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Limits to outsourcing and the evolutionary perspective on firm boundaries

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Although there is reason to expect that outsourcing plays an increasingly important role inworld of commerce, theories of firm boundaries poorly address associated processes ofgovernance change. This paper seeks to address this gap in the spirit of the evolutionarytheory of the firm. This approach highlights the significance of outsourcing as a "process ofshifting from internal to external procurement of activities." Adopting an evolutionaryprocess perspective suggests limits to outsourcing due to governance inseparability andpartly tacit complementarity of capabilities as well as related dis-aggregation costs,including the costs of knowledge codification in the specification of interfaces insupplier/buyer relations, loss of absorptive capacity and integrating capabilities in thesupplier’s system. A key departure from earlier approaches to firm boundaries is anexplanation of such limits to outsourcing and their impact on two interrelated sources ofefficiency: incentives and capabilities. For instance, when limits to outsourcing obtain,governance change for particular activities involves compromises of capability- and/orincentive efficiency in the experimental determination of organizational boundaries. Alsodiscussed are environmental dynamics that variously emphasise efficiency properties ofdispersed or concentrated ownership and capability development.

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Volker Mahnke

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