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How Do Firm Specificity and Asset Specificity Differ ? Implications for the Choice of Firm Boundaries

We develop a theory of firm boundaries that considers (i) the asset specificity of the resources that enable an activity, (ii) their firm specificity, and (iii) the firm's endowment with these resources. Our theoretical framework, which draws on transaction-cost and resource-based perspectives, leads to new predictions about activities that should be outsourced (market governance) as opposed to those that should be undertaken within firm boundaries (hierarchical governance). For example, in the case where a firm is endowed with firm-specific resources and asset specificity is low, our theory suggests that a hierarchal form of governance is more likely. In another case, where the firm is not endowed with activity-enabling resources, and asset specificity is high and firm specificity low, our theory suggests that a market form of governance is more likely when the ex-ante opportunity costs of the resources are high.