Information strategies and the theory of the Firm

Information costs play a key role in determining the relative efficiency of alternative organisational structures. The choice of locations at which information is stored in a firm is an important determinant of its information costs. A specific example of information use is modelled in order to explore what factors determine whether information should be stored centrally or locally and if it should be replicated at different sites. This provides insights into why firms are structured hierarchically, with some decisions and tasks being performed centrally and others at different levels of decentralisation. The effects of new information technologies are also discussed. These can radically alter the patterns and levels of information costs within a firm and so can cause substantial changes in organisational structure.

The economic theory of the firm as a foundation for international business theory

The economic theory of the firm is central to the theory of the multinational enterprise. Recent literature on multinationals, however, makes only limited reference to the economic theory of the firm. Multinationals play an important role in coordinating the international division of labour through internal markets. The paper reviews the economic principles that underlie this view. Optimal internalisation equates marginal benefits and costs. The benefits of internalisation stem mainly from the difficulties of licensing proprietary knowledge, reflecting the view that MNEs possess an ‘ownership’ or ‘firm-specific’ advantage. The costs of internalisation, it is argued, reflect managerial capability, and in particular the capability to manage a large firm. The paper argues that management capability is a complement to ownership advantage. Ownership advantage determines the potential of the firm, and management capability governs the fulfilment of this potential through overcoming barriers to growth. The analysis is applied to a variety of issues, including out-sourcing, geographical dispersion of production, and regional specialisation in marketing.

The transaction cost economics theory of the family firm: family-based human asset specificity and the bifurcation bias

We develop a transaction cost economics theory of the family firm, building upon the concepts of family-based asset specificity, bounded rationality, and bounded reliability. We argue that the prosperity and survival of family firms depend on the absence of a dysfunctional bifurcation bias. The bifurcation bias is an expression of bounded reliability, reflected in the de facto asymmetric treatment of family vs. nonfamily assets (especially human assets). We propose that absence of bifurcation bias is critical to fostering reliability in family business functioning. Our study ends the unproductive divide between the agency and stewardship perspectives of the family firm, which offer conflicting accounts of this firm type's functioning. We show that the predictions of the agency and stewardship perspectives can be usefully reconciled when focusing on how family firms address the bifurcation bias or fail to do so.

Two-way communication costs and the boundaries of the firm

Casson and Wadeson (International Journal of the Economics of Business, 1998, 5, pp. 5-27) have modelled the dialogue, or conversation, which customers have with their suppliers in order to convey their requirements, while taking production implications into account. They showed that this has important implications for the positioning of the boundaries of the firm. Unfortunately, their model has the restriction that communication is only costly in the direction of customer to supplier. This paper extends their model by introducing two-way communication costs. It shows that the level of communication cost in the direction of supplier to customer is a key additional factor in determining the nature of the dialogue that takes place. It also shows that this has important additional implications for the positioning of the boundaries of the firm. Custom computer software development is used as an example of an application of the theory.

Communication costs and the boundaries of the firm

Much has been written about where the boundaries of the firm are drawn, but little about what occurs at the boundaries themselves. When a firm subcontracts, does it inform its suppliers fully of what it requires, or is it willing to accept what they have available? In practice firms often engage in a dialogue, or conversation, with their suppliers, in which at first they set out their general requirements, and only when the supplier reports back on how these can be met are their more specific requirements set out. This paper models such conversations as a rational response to communication costs. The model is used to examine the impact of new information technology, such as CAD/CAM, on the conduct of subcontracting. It can also be used to examine its impact on the marketing activities of firms. The technique of analysis, which is based on the economic theory of teams, has more general applications too. It can be used to model all the forms of dialogue involved in the processes of coordination both within and between firms.

Testing the expectations theory of the term structure in threshold models

We test the expectations theory of the term structure of U.S. interest rates in nonlinear systems. These models allow the response of the change in short rates to past values of the spread to depend upon the level of the spread. The nonlinear system is tested against a linear system, and the results of testing the expectations theory in both models are contrasted. We find that the results of tests of the implications of the expectations theory depend on the size and sign of the spread. The long maturity spread predicts future changes of the short rate only when it is high.

Revisiting the emergence of the modern business enterprise: entrepreneurship and the Singer global distribution system

This paper approaches the question of why entrepreneurial firms exist from a broad business historical perspective. It observes that the original development of the modern business enterprise was very strongly associated with entrepreneurial innovation rather than an extension of managerial routine. The widely-used theory of the entrepreneur as a specialist in judgmental decision making is applied to the particular point in time when entrepreneurs had to develop novel organizational designs in what Chandler described as the prelude to the ‘managerial revolution’. The paper illustrates how the theory of entrepreneurship then best explains the rise of the modern corporation by focusing on the case study of vertical integration par excellence, Singer.