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This chapter explores the reciprocal relationship between technological innovation and the boundaries of the firm, and the paths in which firm boundaries might be expected to follow under different circumstances. It argues that while one might follow Langlois (2003) in believing that there will be a tendency for large, vertically-integrated firms to become less common in the technological environment that is currently unfolding, other tendencies will also be afoot, leading to a spectrum of different types of inter- and intra-firm relationships. This includes the creation of new giant enterprises whose evolution in the early 20th century was described by Chandler (1962, 1977) as the imposition of a ‘visible hand’ to reduce uncertainties in market-based relationships.

This chapter analyzes the changing boundaries of firms in terms of vertical integration and dis-integration (specialization) in dynamic and uncertain technological and market environments. In particular, it addresses the question of stability and change in firms’ decisions to ‘make or buy’ in contexts characterized by periods of technological revolutions punctuating periods of relative technological stability and smooth technical progress. The chapter is inspired by the case of the computer and semiconductor industries, and proposes the building blocks of a model in the ‘history-friendly’ style, showing how alternative dynamics of demand and technical change might generate profoundly different patterns of evolution in the two industries. The main argument proposed concerns the role of co-evolution in the upstream and downstream industries in explaining the changing boundaries of firms.

This chapter examines the legal boundaries of the firm, which shift depending on questions that are asked (an organizational version of the “uncertainty principle”). The legal boundaries of firms refer to the management and regulation of firms both internally and externally. From an internal perspective, the setting and exercise of legal rules allow for the self-governance of most business firms. From an external perspective, different legal rules or “choice architectures” may prohibit or encourage particular behaviors of firms and their participants. These internal and external perspectives correspond to the “bottom-up” and “top-down” perspectives described in previous chapters. Considerable variation is possible with respect to the management and regulation of the boundaries of the firm. Managers and policy makers may choose to advance different objectives and values when addressing issues concerning the boundaries of the firm.

This chapter uses the concepts of human capital, social capital, and institutional capital to explain the existence of the firm and boundaries of the firm. In addition, it provides a brief literature review of the existing studies on the theory of the firm.

The introduction discusses the role of law in the social recognition, conceptual definition, and historical evolution of business enterprises, also known as firms. It describes firms as social institutions evolving in a global historical context. Law distinguishes firms from other institutions (such as charities and nation-states). Law also enables business participants to construct internal authority structures. Governments use law to set the external “rules of the game” for firms in terms of their management, financing, and legal liability. After outlining the chapters of the book, the introduction describes the overall project as both “conservative” in the sense of recovering forgotten foundational knowledge about business firms and “progressive” in the sense of emphasizing the considerable flexibility available for business participants as well as governments with respect to the objectives, purposes, and values of firms.

Chapter 6 by Fontagné and D’Isanto focuses on which core competence to retain within the firm and what to outsource or offshore. Using a 2012 fragmentation survey of global value chains in fifteen European countries, they focus on 28,000 firms located in France with over 50 employees in 2008, belonging to industry, trade, and non-financial services sectors. This rich data reveals the strategic choices made by firms to perform activities within the firm, in France, or abroad (offshoring). The chapter identifies why leading firms decide not to offshore certain activities, and considers the consequences for employment of firms’ offshoring strategies. Reasons for offshoring conform to the usual theories addressing the boundaries of multinational firms: transport, transaction, and information costs are important barriers to offshoring. Strategic segments of the value chain, when offshored, are kept within the firm's boundaries due to potential problems of incomplete contracts. Offshoring firms are shown to be larger, confirming that in cases of incomplete contracts, only the largest and most efficient firms benefit from offshoring.

Dynamic capabilities are deeply enmeshed with business model innovation and implementation. They reside partly in the collective learning and culture of the organization as well as in the entrepreneurial skill of the top management team. Entrepreneurial managers bear the primary responsibility for recognizing the need for business model change, for adjusting or inventing business models, for orchestrating the necessary assets, and, more generally, for (re)structuring the organization when,needed. The top management team is also responsible for strategy formulation, which is separate from, but related to, dynamic capabilities. The organization’s structure, incentives, and culture can, in turn, be more or less well suited to the recognition of new opportunities and the implementation of new structures that are integral to the dynamic capabilities of the firm. The design of new business models requires attention to balancing customer needs and technological possibilities consistent with an overarching logic of organization.