. On the contrary, it is a logical conclusion that "the scope of firm tends to shrink meanwhile the scale of firm tends to increase", and practical evidences of development of firm canbe found to support this conclusion. So the study restates the original meaning of firm scope posed by Coase, and clears the unnecessary divergence in the theoretical discussion on the subject of firm scope.Much of the literature on firm scope since Coase uses the transaction-cost economics approach (henceforth, the TCE) to analyze the determinant of firm scope. According to the transaction-cost economics approach, the optimal organizational form of transactions is found bycomparing the cost of the two distinct transactional modes------the marketand the firm, and the scope will be determined on the point where the marginal cost of transaction equals to the marginal cost of bureaucracy. This conclusion of determination of firm scope by TCE does have some reasonable ingredients, but when examined in the framework of revenue-and-cost the conclusion shows some important defect. After making the untold premise of TCE obvious, still we can not assure the universality of the conclusion: it is not a stable solution to the problem of determination of firm scope. A closer study on the revenue of the two organizational forms of transaction finds out an evident revenue difference between the market and the firm which provide a reliable basis for the application of the analytical framework of cost-and-revenue. After comparing both of the static marginal cost and marginal revenue of organizing transaction by the market with that of the firm, we find a more stable solution to the problem of determination of firm scope, and the point on which the firm scope is kept in equilibrium arrived in this study is obviously different with the point determined through the way of TCE.