New insights on the interaction between transaction costs and capabilities considerations in shaping organisational boundaries

This paper shows that some explanations provided by transaction costs and capabilities analyses are complementary - rather than independent or rival - accounts of organisational boundaries. Transactions and capabilities considerations interplay in a two-way dynamic interaction in determining the boundaries of the firm whenever there are informational limits that make knowledge difficult to trade and transmit. This interaction is stronger in the presence of uncertainty that prevents individuals from estimating the probability distribution of future contingencies. The paper is structured as follows. Section 1 introduces the concepts of knowledge transmittability and tradability. Sections 2 and 3 present the conditions under which transaction costs and capabilities considerations are important in vertical-integration and horizontal-expansion decisions. Finally, section 4 is dedicated to the main crossed-linked effects between transaction costs and capabilities considerations in shaping the boundaries of the firm.