Organisational advantage of inter-firm networks compared with markets and hierarchies

Abstract

Markets, hierarchies and networks co-exist in modern economies, but when are inter-firm networks the most efficient and innovative organisational alternative? This question is still lacking a theoretically satisfactory answer, because most theorising takes a partial approach and neglects many important aspects of organisational efficiency and innovativeness. The authors of the paper attempt to present a holistic framework of an economic organisation, where the organisational advantage of networks is analysed with four determinants: (1) the similarity of resources and knowledge required by interdependent activities, (2) the level of transaction costs between such activities, (3) the coordination costs of interdependent activities, and (4) the nature of innovative processes. The key argument is that all four determinants influence a firm's organisational decisions. Hence partial theories, which neglect some of these factors, cannot provide satisfactory explanations of economic organisations. The relative importance of each determinant depends on the particular nature of the value-added system and its context. Further, the authors suggest that inter-firm networks have become more important relative to markets and hierarchies because the increasing specialisation and uncertainty of economic activities has made the network form of an organisation relatively more efficient and innovative. The current paradigm shift in the world economy supports this argument.