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Laura Poppo and Todd Zenger, SMJ 1998 Slides by Seth Carnahan

Testing alternative theories of the firm: transaction cost, knowledge-based, and measurement explanations for make-or-buy decisions in information services. Laura Poppo and Todd Zenger, SMJ 1998 Slides by Seth Carnahan. Motivation. Competing explanations for boundaries of the firm

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Laura Poppo and Todd Zenger, SMJ 1998 Slides by Seth Carnahan

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  1. Testing alternative theories of the firm: transaction cost, knowledge-based, and measurement explanations for make-or-buy decisions in information services Laura Poppo and Todd Zenger, SMJ 1998 Slides by Seth Carnahan

  2. Motivation • Competing explanations for boundaries of the firm • Transaction costs economics (e.g. Williamson1975) • Knowledge-based view (e.g. Grant 1996) • Measurement difficulty flowing from property rights issues (e.g. Barzel 1989) and agency issues (e.g. Levinthal 1976) • The distinction between firms and markets does not matter (Alchian and Demsetz 1972) • Need for an inclusive, discriminating model

  3. Motivation • Previous work has mainly used governance form, not governance performance, as the dependent variable • Thus, this paper has a novel combination of independent variables and a novel dependent variable • As IV’s they include asset specificity, difficulty in measuring performance (non-separability), and skill set (task programmability) as suggested by Mahoney (1992). No citation.

  4. Data and analysis • Cross-industry survey of 3,000 randomly selected IT managers • Asked about outsourcing decisions on 9 different IT services • 152 usable responses • Service is unit of analysis • Governance performance: Maximum likelihood Heckman estimation • Correction for bias introduced by exchange attributes • DV: 7 point Likert response to satisfaction with cost, quality, and responsiveness • Governance choice: OLS and probit • DV: % outsourced, 0/1 outsourced currently, 0/1 rejected outsourcing

  5. Predictions on governance performance

  6. Results

  7. Predictions on governance choice

  8. Results

  9. Implications • Strongest result is probably acceptance of TCE and rejection of KBV interpretation of asset specificity and firm boundaries • Contrary to Masten et al (1991) • Caveat: high velocity environment reduces importance of shared language and routines inside the firm • Measurement difficulty more detrimental to firm performance than market performance • Markets and firms are different, contrary to the nexus of contracts argument

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