The determinants of the vertical boundaries of the construction firm: comment

Abstract

In recent years, the study of organizational issues has made a tremendous progress owing to the development of two powerful analytical theories – transaction cost economics (TCE) and the resource‐based view (RBV). Both approaches have their strengths and limitations and thus researchers might think that synthesizing would be a way forward, Bridge and Tisdell (2004) being a case. In synthesizing TCE and RBV, several problems need to be overcome. First, there is a fundamental disparity in the basic assumption of rationality adopted by transaction cost economics (TCE) and. second, even after being operationalized for discovering the key determinants of the concept of competence, it still cannot escape the charge of tautology. Last, the inclusion of competence/resource and TCE‐related variables may increase predictive power, but the potentially high correlation between asset specificity and rarity, as well as costliness to imitate, are likely to cause the multicollinearity problem that may reduce the reliability of estimators and hence disguise the true effect of each variable on construction contracting. Even if the critiques of tautology and multicollinearity can be technically overcome, ontological tension will remain.

Keywords:

• Subcontracting
• transaction cost
• competence‐based approach

Acknowledgements

I appreciate the useful comments from the four anonymous referees for their constructive comments, which helped to improve this manuscript.

Notes

1. Eccles (1981) successfully applies TCE to explain construction subcontracting.

2. There is a vivid description of the tautological nature of the resource/competence view in Williamson (1999): ‘Show me a success story and I will show you a core competence (Or show a failure and I will show you a missing competence).’

3. If the tautological critique can hold, this critique (variable multicollinearity) will be redundant. However, it seems fair to reserve the possibility that this problem might be overcome one day, just as happened in TCE.

4. The effects of frequency can be captured by considering how frequently a trade contractor is employed by the main contractor. For example, if a main contractor works locally and sees the prospect of stable workload in the years to come, other things being equal, this contractor may be more likely to retain some in‐house staff specialising in a trade that will be repeatedly needed in the decision horizon.