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Why are Firms Hierarchical?

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  • Mark Casson

Abstract

Firms are hierarchical because hierarchy facilitates both monitoring and control. Monitoring is readily explained in terms of agency costs, but control is not. Control relations between superiors and subordinates emerge naturally only when the superior has decisive information and the subordinate does not. When decisiveness does not naturally occur, it may nevertheless be imposed in order to reduce communication costs. The degree of decisiveness reflects the pattern of volatility in the firm's environment. The theory connects the volatility of the environment to the degree of hierarchy in the organisation. Recent changes in volatility can be used to explain contemporary demands for flatter organizational structures.

Suggested Citation

  • Mark Casson, 1994. "Why are Firms Hierarchical?," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 1(1), pages 47-76.
    • Handle: RePEc:taf:ijecbs:v:1:y:1994:i:1:p:47-76
    DOI: 10.1080/758540499
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    1. Miller,Gary J., 1992. "Managerial Dilemmas," Cambridge Books, Cambridge University Press, number 9780521372817, September.
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    Cited by:

    1. Mutinelli, Marco & Piscitello, Lucia, 1998. "The entry mode choice of MNEs: an evolutionary approach," Research Policy, Elsevier, vol. 27(5), pages 491-506, September.
    2. Adelheid Holl & Ilaria Mariotti, 2018. "The Geography of Logistics Firm Location: The Role of Accessibility," Networks and Spatial Economics, Springer, vol. 18(2), pages 337-361, June.
    3. José G. Vargas Hernández & Mohammad Reza Noruzi, 2010. "The Study of Three Organizational Enigmas; Organizational Economy, Organizational Business and Organizational Skills," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 1(1), pages 68-87, March.
    4. Kirsten Foss & Nicolai J. Foss, 2003. "Authority in the Context of Distributed Knowledge," DRUID Working Papers 03-08, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
    5. Yingqi Wei & Xiaming Liu & David Parker & Kirit Vaidya, 1999. "The Regional Distribution of Foreign Direct Investment in China," Regional Studies, Taylor & Francis Journals, vol. 33(9), pages 857-867.
    6. Wang, Jue & Liu, Xiaming & Li, Xiaoying, 2009. "A dual-role typology of multinational subsidiaries," International Business Review, Elsevier, vol. 18(6), pages 578-591, December.
    7. Christer Ljungwall & Martin Linde-Rahr, 2005. "Environmental Policy and the Location of Foreign Direct Investment in China," Governance Working Papers 22020, East Asian Bureau of Economic Research.
    8. Nicolai J. Foss, 1999. "Understanding Leadership A Coordination Theory," DRUID Working Papers 99-3, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
    9. McDonald, Conor & Buckley, Peter J. & Voss, Hinrich & Cross, Adam R. & Chen, Liang, 2018. "Place, space, and foreign direct investment into peripheral cities," International Business Review, Elsevier, vol. 27(4), pages 803-813.
    10. Peter Buckley, 2004. "The Role of China in the Global Strategy of Multinational Enterprises," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 2(1), pages 1-25.
    11. Kapás, Judit, 2003. "Mutáns vállalatok? A belső hibridekről [Mutant firms? On internal hybrids]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(4), pages 335-349.
    12. Buckley, Peter J. & Hashai, Niron, 2014. "The role of technological catch up and domestic market growth in the genesis of emerging country based multinationals," Research Policy, Elsevier, vol. 43(2), pages 423-437.
    13. Hashai, Niron, 2009. "Knowledge transfer considerations and the future of the internalization hypothesis," International Business Review, Elsevier, vol. 18(3), pages 257-264, June.
    14. Mark Casson & Nigel Wadeson, 1996. "Information Strategies and the Theory of the Firm," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 3(3), pages 307-330.
    15. Foss, Nicolai J., 2003. "Bounded rationality in the economics of organization: "Much cited and little used"," Journal of Economic Psychology, Elsevier, vol. 24(2), pages 245-264, April.
    16. Mutinelli, Marco & Piscitello, Lucia, 1997. "Differences in the strategic orientation of Italian MNEs in Central and Eastern Europe. The influence of firm-specific factors," International Business Review, Elsevier, vol. 6(2), pages 185-205, April.
    17. Nicolai J. Foss, 2003. "Selective Intervention and Internal Hybrids: Interpreting and Learning from the Rise and Decline of the Oticon Spaghetti Organization," Organization Science, INFORMS, vol. 14(3), pages 331-349, June.
    18. Mark Casson & Nigel Wadeson, 2012. "Internationalisation Theory," Chapters, in: Michael Dietrich & Jackie Krafft (ed.), Handbook on the Economics and Theory of the Firm, chapter 15, Edward Elgar Publishing.
    19. Buckley, Peter J. & Hashai, Niron, 2005. "Firm configuration and internationalisation: A model," International Business Review, Elsevier, vol. 14(6), pages 655-675, December.
    20. Nicolai Foss, 2002. "'Coase vs Hayek': Economic Organization and the Knowledge Economy," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 9(1), pages 9-35.
    21. Mudambi, Ram, 1999. "MNE internal capital markets and subsidiary strategic independence," International Business Review, Elsevier, vol. 8(2), pages 197-211, April.
    22. Ciabuschi, Francesco & Forsgren, Mats & Martín Martín, Oscar, 2012. "Headquarters involvement and efficiency of innovation development and transfer in multinationals: A matter of sheer ignorance?," International Business Review, Elsevier, vol. 21(2), pages 130-144.

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    More about this item

    Keywords

    Hierarchy; Decisiveness; Monitoring; Control; JEL classfication: L22;
    All these keywords.

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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