Enterprise Boundary Decisions: Theoretical And Empirical Analysis

A firm's boundary means essentially the scope of businesses vertically and horizontally. According to transaction cost economics, there are 3 means of transaction governance: Market Governance, Intermediate Governance and Hierarchical Governance. From Market Governance, Intermediate Governance to Hierarchical Governance, the means of transaction becomes more and more complicated, and the cost of transaction become higher and higher. So the level of transactional cost, the threat of opportunism, and related transaction-specific investment should all be considered as criteria for making a selection of the means of transaction. So after transaction cost economics established, people believe that the principles of boundary decision-making are the level of transactional cost, the threat of opportunism, and related transaction-specific investment. The more complicated of the transaction means, the more effective of reducing the threaten of opportunism caused by related transaction-specific investment. So when the level of the related transaction-specific investment is very high, Hierarchical Governance can be applied by enterprises, though the cost of governance is high, but it can cancel out the risk of opportunism. When the level of the related transaction-specific investment is medium, the Intermediate Governance can reduce the threat of opportunism and avoid the high costs by adopting Hierarchical Governance. When the level of the related transaction-specific investment is very low, the risk of opportunism is very small, then enterprises can choose the cheapest way of Market Governance.But in this way, the transaction cost economics can not explain well that how can the enterprises deal with the high costs when applying the Hierarchical Governance in order to avoid opportunism?As the globalization development and the continuous competition of world market, more and more firms tend to consider the competencies, particularly the core competencies as the critical factor when determining the boundaries. It can be seen such a large scale of merger and acquisition, sub-contracting, outsourcing, and strategic alliances as are rapidly developed in the past ten years. Transaction cost has been not well explained the governance of economic exchange applied by many enterprises. For the purpose to enhance the practical application of boundary decision-making theories, this paper attempts to establish the framework by considering "how a firm's capabilities affect boundary decision".