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DOCUMENT DE TRAVAIL 1998-038 INTER-FIRM COOPERATION NETWORKS : A HISTORICAL PERSPECTIVE Diane Poulin Zhan Su Élie V. Chrysostome
Centre de Service, d’Orientation et de Recherche sur la Compétitivité internationale et l’ingénierie de l’entreprise réseau (SORCIIER)
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12-1998
Diane Poulin, Zhan Su and Élie V. Chrysostome
Inter-Firm Cooperation Networks: A Historical Perspective*
1.
Introduction
2.
The Origin of the Concept of the Network and its Emergence in Various Fields
3.
The Emergence of the Concept of the Inter-Firm Cooperation Network in Economics and Management A. The Forerunners B. The Triggering Factors
4.
The Contribution of the New Theories of the Firm to an Understanding of Inter-Firm Cooperation Networks A. The Transaction Costs Theory B. The Theory of Inter-Firm Cooperation C. The Quasi-Integration Theory D. Games Theory E. The Agency Theory
5.
The Recent Resurgence of Inter-Firm Cooperation Networks A. Regional Economy and Early Forms of Cooperation: Local Networks of Innovators B. The Other Forms of Networks C. Towards the Development of a Paradigm of Networks
6.
Conclusion
*
The authors would like to thank the professors Alain Martel and Jorge Niosi for their comments.
Summary
For over a decade, the concept of the network has aroused considerable interest among practitioners and researchers in economics and management. But where did this concept come from? How was the concept of the network introduced into economics and management? How did it evolve to the point of being considered today by many firms as the key to their success? In order to answer these questions, the present research first carries out a chronological survey and analysis of factors that foreshadowed or triggered the emergence of inter-firm cooperation networks. Our research then puts forward, of the concept of inter-firm cooperation networks, a theoretical explanation drawing on the main theories of the firm. Finally, it presents the new paradigm of networks that is emerging in economics and management, and analyses the different types of networks now common among firms. The results of this research may be summarized as follows. The concept of the network has a long history. It has spread over time, particularly over the last two centuries, to a number of fields including economics and management. In the latter fields, the idea of the network gained special importance in the beginning of the 1980s, because of the major mutations of the international economic environment. In such a context, firms no longer could count on success merely by resorting to neo-classical economic approaches or to policies of acquisition and merger. They therefore had to form networks of cooperative relations.
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1. Introduction Over the last decades, the word “network” has become ubiquitous. It is used in terms such as computer network, social network, postal network, telecommunications network, university network, electrical network, railroad network, road network, airline network, maritime network, distribution network, purchase and sales networks, etc. One could extend to the point of boredom this litany of expressions referring to different types of networks in various fields of activity, expressions that have become familiar to all. While the word “network” has acquired today an importance previously unequalled, it remains vague and ill defined, sometimes even used in contradictory ways. In fact, each discipline uses it in its own way. This diversity of meanings, often conflicting from one field to the other, makes it difficult to pin down. A number of questions remain insufficiently clarified in this regard, among them the history of the concept of the network, and in particular, of its emergence in economics and management. The present research focuses on the latter problem, although with all due modesty, since the subject is vast and complex, and cannot here be dealt with exhaustively. The present article aims at casting some light on the history of the notion of the network and on its introduction in economics and management, with particular attention to the bases and to the logic that underlie inter-firm cooperation networks. It is divided into four parts. The first part deals with the origin of the concept of the network and its emergence in various fields. The second studies specifically the introduction of this concept in economics and management. As for the third, it examines the contribution made by the new theories of the firm to the understanding of inter-firm cooperation networks. Finally, the fourth section analyses the recent resurgence of cooperation networks, with emphasis on their present and varied forms, and on the theories to which they have given rise.
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2. The Origin of the Concept of the Network and its Emergence in Various Fields In his work on networks and social issues (Les réseaux et les enjeux sociaux, 1993), Henry Bakis outlines the history of the concept of the network. While this concept is not a new one, and has spread gradually over the centuries to a variety of fields, thus acquiring broad connotations, it is essentially in the 18th century that it started penetrating into professional areas, such as the military field, town and country planning, medicine, astronomy, topography and economic geography. This process continued in the 19th century, for instance in regional transport and telecommunications. In the latter field, the introduction of the concept of the network, in the mid-1800s, was partly linked to the history of the telegraph, and appears to have taken place at the initiative of an American technician, W. F. Channing. Indeed, it is in America, in the end, that this concept attained a degree of hegemony unparalleled in the present century. In the 20th century, this concept underwent an extraordinarily rapid multidisciplinary development. Without attempting to survey the connotations it acquired during our century in all the fields mentioned above—as this would be an encyclopaedic task—it appears necessary nonetheless to consider the contents of this concept in certain key fields, such as computer science, mathematics and sociology. Already used in mathematics in the 18th century (Euler, 1736) and early 20th century (Sainte-Lagüe, 1926), the concept of the network (or graph) assumed major importance in the mathematical disciplines after World War II. From then on, this concept pervaded the field of operational research almost from its birth. It was at the origin of many applications in operational research, as can be seen in the publications of different researchers who worked on the theory of graphs, such as Berge (1958), Roy (1964), Biggs and Lloyd (1976) and Harary (1965). Computer science is also today one of the fields in which the concept of the network is most applied. It considers the network as an aggregate of transmitters, processors and receptors tightly interconnected for the sole purpose of treating rapidly enormous quantities of complex information. In sociology, the theory of graphs was adopted as early as the 1950s by a group of sociologists using mathematical methods. First using the term network as a mere metaphor, they came later to apply the logic of networks to represent social ties between individuals (Berkowitz, 1965). This group grew to the point where analysis of networks, from the 1970s on, became an important area of sociology—witness the studies of White (1970; 1976; 1981), Freeman (1979), Freeman, Borgatti and White (1991), and Burt (1982; 1992). One of these authors eventually created a journal entitled Social Networks, specifically devoted to the study of such networks. In the light of the above survey, it is admittedly very difficult to determine precisely how the concept of the network moved from one discipline to the other. All the more so since certain disciplines witnessed a simultaneous evolution of the concept. It is possible, however, to identify, from one field to the other, a certain number of elements characteristic of the concept of the network. These are: the system, interconnections, poles of interconnection (nodes) or actors that are members of the system, links and flows. Thus from the field of the military to that of sociology, through topography, geography, town and country planning, medicine, telecommunications, computer science and mathematics, the network is always perceived as a system, that is, as a complex entity of mutually interacting elements (Bertalanffy, 1956). This conception of the network obviously calls for an important observation: a network is not a mere cluster of isolated elements, but rather a harmonious and well-organized whole, in which the significance 4
of each component rests upon its contribution to the conservation and development of the whole (Angyal, 1941). At the same time, the conception of a network as an entity, a well-organized totality, necessarily presupposes the existence of harmonious links between the various components or elements of this totality. In other words, the existence of a network implies an interconnection between different poles of action interlinked and interacting through a flow of exchanges of various types. For instance, in town and country planning, the road network is a system composed of towns linked together by roads, on which users go from one town to the other. In this example, the towns represent the interconnection poles or nodes, the roads represent the links and the users represent the flow. The introduction of the concept of the network in sociology shows that the relevance of this concept is not limited to the above mentioned traditional fields, but also extends to human social relations. The nodes of a network no longer are necessarily geographical liaison points or objects, but can be also, and above all, true social actors, that is, humans who give life to the network through their social interactions. In other words, the emergence of the concept of the network in sociology marked an evolution in the understanding researchers had of the nature of poles of interconnection (nodes) within a network. These are no longer perceived exclusively as static (inactive) and non-social (inert) elements, but also and mostly as dynamic (active) and social (human) interconnection poles, that is, as real social actors. The logic of the network is thus no longer confined to a static and non-social system, but also extends to a dynamic and social system, which in fact is the main subject of sociological studies. The emergence of the concept of the network in sociology was bound to further its emergence in economics, since these sciences are akin and quite naturally influence each other. However, this interdisciplinary influence was not the only factor in play. To conclude the first part of this research, Table 1 presents a synthesis of the different conceptions and of the different types of networks, as well as the characteristics of each, in some of the fields considered above.
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Table 1: Analysis of the Emergence of Inter-Firm Cooperation Networks Fields of activity
Definition of the network
Type of network
Characteristics of the network
Contribution to the emergence of inter-firm cooperation networks
Military and town and country planning fields
A totality of fortifications or of interconnected roads
Fortifications network Road network
Interconnection nodes, links, flow Static and non-social network
Network architecture Interconnections
Mathematics
Representation of points having links between them
Network of points or graph
Points of interrelation, links Static and non-social network
Network architecture Interrelations, links
Medicine
A system of neurons interconnected by nerve impulses, i.e. electrical waves
Neural network
System, links, flow, poles of interconnection (non-social and dynamic) Dynamic and non-social network
Network architecture, node Interconnections, flow, links
Transport and communications
A totality of links Transport and communication links between different points
Communications network
System, links, flow, poles or points of interconnection (non-social and static) Non-social network
Network architecture Interconnections, flow
Sociology
Social structure composed of a Social network finite sum of individuals having a finite sum of social relations
Structure, links, social relations, flow, individual, active poles of interconnection Dynamic and social network
Network architecture Social interactions Application of the concept of the network to relations between social actors
3. The Emergence of the Concept of the Inter-Firm Cooperation Network in Economics and Management A number of factors, aside from the influence of sociology, fostered the emergence of the concept of the inter-firm cooperation network in management and economics. These factors are set out below in two parts: on the one hand, those which foreshadowed this emergence, and on the other those, associated with the new global economy, which triggered it.
A. The Forerunners The history of economic thought shows that the concept of the network was for many years virtually ignored in economics and management. It appears that only a few isolated authors used this concept, without always giving it an importance comparable to that it had acquired in the fields discussed above. Among these authors, three deserve mention for the contribution they made to the emergence of networks: the philosopher Saint-Simon in the middle of the 19th century, and the researchers Roethilsberger and Dickson in the first half of the 20th century. Saint-Simon had a particularly fruitful, organicistic vision of the concept of the network, a vision which impelled his disciples to develop, from the 1830s on, a genuine philosophy of the network that pervaded at the time various fields of activity, including economics. The basic principle that underlay the philosophy of the network in Saint-Simon’s school of thought was that the multiplicity of relations and the phenomenon of circulation have the effect of generating the greatest ideas and projects. For these thinkers, it was therefore imperative “to put everything in relation with everything in order to generate a movement of circulation of persons, goods, capital, ideas and knowledge” (Dupuy, 1995). In this spirit, the disciples of Saint-Simon actively promoted all kinds of networks, including in banking and finance. In the Encyclopaedia Universalis, Dupuy states that they seem to have influenced, in the 19th century, the American precursors of the concept of the network in the field of urban architecture. Roethilsberger and Dickson (1939), in the wake of Mayo’s work on informal phenomena within the organization, were able to demonstrate the existence of what they called the “informal network” in the organization. Guided as it was by the tenets of behavioural science, their study deeply marked the very conception of human resources management. It has remained to this day a major preoccupation in the work of a number of researchers (Krackhardt, Hanson, 1993). While the ideas of Saint-Simon in 1830, and those of Roethilsberger and Dickson in 1939, undoubtedly contributed to the emergence of the concept of the network in economics and management, they seem to have been almost disregarded at the time they were developed. Indeed, the ideas of these authors had little impact on the organization of the economy and of management. This was mainly due to the eminently hegemonic character of the economic ideas that prevailed in the 18th and 19th centuries. From the time of the famous Scottish economist Adam Smith until the decades following World War II, the world economy was particularly dominated by an economic individualism grounded in the search for maximum profit by individual and autonomous economic actors engaged in sharp competition. Given such a situation, where economic actors were in general obsessed only by their individual interests, and where those operating in the same sector perceived each other as economic opponents, one can readily understand that for a long time there could have been no opening for the emergence of inter-firm cooperation networks. The economic system resembled a kind of jungle where each firm was engaged in a merciless battle with others to ensure its survival and development. This was of course a struggle akin to economic cannibalism, in which large 7
firms did not hesitate to crush smaller ones in order to appropriate whatever favourable economic position the latter had secured. This phenomenon was especially conspicuous in the United States, where antitrust laws, developed initially to protect small firms, in fact further delayed the formal organization of inter-firm cooperation networks. The dominant influence of the ideas of classical and neo-classical economics stifled the development of the concept of the network put forward by Saint-Simon in 1830 and, consequently, delayed considerably its emergence in economics and management. It was only much later, in the last quarter of the 20th century, that the idea of inter-firm cooperation networks reappeared among researchers in economics and practitioners of management, because the ideas of classical and neo-classical economics could not meet entirely the interests of economic actors. It is a fact that the organization of economic activities by way of inter-firm cooperation networks allows economic actors to overcome economic difficulties that classical and neo-classical economic behaviour cannot resolve. The inability of classical and neo-classical economic tenets to meet wholly the concerns and interests of economic actors was one of the main factors in the recent resurgence of the concept of the network in economics and management. Given the mutations in the economic environment, regulation of the market through prices, as well as competition between individual and autonomous economic actors (or firms) with a view to maximum profit no longer appear to be adequate means of ensuring the survival of firms. On the theoretical level, this analysis obtains the assent of more and more researchers. Nelson and Winter (1982), Rosenberg (1982), Elster (1983), Dosi, Freeman and others (1988) have shown, on the basis of empirical studies, that economic actors are not entirely rational, and that in general their economic choices reflect a limited rationality, because they only have limited knowledge of the market. These authors also believe that competition on the market (through prices) does not constitute the only form of coordination of economic relations; indeed they advocate certain forms of cooperation between firms. For instance, technological alliances between firms are considered a favourable alternative to the ideas of classical and neo-classical economics, in that they reduce R&D costs and uncertainties, and also allow firms to adapt to the speed of technological evolution (Niosi, 1995). These views account well for the behaviour of the economic actors who sought more satisfactory modes of economic regulation than those derived from debatable classical and neo-classical economic principles. A number of American firms, no longer able to survive today through the sole recourse to these ideas, gradually adopted other economic approaches and new organizational forms more likely to bring them success. One of these early approaches was cooperation between firms, the development of which later generated the different forms of inter-firm cooperation networks. A major feature of industrial economy, and one to which Schumpeter (1911, 1942) devoted several of his works, is the fact that efficiency increases with the size of economic units. This phenomenon, particularly manifest initially in R&D (Scherer, 1970), played an important role in the emergence of networks of inter-firm relations. These firms engage in relations of cooperation and thus form large-scale economic systems, so as to benefit from economies of scale and of complexity, and to be more efficient (Niosi, 1995). These economies of scale and complexity (Baumol, Braustein, 1977) provide advantages that these firms could not enjoy if they each behaved as autonomous and individual actors, according to classical and neo-classical creed. It is appropriate to note here that industrial economics represented a sharp departure from neo-classical economics. The ideas of industrial economics were thus an important factor in the emergence of inter-firm cooperation networks. Other factors, however, intervened in this process.
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B. The Triggering Factors The development of technology has made of our world an ever-smaller global village, the economy of which (Beck, 1994) is distinguished by fierce competition no longer limited by national boundaries. The conquest of foreign markets has become a leitmotif for many firms, but at the same time, it represents a challenge difficult to meet alone. These firms no longer can restrict themselves to their domestic market, nor can they continue to rely on exclusive access to markets that once were their preserves. Their success depends on their achieving world-class positioning. The lightning-fast flow of information has brought clients much closer to firms, and geographical remoteness no longer can prevent clients from making the most stringent demands. The satisfaction of these demands increasingly requires the working out of new management concepts, such as “just in time” or “total quality,” concepts that rest entirely or in part on the establishment of very close interorganizational links. For their survival and development, many firms now need ever-growing R&D budgets, which are difficult to sustain, even for large corporations. Thus, these large corporations can no longer rely only on their own expertise and their own drive towards technological innovation, since they risk otherwise falling behind in the race for competitiveness. All these phenomena, representative of the new socio-economic trend that researchers generally call the “globalization of the economy and the markets,” go to prove to what an extent the present environment no longer allows firms to go it alone in their struggle for competitiveness (Axelrod, 1984). Given such an economic environment, one readily understands the increasing interest shown by economists and managers for the network as a mode of organization. Contrary to the fortress firm (Butera, 1991), it is a type of organization characteristically wide-open to other economic actors (firms) as well as to partnerships, an openness that is paramount in terms of survival (Sérieyx, 1993; Poulin, Montreuil, Gauvin, 1994). Moreover, it should be noted in this regard that the advent of network-type organization has been furthered by the many extraordinary facilities developed in our day in the field of telecommunications. In a word, the globalization of the economy and the markets is one of the basic factors that triggered a resurgence of networks in economics and management. It represents therefore an important step in the history of inter-firm cooperation networks. Another element worthy of note is the influence of Japanese firms, as their success rests in part on the network structure they have always favoured. The development over the last decades of large Asian firms—based as they are on a structure of interfirm cooperation networks—was undoubtedly a major factor leading to the tremendous resurgence of such networks in Western countries. Indeed, over that period, Asian firms were not only extremely successful, but also were unaffected by the kinds of problems that plagued Western firms. Contrary to what certain Western economists believe, this is because they never were organized on the basis of neoclassical economic principles, since they were not individual actors in the market (Aoki, 1984; Goto, 1982). These large Asian firms are organized on the basis of networks of mutual relations, which explains their achievements and similarly impels Western firms to resort to this mode of organization. It is reasonable to assume, therefore, that the success of Asian firms furthered the emergence of inter-firm cooperation networks in the West. In order to understand the growth of such networks in Asia, a look at the background of the organization of large Asian firms may be instructive. The organization of these firms is not rooted in a theory of the firm or in recent business approaches. It goes back much further into the cultural past of Asians, indeed to the pre-modern period (Biggart, Hamilton, 1992). The very notion of the network is one of the central values of Asian culture. The latter 9
is characterized by a kind of communitarianism, in which great importance is given to relations between individual members of the community, and where decision-making based on the consensus and the participation of the said members is encouraged (Alston, 1986). Among the Chinese, for instance, social networks—that is, relations between members of society—are of the utmost importance, since they are institutionalized and, as such, determine the social norms on which society must rest (Biggart, Hamilton, 1992; Fei, 1992). Likewise, Koreans favour work relationships between close relatives or friends, since the privileged relations between both parties are perceived as exercising pressure upon the worker. Since the latter is at the same time a friend or relative of his employer, this compels him to perform well in order to avoid social embarrassment. These cultural values based on social networks (networks of relations between individuals) influenced enormously the organization of economic activity in Asia. They explain the existence of those networks of commercial relations that ensured the success of both Chinese itinerant merchants and Japanese sedentary merchants in the pre-modern era (Biggart, Hamilton, 1992). This network-based organization of economic activities survived the advent of the modern era, and is pursued to our day, which explains why large firms in China, Japan and Korea are organized into inter-firm cooperation networks. Such networks differ nevertheless from country to country, as do their respective historical evolutions. Thus in Japan, the present kigyo shudan, which are fairly complex networks of different interests, come from the zaibatsu, which are pre-World War II conglomerates of family interests. In South Korea, the chaebols are networks of medium-sized firms controlled by one person or one family through a mother firm (holding). In Taiwan, the jituanqiye are conglomerates composed of a small number of family firms. To sum up, while the organization of Asian firms is an original phenomenon rooted in local cultures and experiences, the success of Asian networks during a period of crisis in Western neo-classical economies inevitably promoted network-type organization in the West. The Asian experience thus reinforced the perceptions of Western firms concerning the inability of neo-classical economic methods to meet their interests wholly. In brief, the influence of large Japanese firms, along with globalization, the industrial economy, and the inadequacies of classical or neo-classical economics all are major factors that favoured the resurgence of inter-firm cooperation networks.
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4. The Contribution of the New Theories of the Firm to an Understanding of Inter-Firm Cooperation Networks The new theories of the firm that favour the comprehension of inter-firm cooperation networks are the following: the transaction costs theory, the theory of inter-firm cooperation, the quasi-integration theory, the games theory and the agency theory.
A. The Transaction Costs Theory The transaction costs theory, first put forward by Coase (1937) and mainly worked out by Williamson (1975, 1979, 1985, 1987, 1990, 1994), bases its analysis on the transactions between different economic actors. It holds that, in order to increase social wellbeing, it is essential that economic actors minimize the cost of their transactions, by choosing as the governance mode of these transactions (mode of economic regulation) the economic institution that allows the most substantial economies in transaction costs. Williamson (1975) adds that this economic institution may be either the market or the hierarchy. He draws a distinction between two types of transaction costs that are independent: on the one hand, the transaction costs ex ante, associated with the negotiation, the formal drawing-up and the guarantee of a governance mode, and on the other hand, the transaction costs ex post, associated with the organization and adequate functioning of the governance mode chosen. Williamson states that, in order to choose the governance mode permitting the most substantial economies in transaction costs, one must carry out a comparative study of the transaction costs generated by each governance mode, so as to opt for the one with the lowest transaction costs. Such a comparative study obviously necessitates an evaluation (measurement) of transaction costs associated with each governance mode, an evaluation which itself, in Williamson’s view, rests on the analysis of certain phenomena characterizing economic transactions or their actors. These phenomena are socio-economic; in this respect, Williamson moves away from certain principles of neo-classical economics and is conspicuous by the realism of his thought. These phenomena, which neo-classical economics seem to disregard, represent the main hypotheses of transaction costs economics. They are: limited rationality (Simon, 1955), the specific character of many of the assets involved in economic transactions, the eventual occurrence of opportunistic behaviour due to the specific character of the assets or to limited rationality, the impact of management problems. Challenging the tenets of neo-classical economics that postulate total rationality, Williamson, like Simon, believes that every economic actor (human being), being endowed with limited rationality, cannot foresee in his contract all the events or decisions issuing from his co-contractors or from his environment. He therefore concludes that, owing to limited rationality, the economic actor faces uncertainties that impose on him transaction costs necessary to protect himself; the said actor must accordingly seek a governance mode that reduces these uncertainties while minimizing transaction costs. Similarly, going against neo-classical economic dogma, which holds that goods involved in transactions are standard goods, Williamson (1985) thinks that many assets involved in contractual transactions have a specific character. He identifies five types of asset specificity, i.e. physical asset specificity, site specificity, human asset specificity (human resources), dedicated assets (physical specificity of site) and intangible assets (specificity of brand or clientele). Williamson believes that the specificity of assets makes it difficult to use them again in other contracts. He believes that this difficulty, or impossibility, of reutilization of specific assets could eventually foster opportunist behaviour among co-contractors; each would then seek to exploit weaknesses in the position of the other. For protection against such 11
opportunistic behaviour, either ex ante or ex post, each co-contractor must seek the governance mode that, at the same time, minimizes the transaction costs of such protection. There is one last major phenomenon, relating to the choice of governance mode, which is not taken into account by neo-classical economics: the impact of management problems. Williamson points to incentive (motivation) for economic actors as well as to bureaucracy as the two main management tools, the handling of which may cause problems generating transaction costs. More precisely, he argues that economic actors who own their business have a stronger incentive (motivation) to find solutions that both economize on transaction costs and avoid bureaucracy than economic actors who are not owners of their business. He concludes that this reality strongly influences the economic actor’s choice of the governance mode of his transactions. To sum up, for Williamson, limited rationality, specificity of assets, eventual opportunistic behaviour and the incidence of management problems are all socio-economic phenomena generating transaction costs. The economic actor must measure these various transaction costs as a whole for each governance mode, so as to choose the governance mode for which these transaction costs are the lowest. However, in the end, Williamson reaches the conclusion that the governance mode that most generates economies in transaction costs is the hierarchy. He thinks that internationalization of transactions in a single firm, through integration either vertical (upstream or downstream) or horizontal, is a governance mode that relieves the economic actor from the many uncertainties resulting from the inadequacies of the market. In Williamson’s opinion, the hierarchy lessens the likelihood of opportunistic behaviour flowing from the specificity of assets and from limited rationality, and decreases the likelihood of management problems related to motivation. In other words, Williamson believes that the hierarchy (the firm) is the mode of economic regulation that permits to account for the behaviour of economic actors. Obviously, such a view could not escape some degree of criticism. Many researchers think that the hierarchy, as a governance mode, cannot account effectively for the behaviour of economic actors (Lundvall, 1990; Teece, 1986; Niosi, 1995). This stand is quite justifiable, given that since the mid1980s, there has been a vast and uninterrupted movement of externalization of transactions, which brought about a paring down of the firms involved. It has also been argued that transaction costs economics focuses too much on the specificity of assets and the reduction of transaction costs, while underestimating the importance of production costs (Baudry, 1995) or of other considerations of a strategic nature (Kogut, 1988; Dussauge and others, 1988; Noël, Zhang, 1993). The proponents of transaction costs economics are also taken to task for their apparent lack of precision and realism (Kay, 1992; Niosi, 1995) as regards some of their postulates. It is undeniable that their attempts to establish their theory on an empirical basis are fraught with difficulties (Baudry, 1995). Indeed, they cannot offer a precise measurement for transaction costs, nor can they clearly distinguish transaction costs from production costs. Finally, Williamson appears not to be particularly interested in the mode of governance intermediate between market and hierarchy, although he did recognize, in a book published in 1985, the existence of such a governance mode, which he baptized bilateral governance. Yet, economic realities demonstrate that many economic actors opt for the different forms of the mode of governance intermediate between market and hierarchy. Despite all these criticisms, transaction costs economics is of real value in many respects. It is an original approach, which gave greater depth to economic thought by taking into account elements neglected by neo-classical economics. From that viewpoint, transaction costs economics not only brought economics 12
and management closer together (Ghertman, 19941) but also afforded considerable insight into the integration of firms. As concerns more specifically the analysis of inter-firm cooperation networks, transaction costs economics played a crucial role, in that it furthered the understanding of such networks and particularly of their advantages. In crediting the hierarchy, and more precisely integrations—whether of the horizontal or of the vertical type—with being the mode of governance which most minimizes transaction costs, transaction costs economics admits the conclusion that the formation of a network (either vertical or horizontal) of inter-firm cooperation may be justified by the wish to minimize certain transaction costs. Clearly, such a justification of the development of networks thoroughly overturns the sacrosanct principle of neo-classical economics underlying the powerful antitrust legislation of the sixties. Recall that these laws perceived the creation of networks as attempts to achieve a monopolistic grasp upon the market. In other words, transaction costs economics weakened the antitrust legislation that impeded the formation of networks. In so doing, it was instrumental in the toning down of this legislation from the seventies on, a development that to some extent favoured the formation of vertical and horizontal networks. One may conclude that, while Williamson showed no salient interest in inter-firm cooperation networks, his transaction costs theory nonetheless made a major contribution to the understanding of the emergence of these networks. Another theory that also made a significant contribution to this end was Richardson’s theory (1972) of inter-firm cooperation.
B. The Theory of Inter-Firm Cooperation The theory of inter-firm cooperation originates from researches by Richardson (1972). Pondering the repartition of activities in an economy, he came to question the transaction costs theory initiated by Coase (1937), which Williamson (1975, 1985) later advocated. Richardson (1972) believes that the transaction costs theory does not allow a perception of the full complexity of inter-firm cooperation relations, but rather impoverishes it. He thinks that the activities of organizations are mutually complementary and that accordingly they need coordination. He then draws a distinction between three types of coordination mechanisms: the firm (hierarchy), the market (price mechanism), and inter-firm cooperation (Richardson, 1972). He believes that one or the other of these mechanisms is appropriate, depending on whether the activities of organizations are complementary, and whether or not they require ex ante coordination. Richardson (1972) states, however, that there is no clear boundary between these three coordination mechanisms, which he perceives as a continuum. As a result of these researches, Richardson does not merely challenge the transaction costs theory; he also sets the bases of a real inter-firm cooperation theory by introducing into his analysis a new coordination mechanism different from both the firm and the market, that is, inter-firm cooperation. In the framework of the present study of the history of inter-firm cooperation networks, an analysis of Richardson’s work (1972) allows the following conclusion. By presenting for the first time inter-firm cooperation as a coordination mechanism of economic activity, Richardson also laid the bases of a theory of inter-firm cooperation networks, since his researches made it possible to perceive these networks as an aggregate (intertwining) of different forms of cooperation. However, the main shortcoming of Richardson’s work (1972) is his failure to indicate clearly the means of inter-firm cooperation. In other words, he does not specify the different forms which inter-firm cooperation may take, but is content to point out that the institutional counterparts of this form of 1
M. Ghertman is the author of the foreword to the French edition of O. Williamson’s work, published in 1994.
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coordination are complex relations of cooperation and affiliation. Aoki’s research (1986, 1988) addressed specifically these critical issues. This author strove to give full legitimacy to inter-firm cooperation theory, by carrying out exhaustive studies of certain forms of inter-firm cooperation, thus fostering a better comprehension of the emergence of networks.
C. The Quasi-Integration Theory Aoki (1986, 1988), whose work is deeply indebted to that of Richardson (1972), considers inter-firm cooperation as a coordination mechanism, which he positions between the market and the hierarchy. He gives it the name of quasi-integration. He discriminates three forms of this coordination mechanism, that is, three forms of inter-firm cooperation: authority, or subcontracting stricto sensu, which he perceives as a vertical quasi-integration; incentive, which he perceives as an oblique quasi-integration; and confidence, which he does not consider to be a form of quasi-integration. As an outcome of his researches, Aoki (1986, 1988) indicates that quasi-integration is an organizational form preferable to the market and to the hierarchy, since on the one hand, it remedies the deficiencies of both while combining their advantages, and since on the other, it generates a surplus of wealth called relational quasi-rent. Quasi-integration is also a stable mechanism, according to Aoki. Aoki’s main contribution to the understanding of the emergence of inter-firm cooperation networks was his lucid classification of different forms of inter-firm cooperation, forms that together constitute a network. Another remarkable contribution was his methodical formalization of the “faire faire” strategy of “having things done,” as against the “faire” strategy of “doing them,” the former being one of the main strategies used in inter-firm cooperation networks. Aoki’s work (1986, 1988) on inter-firm cooperation was essentially devoted to an in-depth study of subcontracting, of which he worked out an exhaustive typology. While Aoki’s remarkable contribution, focussed on subcontracting, provides some explanation of the rise of inter-firm cooperation networks—in that the regulation of economic activity is displaced from a logic of integration (the “faire” strategy) to a logic of quasi-integration (the “faire faire” strategy)—it has not been spared some measure of censure. Indeed, his studies (1986, 1988) seem to be restricted to one generic form of inter-firm cooperation, that is, quasi-integration (vertical or oblique). This does not allow a full understanding of the forms of inter-firm cooperation that initiated the rise of inter-firm cooperation networks. However, before we consider these other forms of inter-firm cooperation which afford a global view of the rise of such networks, it appears necessary to analyse the theory of games and the agency theory, since they provide respectively a more thorough study of vertical and of oblique quasiintegration, and since they also make a significant contribution to the explanation of the emergence of networks.
D. Games Theory Games theory is particularly relevant to the study of inter-firm cooperation (Axelrod, 1984), inasmuch as it offers solutions to problems which arise in situations akin to quasi-vertical integration (that is, situations of subcontracting stricto sensu, i.e. authority), problems that hinder inter-firm relations. Using games theory, one can argue that quasi-vertical integration, that is, subcontracting, is similar to the predicament known as the “prisoner’s dilemma” (Baudry, 1995). In such a predicament, the order giver and the subcontractor each pursue his own individual interests and adopt an aggressive strategy one toward the other. The order giver often changes his subcontractors and in each instance chooses the “lowest bidder”; at the same time, the subcontractor, who for his part is never sure of obtaining a further contract, accepts orders while knowing that he would cheat so as to evade them in regard to the quality of the products he supplies. Axelrod (1984) applied games theory to such a situation and managed to show 14
that, while individualistic and non-cooperative behaviour of the contracting parties might be justified in a one shot game (the static version of the game), over the long term, cooperation is more fruitful, since each party gains more than if it had adopted an individualistic approach. Thus, in the theory of firms, games theory introduces the notion of a true relation of cooperation. Such a relationship no longer amounts to a simple relation of order giver to subcontractor, but rather represents a real relation of cooperation between firms. Obviously this is an important evolution in inter-firm cooperation relations, which thus mark a remarkable progress in regard to vertical subcontracting (quasiintegration or authority). With regard to the present research, games theory affords an explanation of the emergence of specific cooperation networks based on an economic regulation responding to the logic of “doing together.” Games theory, however, has been criticized for drawing too simplistic a picture of relations that may exist between economic actors (firms), and for restricting these relations to an either-or binary mode as between cooperation and non-cooperation (Gugler, 1991). Similarly, this theory has been taken to task for its failing to indicate in which manner the cooperation it advocates could be put into effect. The agency theory attempts to clarify this issue.
E. The Agency Theory The agency theory (Jensen, Meckling, 1976; Fama, 1980; Fama, Jensen, 1983; Adams, 1994) is one of the economic models that allows a full apprehension of the second form of inter-firm cooperation identified by Aoki (1986, 1988), i.e. incentive, or oblique quasi-integration. The agency theory, which many authors also call the incentive theory, furthers the understanding of the conditions of emergence of inter-firm cooperation networks. The agency theory argues that there is a conflict of interests between the mandate receivers (i.e. the agents) and the mandate givers, i.e. the principals (McClean Park, Conlon, 1995), and that such a situation is not favourable to the latter, since the agents have more information than have the mandate givers (Adams, 1994; Nilakant, Hayagreeva, 1994). The agency theory holds that this asymmetry of information entails, for the mandate givers, the risk of not having access to all the information necessary to ascertain whether their agents behave loyally (Adams, 1994): this is the risk of “adverse selection” or again the “anti-selection risk” (Baudry, 1995). Furthermore, the agency theory postulates that agents and mandate givers act rationally, and that they both use the contractual process to maximize their own interests by adopting opportunistic behaviour, behaviour detrimental to their co-contractors (Adams, 1994; Nilakant, Hayagreeva, 1994). The theory specifies that, since the agents in such a situation incline to opportunistic attitudes detrimental to their mandate givers’ interests, there is a high risk that these agents will not make a thorough effort to manage loyally the interests of their mandate givers: this is the “moral risk” (Adams, 1994; Baudry, 1995). The theory also considers the information available to agents—but which they do not disclose—to be a commodity, i.e. a good that the mandate givers can acquire by purchasing it from the agents. In fact, the agency theory, which seems a priori concerned with the interests of the mandate givers, aims at finding a form of contract that would be efficient for them (Nilakant, Hayagreeva, 1994). This would be a form of contract that would minimize the mandate givers’ agency costs (related to supervision, motivation and insurance of the agent’s engagement) and that would at the same time incite the agents both to disclose all the information available to them and to make maximum efforts to further the interests of the mandate givers. 15
In other words, the agency theory, in the interest of the mandate givers, seeks a contractual formula sufficiently inciting to secure the agents’ loyalty. From that viewpoint, it considers that a contractual formula based on control of behaviour is preferable to the traditional contractual formula based on control of results. As such, the inter-firm partnership contract seems an advisable contractual form (Baudry, 1995), since it offers a compromise between risk-sharing and incentive, fostering as it does the loyal behaviour of agents through the recourse to new elements. Of note, among these new elements, are the increase in the duration of the contract, the renewal of the contract, flexibility on the part of the mandate givers and greater autonomy of the agents, innovation incentives for the agents, recognition of their rights as originators of the innovation, an equitable sharing-out of the quasi-rent, etc. In a way, the inter-firm partnership contract therefore represents for the agents a premium for renouncing opportunistic behaviour (Baudry, 1995). All considered, the agency theory provides an explanation of the concept of inter-firm cooperation that is more comprehensive than those afforded by games theory or vertical quasi-integration. It introduces for the first time in the theory of the firm a new and real form of cooperation, to wit, a partnership (Baudry, 1995). It shows that such a form of cooperation is preferable to subcontracting stricto sensu, since it does not confine itself to an inter-firm relation of a vertical type, but rather advocates more flexible relations of inter-firm cooperation, as between equals. The agency theory has been criticized for not lending itself to generalisation and for not being as realistic as it is claimed to be. It has been argued, on the one hand, that the implementation of an incentive contract is probably not a sufficient means of reducing uncertainties (Nilakant, Hayagreeva, 1994), and on the other hand, that the unlimited rationality which the agency theory postulates is totally illusory. Similarly, this theory has been taken to task for focussing attention on cooperation between two types of actors only, and therefore for not being applicable to cases of cooperative relations involving more than two types of economic actors. Nevertheless, for the purposes of the present study, the agency theory has the merit of filling in part an important gap left behind by theories of the firm previously studied here. As pointed out, the agency theory focuses on the functioning of cooperation networks between principals and agents, and highlights certain elements it considers essential: flexibility of the principals, equitable sharing of the quasi-rent, mutual confidence and transparency in the circulation of information, interaction between principals and agents, etc. Furthermore, the pioneers of the agency theory were apparently the first to introduce the notion of the network into theories of the firm, although this concept was not the subject of their work, nor was their use of the term “network” rigorous. These pioneers (Jensen and Meckling, 1976) perceived organizations as networks of contractual relationships between individuals. To quote them: “Most organizations are simply legal fictions which serve as a nexus for a set of contracting relationships among individuals.” This statement is particularly relevant in that the term “nexus” designates an aggregate of ties (The Concise Oxford Dictionary, 1990), or simply a network. There is no doubt, in this light, that Jensen and Meckling bring forward a new vision of the organization and especially of the relations prevailing between shareholders (mandate givers) and managers (mandate receivers). In brief, the agency theory goes much further than other theories of the firm surveyed here in its understanding of inter-firm cooperation networks. Not only does it spell out how they work, but it also reveals the significance of a specific kind of network, i.e. partnership. To sum up, while all the theories presented and discussed above share the same objective of optimizing the choices of economic actors (firms), none of them is sufficiently established to afford a single yet comprehensive explanation of the sum behaviour of these actors. As a result, certain researchers, such as Parkhe (1993), advanced the notion of combining certain of these theories in order better to account for 16
the economic behaviour of firms. Others believe that each theory corresponds to a precise type of problem of economic coordination, and thus provides an explanation of the reaction of economic actors to such kinds of problems. Among the latter researchers, may be cited Brousseau (1993), who puts forward an analysis, at once synthetic and critical, of these main theories of the firm, and defines them as contractual approaches that seek to elucidate the solutions adopted by economic actors in response to limited rationality, opportunism and risk. More precisely, he suggests that routine and authority are solutions adopted by economic actors in the face of limited rationality, while mechanisms of supervision, arbitration and incentive are solutions to opportunism. Finally, Brousseau refers to insurance mechanisms as solutions adopted by economic actors in response to risk. He then concludes that all these solutions, which he also calls coordination mechanisms, are at the same time complementary and concurrent. It is interesting to note that one of the mechanisms of coordination advanced by Brousseau, i.e. incentive, evokes the idea of inter-firm cooperation networks, since it implies a real relationship between firms (Aoki, 1988). One important benefit of all the theories of the firm reviewed above is that the inadequacies of some, as well as the relevance of others, have in each case helped us understand how the step-by-step evolution of the economic behaviour of firms finally led to the recent resurgence of inter-firm cooperation networks.
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5.
The Recent Resurgence of Inter-Firm Cooperation Networks
In the light of all the above, it is clear that the network is a phenomenon that goes back a long way in economics and management. However, its present explosive development dates back to less than two decades. The following paragraphs examine the conditions under which this development took place, with emphasis on the regional economy and local networks of innovators, as well as on the different forms of networks and on the paradigm of networks.
A. Regional Economy and Early Forms of Cooperation: Local Networks of Innovators The resurgence of the concept of the network, in its strict sense, in economics and management, is a recent phenomenon first observed in regional economies in the mid-1980s. During that period, the specialists of geographical and regional economics perceived technological cooperations as “agglomeration effects.” These were considered to be a consequence of a process of geographical concentration, in which high technology firms benefited from research activities carried out by universities and public laboratories of the region, and also from government programmes that provided financial advantages (Smith, 1981; Markusen, 1986; Breheny, 1988; Saxenian, 1991; Storper, Harrison, 1991). This phenomenon of geographical concentration, in which the economic actors—that is, the firms, the universities and the public authorities in a given region—entertain technological cooperation and ties of all sorts for the sake of regional development, does reflect accurately the logic of networks. Piore and Sabel (1984) were therefore quite justified in qualifying this phenomenon as a local network of innovators. In so doing, they became the first to use the term “network” in its present meaning in economics and management. Technological cooperation has been perceived as the first form of cooperation networks. This view is now shared by a number of researchers including Niosi (1995). The term “local network of innovators” was also gradually adopted by those involved in the implementation of governmental economic policies. In France, for instance, in the wake of the decentralization policy adopted to further the economic development of regions, terms such as “regional innovation network” and “national innovation system” quite rapidly became popular. However, the experts in regional economy considered the network approach as a regional or urban phenomenon. In other words, these experts did not believe that this approach, and in particular as it relates to technological cooperation, could be used in an international context. In the United States, the emergence of networks was delayed as a result of strict antitrust legislation, although there were a few instances of informal experiences with networks of professional associations (Hounshell, Smith, 1988). Only after the repeal of the legislation in 1984 did business networks develop on a regular basis in the United States. Parallel to this outline of the recent evolution of inter-firm cooperation networks, Miles and Snow (1984) have put forward a different historical interpretation of the same phenomenon that bears careful attention. They view the network structure as a result of a long evolution in organizational structures since 1800. They believe that, starting from an agency structure in 1800, organizations moved towards a function structure in 1850, a division structure in 1900, a matrix structure in 1950, and will adopt a dynamic structure by the next century. Their interpretation of the evolution of organizations is summarized in Table 2.
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Table 2: Evolution of Organizational Forms According to Miles and Snow (1984) Product-market strategy Organization structure
Inventor or early user
Core activating and control mechanisms
1800 Single product or service Local/regional markets
Agency
Numerous small owner-managed firms
Personal direction and control
1850 Limited, standardized product or service line. Regional/national markets
Functional
Carnegie Steel
Central plan and budgets
1900 Diversified, changing product or service line. National/international markets
Divisional
General Motors Sears Roebuck Hewlett-Packard
Corporate policies and division profit centers
1950 Standard and innovative products or services. Stable and changing markets
Matrix
Several aerospace and electronics firms (e.g. NASA, TRW, IBM, Texas Instruments)
Temporary teams and lateral resource allocation devices such as internal markets, joint planning systems, etc.
2000 Product or service design. Global, changing markets
Dynamic network
International/construction firms; Global consumer goods companies: Selected electronics and computer firms (e.g., IBM)
Broker-assembled temporary structures with shared information systems as basis for trust and coordination.
Source: R. E. Miles, Snow C. C., Fit, Failure And The Hall of Fame, California Management Review, Vol. XXVI. No. 3. Spring 1984
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B. The Other Forms of Networks Local networks of innovators or technological networks were the first forms of inter-firm cooperation networks to be identified since the resurgence of networks in economics and management. Local networks of innovators thus cleared the way for the emergence of several other forms of networks, as their advantages incited their economic partners to devise a number of other forms of cooperation. These constitute simple forms of networks, the many possible combinations of which generate complex networks of inter-firm cooperation. Among simple forms of inter-firm cooperation networks, researchers have currently identified the following: joint ventures, consortiums and licensing agreements, among others. Numerous complex networks deriving from these simple inter-firm cooperation networks have been identified and classified by Poulin et al. (1994), as appropriate, on a basis of nodes, links, relations and flows. The different types of complex networks identified on a basis of nodes are: the industrial network, internal network, external network, business network, horizontal network, vertical network, diagonal network, sectorial network, territorial network, and global network. Networks identified on a basis of links are: the dynamic network, flexible network, formal network, informal network, spontaneous network, stable network, and structured network. As for types of networks identified on a basis of relations, they are: the purchase network, production network, service network, technological network, strategic network, cooperation network, and learning network. Finally, networks identified on a basis of flows are: the hierarchical network, heterarchical network, star network, industrial clan, sharedownership network, and structural network (Poulin, Montreuil, Gauvin, 1994). Table 3 presents a synthesis of all these different types of networks, according to the partners involved, the nature of the partnership, the raison d’être of the network, and the structure of the network.
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Table 3: Typology of Interorganization Networks Situation of partners
Characteristics of network according to nodes
Value chain Sector of activity Geographical location
Horizontal/Vertical/Diagonal Sectorial/Non-sectorial Local/Regional/Provincial National/International
Nature of partnership
Characteristics of network according to links
Level of constraints Nature of constraints Duration Degree of flexibility
Formal/Informal Spontaneous/Dynamic/Stable Structured/Flexible
Reason for the network
Characteristics of network according to relations
Scope of operation Schedule Goals and objectives
Outside function/Inside function Strategic/Tactical Cooperation/ Learning
Structure of network
Characteristics of network according to flows
Creation of a new entity Financial participation Interaction between partners Empowerment
Structural Property sharing Star-shaped/Industrial clan Hierarchical/Heterarchical
Source: D. Poulin, B. Montreuil, and S. Gauvin, Bâtir aujourd'hui l'organisation de demain, Publi-Relais, Montreal, 1994.
C. Towards the Development of a Paradigm of Networks The theoretical explanation of networks, and in particular their relation to the market and the hierarchy, are widely debated among researchers. Some think that networks are a mode of economic regulation different from both the market and the hierarchy. Others, more numerous, consider them as a hybrid mode of regulation halfway between the market and the hierarchy. Among those, Thorelli (1986) should be credited with having carried out the first in-depth studies of the concept of the network in economics and management, whereas Piore and Sabel (1984) were the first to use the term “network” in its present meaning. Thorelli’s work applies perfectly to the logic of inter-firm cooperation, and as such goes beyond previous theories towards explaining the economic behaviour of firms. Impelled no doubt by the inadequacies of theories of the firm developed up to the 1980s, Thorelli (1986) expounded a new vision of the network in economics, in his article entitled “Networks: Between Markets and Hierarchies.” Specifically, he proposed that the economy as a whole be considered as a network of organizations, involving a vast hierarchy of subordination and a web of secondary networks. In so doing, he actually imparted a new content to the concept of the network. In his view, this concept refers to an aggregate of two or more organizations involved in long-term relations. This understanding of the concept was favourably received by a number of researchers specializing in studies of the firm. They promptly rallied to his conception of the network, considering its contents and logic as a viable alternative to existing theories. Some of them, such a Jarillo (1988), believe that networks can be of use to managers and can strengthen the competitive position of their firms. Others, such as Borys and 21
Jemison (1989), or Gugler (1991), take the same view as Jarillo but emphasize the ill-defined character of network boundaries. It should be stressed that the rise of networks among firms is fundamentally a phenomenon of the last quarter of the 20th century. A survey of relevant scientific literature between 1891 and 1986 suggests that researchers have focused mainly on phenomena of coparticipation (Noél, Zhang, 1993), rather than on inter-firm cooperation networks. This view is shared by several authors, including Miles and Snow (1984, 1986). The latter, it may be added, picture inter-firm cooperation networks as an organizational form which complements and remedies the deficiencies of earlier such forms.
6. Conclusion Over time and with increasing speed over the last two centuries, the concept of the network has spread to a great variety of fields, including transport, telecommunications, sociology, computer science, as well as economics and management. In the latter fields, the concept of the network has become particularly important since the beginning of the 1980s. This is due to the deep mutations that firms have had to face in the international economic environment over the last decades in order to survive. The demands of the global economy have become such that economic actors no longer can achieve success by relying on economic behaviour based on the principles of neo-classical economics. Similarly, the policies of acquisition and merger that had been perceived as an alternative and a “remedy” to the deficiencies of neo-classical economics appear not to have met adequately the hopes they had raised. These inadequacies of favourably regarded economic approaches compelled economic actors to consider, at the beginning of the 1980s, a new form of regulation of economic activities, that is, inter-firm cooperation. Thus arose the phenomenon of inter-firm cooperation networks, which is undergoing today an explosive development. A number of researchers took an interest in inter-firm cooperation and formulated different theories of the firm. While seeking an explanation of the relevance of such cooperation, they also made a major contribution to the understanding of the rise of inter-firm cooperation networks. Some of these theories are: Richardson’s theory of inter-firm cooperation (1972), the agency theory (Jensen, Meckling, 1976; Fama, 1983), Axelrod’s games theory (1984), Aoki’s quasi-integration theory (1986; 1988) and Thorelli’s theory of networks (1986). Without detracting from the importance of these theories, particular credit must be given to Williamson’s transaction costs theory (1975; 1985) for an explanation of the rise of inter-firm cooperation networks. To this end, this theory depicts the market and the hierarchy as economic regulation mechanisms occupying respectively the two poles of a continuum, in which are found different forms of a third, intermediate, economic regulation mechanism, that is, inter-firm cooperation. It would appear that most of the above mentioned theories of the firm draw upon the transaction costs theory.
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