Explaining Firm Emergence: Specialization, Transaction Costs, and the Integration Process

Abstract

This article explains firm emergence and the role of firms in the market structure using the productive power of specialization. Based on productivity efficiencies through technological specialization, a model for firm emergence is drafted alongside Coasean transaction cost theory. I find that transaction costs cannot explain firm emergence but the entrepreneurial specialization perspective here adopted provides a promising approach to understanding the firm’s function to the entrepreneur and its internal organization and capabilities. It suggests a foundational framework for studying the creation of capabilities and the interplay between markets, firms, and entrepreneurs.

Keywords: firm emergence, resource heterogeneity, specialization, transaction costs

JEL Classification: D23, L22, L23, L26