Resource Allocation and Firm Boundaries

In a modern economy, much of the allocation of financial and nonfinancial resources is mediated by organizations. This essay points to three general features of this mediating role of organizations in the resource allocation process. One line of argument relates to the distinct opportunities and opportunity costs that an organization faces. The set of investment opportunities for organizations differs as a result of their privileged access to different investment opportunities. The second line of argument considers the impact of differential beliefs and perspectives on the resource allocation process. The diversity of independent budgetary entities, both internal to and external to the organization, is argued to importantly influence the heterogeneity of the bases of selection among alternative investment opportunities. Lastly, this mediation of resource allocation by the firm plays a particularly important role with respect to the allocation of resources over time on a given initiative. Organizations do not simply buffer initiatives from selection but potentially provide different bases for interim selection processes.