Boundary choice interdependency: evidence from the construction industry

Brahm, F and Tarzijan, J (2013) Boundary choice interdependency: evidence from the construction industry. Industrial and Corporate Change, 22 (5). pp. 1229-1271. ISSN 0960-6491

Abstract

Extant research on the theory of the firm has stressed the need to consider interdependencies when analyzing firm boundary choices. We study the existence of interdependencies between boundary decisions using a unique database that includes detailed organizational information on 59% of the construction projects undertaken in the Chilean housing sector between the years 2005 and 2009. Specifically, we show that integration between design and construction activities increases the likelihood of integration between ownership/development and construction activities (and vice versa). This result is of a large magnitude, supporting the view that boundary choices need to be studied in relation to each other. A careful identification strategy also allows us to shed light on the mechanisms that likely drive this interdependency: a “coordination effect,” a “transaction hazard effect,” and a “production effect.” The latter is shown to be the most important mechanism at work, suggesting that “boundary choice complementarity” is primarily motivated by the need to align investment incentives for the joint development of capabilities.