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

Abstract

Chang seems to suggest that developing closer relations between Transaction Cost Economics (TCE) and the Resource‐Based View (RBV) is not yet needed. However, we are unmoved in our belief that this development is compelling and remain committed to our approach to pluralism. We disagree with Chang's critiques of our approach. We clarify that a synthesis of TCE and RBV along the lines of theoretical monism is not attempted. On this basis, two of the three questions raised, labelled ‘ontological dissonance’ and ‘variable multicollinearity’, are not applicable. With regard to the other question that relates to refutability, Barney has shown that the variables are refutable and Barney also makes reference to empirical work pertaining to RBV. We agree with Chang that TCE is weak on differential production and believe that an acceptance of the coexistence of TCE and RBV is likely to make both theories more successful on the issue of vertical integration. In the end, pluralism appeals as much to us as it does to the chief proponents of TCE and RBV, as a means of making progress in the near term.

Keywords:

• Construction firm
• vertical boundaries
• transaction costs
• capability, competence

Notes

1. That Williamson and Barney are pluralists should be no surprise. Williamson is a key figure in the International Society for New Institutional Economics, whose mission is to stimulate and disseminate interdisciplinary research on economic, political and social institutions and their effects on economic activity. While the field of strategic management is eclectic by its very nature and has already been strongly influenced by elements of the New Institutional Economics agenda, including TCE (Hoskisson et al. (1999). Tisdell has also long been an advocate of theoretical pluralism (Bruce, 2000; Tisdell, 1972, 1995a, 1995b and 1996).

2. In a Lakatosian spirit, and as Groenewegan and Vromen (1996, p. 371) explain (with particular reference to the theory of the firm), theoretical pluralism is, ‘… grounded in the principal reason that any single theory inevitably gives a partial account … our understanding of phenomenon can be enhanced if we entertain several theories instead of just one, at least in so far as the theories do not contradict each other’.

3. For example, Foss (1993, 2000), Foss et al. (1995), Knusden (1993), Seth and Thomas (1994) and Tisdell (1996) all compare and contrast attributes of TCE and RBV, and in a good number of these examples this includes behavioural attributes.

4. Here, RBV would cover the full range of stereotypical market structures and TCE would be more focused on markets with larger numbers of competing firms. Under all conditions, however, there is the assumption that firms seek to maximise profits in the short run and this is consistent with the semi‐strong form of rationality assumed in TCE and RBV.

5. This still does not amount to a synthesis of RBV and TCE. Rather, we attempt to develop closer relations between RBV and transaction costs (of the kind envisaged by Coase) while maintaining the competence‐based logic of RBV. When incorporating the frequency variable in the RBV, this would be measured from a classical production perspective and need only be measured in terms of the continuity or recurrence of the activity. It need not necessarily be a large transaction (in the sense of large magnitude of exchange relative to the firm's total revenues/costs). That is, any activity that has the potential to increase revenue and/or reduce net costs becomes valuable. At the margin, even previously trivial transactions can become valuable.

6. Any attempt to extend TCE in the domain of differential production costs and benefits would require alterations to TCE's operation within conditions pertaining to firm homogeneity. This would undermine TCE's ability to account for governance structures designed to economise on the possibility ex post opportunism arising out of the ‘fundamental transformation’. Instead, one of the strengths of RBV is differential production.