Firm boundary decisions have been traditionally studied through the lens of transaction cost theory (TCT) (Masten et al., 1991; Monteverde, 1995; Williamson, 1975, 1985). However, the challenging evidence associated with the worldwide diffusion of new outsourcing practices, such as advanced subcontracting in the automobile industry, has driven researchers to analyze this phenomenon using alternative – although somewhat complementary – paradigms like the knowledge-based view of the firm (KBVF) (Grant, 1997; Kogut and Zander, 1993; Madhok and Tallman, 1998; Malhotra, 2003; Moran and Ghoshal, 1996) or the relational view (RV) (Dyer and Singh, 1998).
Although these paradigms question some of the predictions of TCT, the underlying hypothesis of this paradigm – the minimization of production and transaction costs – remains valid (Barney and Ouchi, 1986). In relation to this, a new trend is drawing the attention of both academics and practitioners: increased outsourcing of high-value and knowledge-based services that have traditionally been conducted internally by the firm, even to emerging countries (Bunyaratavej et al., 2007, 2008; Doh, 2005; Lewin and Peeters, 2006; Kedia and Mukherjee, 2008; Kotabe and Murray, 1990, 2004; Mol et al., 2004, 2005; UNCTAD, 2004, 2005). As far as these services are concerned, this chapter will focus on R&D specifically. Like advanced subcontracting, the outsourcing phenomenon of R&D services is another example of a boundary decision that does not perfectly fit with TCT. Due to the fact that firms are both increasingly fragmenting their product development activities and outsourcing some of these stages to external specialized providers (UNCTAD, 2005), we analyze the governance-mode decision related to R&D services.