Blurred Boundaries between Firms, and New Boundaries within (Large Multinational) Firms: The Impact of Decentralized Networks for Innovation

Changes in the environment for international business activities have facilitated more open networked formations, both within and between firms. The spread of more open networks for innovation is increasingly blurring the boundaries between firms. Yet in contrast, more open relationships within large multinational corporations imply that some new boundaries are being correspondingly erected between different sub-units of the firm. A critical feature of more open structures is that internal and external networks have become more closely connected to one another.Keywords: Theory of the firm. Internal and External networks, Open networks, Innovation, Open innovation, Multinational corporationsJEL Classification: D21, F23, L14, O32I. IntroductionTo explain the existence of the firm as a mode of economic organization and coordination (although not the heterogeneity of firms), transaction cost theorists have sometimes drawn a clear and sharp distinction between the apparently purely hierarchical coordination of economic activity within the firm, and the apparently purely non-hierarchical coordination of activity between firms or between firms and other actors, at arm's length through market relationships (by extension of the analysis of Coase 1937). This approach is designed to establish whether a given set of exchange relationships is more efficiently conducted within firms in general, or instead in markets. In the simplest version of this story, there are clear and distinct boundaries between firms and markets (and hence between firms themselves, which are connected essentially just through markets), and no relevant boundaries or sub-divisions within firms.In the Schumpeterian literature, attention shifted to the role of the firm as a continuous creator of knowledge ttirough localized search efforts in and around production, which better explains firm heterogeneity (Nelson and Winter 1982; Rosenberg 1982; Nelson 1991, 2008). However, such problem-solving efforts often call forth knowledge exchanges between firms, and between firms and non-firm actors. If the flows of knowledge between firms, and the extent to which firms draw upon external capabilities rises sufficienuy, then the boundaries between firms may begin to become blurred. In large firms the evolutionary trajectories or paths of corporate technological learning also involve knowledge creation across various divisions or business units, and in multinational corporations (MNCs) they have increasingly involved knowledge creation both at home and in their foreign subsidiaries, and so knowledge often needs to flow within as well as between firms.In this latter context, the barriers to knowledge exchange between different units of a large firm can become as much of an issue as the boundaries between firms, and in particular a tension may develop between the local inter-organizational networking relationships of an intra-firm unit, and its wider international networking relationships with other parts of its corporate group. Partly as a result of this line of research on international networks for knowledge creation or innovation (Hedlund 1986; Cantwell 1995), it has become apparent that such international business networks frequently need to be comprised and to connect both internal MNC networks (usually, across national borders) and various kinds of inter-firm networks (often arranged around a subsidiary within some local or regional geographical area) (Castellani and Zanfei 2006; Cantwell and Mudambi 2011).The rise of so-called vertical specialization In some industries has helped reduce the role of in-house RD Mowery 2009; Adams, Brusoni, and Malerba 2013). This change implies a shift towards a more open structure of inter-firm network relationships, and a decline in the relative significance of any unitary pyramid-like structure of organizational hierarchy in the coordination of activity in the MNC. …