Labor market frictions and firms’ build-borrow-buy choices

This paper uses transaction cost economics and property rights theory to explain how different kinds of labor market frictions may affect firms’ choices among different governance modes of resource acquisition. This paper considers two important dimensions of labor market frictions: the breadth of control rights over employees and the legal enforceability of those control rights. These two different dimensions give rise to four different scenarios where firms may prefer to use alliances or acquisitions (or both). Firm choices depend on whether labor market frictions secure firms’ rights over employees, whether human capital has greater strategic value and whether labor market frictions promote successful acquisitions or alliance formation. This research provides additional considerations surrounding labor market conditions to enrich the original build-borrow-buy framework.