The Boundaries of the Firm: When to Make vs. Buy

Abstract. Every firm faces the same question: which activities should happen inside the organization, and which should be purchased from the market? The CES framework answers this with two parameters — the complementarity of inputs (rho) and the cost of information across organizational boundaries (T). The governance boundary traces a curve in (rho, T) space, and real-world vertical integration patterns in semiconductors match the prediction closely.