Theories of the Firm and their Value Creation Assumptions

Abstract

Since Coase’s (1937) seminal paper on ‘The Nature of the Firm’, strategy scholars are invested in developing so-called ‘theories of the firm’ (ToFs). These are theories that should answer four questions on the nature of firms: Why do firms exist? Why are their boundaries as they are? Why are they organized the way they are? and Why are they so heterogeneous? In answering these questions, at least twenty ToFs have been put forward in the last decades. These include economics-based ToFs such as principal-agent theory and transaction-cost economics; organization theory-based ToFs such as behavioral theory and bureaucratic theory; and strategy-based ToFs such as the value-chain model and stakeholder theory. Assuming that all ToFs attempt to answer the four questions above, the question arises why we would need so many ToFs. Do we really need so many? And, if so, why? The extant literature provides a partial answer to this question by looking at complementarities between ToFs. Along that line, scholars have suggested to combine various ToFs (e.g., Coff, 1999; Foss & Foss, 2005; Pitelis, 2007). However, as these suggestions typically concern the combination of two or of three ToFs, they do not account for the fact that we have at least twenty now. Also more comprehensive reviews (e.g., Conner, 1991; Foss, 1993; Madhok, 2002) do not explain the multitude of ToFs in our literature. To find an answer to this question, this paper provides a two-step comparison of ToFs. The first step is a bird’s eye view comparison of eighteen well-known ToFs along some apparent differences. This step reveals differences between some ToFs, but it also leaves a group of ToFs that are apparently similar. In the second step we further compare this group of ToFs on their more implicit assumptions. Based on this two-step comparison, we conclude that we do indeed need a variety of ToF. The reason is that the various ToFs have different assumptions on how firms create value and from which sources this value is derived. Since firms in practice also differ in the way they create value, our conclusion is that we need more than one ToF to explain this variety. The implication is that scholars engaged in the ToF debate may want to put firm value creation center stage. This, we shall argue, requires adding a fifth question to the ToF that precedes the other four questions: what value does a firm create?

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