Niels Peter Mols*, Jesper Rosenberg Hansen, Anders Ryom Villadsen

Transcription

1 BOUNDARY CHOICE AND PERFORMANCE OF MUNICIPALITIES: A TEST OF TRANSACTION COST, AGENCY, NEOCLASSICAL ECONOMICS, RESOURCE- BASED, AND INSTITUTIONAL EXPLANATIONS Niels Peter Mols*, Jesper Rosenberg Hansen, Anders Ryom Villadsen School of Economics and Management, University of Aarhus, Denmark nmols@econ.au.dk Preferred Stream: 12, (alternatively stream 9 or 14) Refereed paper Profile of presenter*: Niels Peter Mols is professor of marketing at the School of Economics and Management, building 1322, University of Aarhus, DK-8000 Aarhus C, Denmark. Phone: , nmols@econ.au.dk

2 BOUNDARY CHOICE AND PERFORMANCE OF MUNICIPALITIES: A TEST OF TRANSACTION COST, AGENCY, NEOCLASSICAL ECONOMICS, RESOURCE- BASED, AND INSTITUTIONAL EXPLANATIONS ABSTRACT What determines the choices of organisational boundaries of municipalities? And do the boundary choices affect performance? Different theoretical approaches are used to answer these questions in this paper. Based on a survey among Danish municipalities it is shown that especially resource-based and neoclassical economics variables are able to predict the choice of boundary. It is also indicated that institutional forces are influential in setting the boundaries. Furthermore, many of the central exchange attributes identified by transaction cost theory and agency theory are significantly related to performance. Thus, our results support parts of all these theories. The support indicates that the study of public sector institutions boundary choices may benefit from integrating economic theories, which assume rationality and opportunism, with institutional theory emphasising more unreflective and socially determined behaviour characterised by path dependence and non-opportunistic norms. Keywords: Local government, strategy, transaction cost economics, agency theory, resource-based view, vertical integration. INTRODUCTION Danish municipalities are democratically run and community-centred institutions that regulate a large number of actions and services. The main part of the public sector expansion that characterises the Scandinavian model took place at the municipal level, and it has for several years been considered whether municipal activities should be governed by the market or the hierarchy. Economic theories, such as transaction cost theory (Williamson 1985, 1991), agency theory (Bergen, Dutta & Walker 1992), resource-based view of the firm (Barney 1991), and neoclassical economics (Harrigan 1983, 1984; Porter 1980) can be used to predict the choice of governance structure. However, the boundaries observed in practice may not be the result of economic pressure. Hence, it cannot be assumed that competitive pressure eliminates the less efficient municipalities, and thus the assumption that the municipalities follow the normative rules in the economic theories of boundary choice is not likely to hold. Therefore, a study of these public sector institutions has to be supplemented by a broader institutional theory in order to explain their boundary choices (DiMaggio & Powell 1983; Brown & Potoski 2003; Amirkhanyan, Kim & Lambright 2007). Furthermore, choosing performance instead of boundary choice as the dependent variable makes it possible to test whether the economic theories of boundary choice are able to explain differences in performance in public sector institutions (cf. Poppo and Zenger 1998). This paper attempts to answer two questions: What determines a municipality s boundary choices? Do boundary choices affect a municipality s performance? First, a number of hypotheses are deduced from economic theories of the firm and institutional theory. The hypotheses identify a number of variables affecting boundary choice and how boundary choice affects performance. Finally the paper presents the results from an empirical study of boundary choice in Danish municipalities.

3 HYPOTHESES Transaction cost theory: asset specificity and uncertainty Transaction cost theory attempts to explain whether a transaction should be governed inside the firm or by the market (Williamson 1985). Whether vertical integration is an efficient strategy is primarily determined by the level of transaction-specific assets. Transaction-specific assets have lower value when used in other transactions or for other purposes. With an investment in transaction-specific assets it is necessary to protect its value from being appropriated by others, and therefore higher transaction-specific investments result in internalisation. This prediction has received strong empirical support (David & Han 2004), but it assumes that the market forces are strong enough to eliminate inefficient governance structures, leaving only the transaction cost minimising governance structures to be observed in empirical tests (Rindfleisch & Heide 1997). However, since this might not be the case for activities carried out by municipalities, it is necessary to investigate the effects on performance. In this respect, transaction cost theory predicts that an increase in the degree of asset specificity increases the cost of activities organised by use of the market (Williamson 1991). This results in two hypotheses: Hypothesis 1a (H.1a.): The greater the asset specificity, the higher the percentage of requirements the municipality will produce internally. Hypothesis 1b (H.1b.): The greater the asset specificity, the lower the performance of external suppliers. Williamson (1991) also argues that an increase in uncertainty increases the costs of using the market and the hybrid more than the cost of using the hierarchy, especially when combined with moderate to high levels of transaction-specific assets. The empirical results relating uncertainty to governance structure are mixed (David & Han 2004), but in accordance with transaction cost theory we propose: Hypothesis 1c (H.1c.): When asset specificity is moderate to high, then the greater the uncertainty (volume, technological, performance), the higher the percentage of requirements the municipality will produce internally. Hypothesis 1d (H.1d.): Increases in uncertainty increase cost. At moderate to high levels of transaction-specific assets, increases in uncertainty have a higher negative effect on the performance of the hybrid and the market than on the performance of the internally organised activities. Agency theory: uncertainty One of the contributions of agency theory is the observation that risk-averse agents have to be paid a risk premium when the environmental uncertainty results in a less than perfect relationship between effort and performance, and the agents are paid based on their performance, i.e. have an outcome-based contract. This has two effects: First, it raises the costs of using markets governed by outcome-based contracts.

4 Second, increases in volume uncertainty and technological uncertainty will lead to increased costs of using the market, and eventually the market will be replaced by the hierarchy and increased use of behaviourbased contracts (Bergen, Dutta & Walker 1992; Milgrom & Roberts 1992). Another central variable in agency theory is performance uncertainty. Performance uncertainty refers to situations where it is difficult to observe and measure the quality of output even some time after having inspected and evaluated the product or service. If performance uncertainty increases, monitoring costs will increase and the incentives for the agent to shirk will also increase, and ultimately the market fails (cf. Bergen, Dutta & Walker 1992; Mayer & Solomon 2006). Inside the firm, the management team can get access to more information, it can more closely monitor input and behaviour, it can closely supervise activities, and it is easier to align incentives. The result is that the negative effect of performance uncertainty is predicted to be stronger when activities are organised by use of the market than when activities are organised internally by use of behaviour-based contracts (Poppo & Zenger 1998). Hypothesis 2a (H.2a.): The greater the uncertainty (volume, technological, performance), the higher the percentage of requirements the municipality will produce internally. Hypothesis 2b (H.2b.): The greater the uncertainty, the lower the performance. Resource-based view of the firm: expertise The resource-based view of the firm identifies characteristics of internal resources and capabilities that lead to sustainable competitive advantage (Barney 1991, Peteraf 1993). It has become the dominant approach to research in strategic management, and recently it has also been the starting point for research related to the public sector (e.g. Bryson, Ackermann & Eden 2007; Hoskisson, Hitt, Wan & Yiu 1999). Briefly described, the resource-based view proposes that an increase in the internal expertise required to manage and carry out an activity will have a positive effect on performance (Barney 1991; Mayer & Solomon 2006). Barney (1999) argues that it may be too costly for a firm to develop the needed capabilities internally, and it may also be too costly to internalise the capabilities by acquiring the firm that possesses them. Thus, the least costly solution is to buy the needed products and services from the firm with the greatest expertise. This is in line with Quinn and Hilmer (1994), who suggest that only core competences and other transaction-specific assets should be placed internally, whereas all other activities can be outsourced. From this it can be expected that an increase in the expertise of the external service suppliers will have a positive effect on the performance of the external service suppliers. The empirical (Newbert 2007) and theoretical work relating resources and capabilities to governance structure is limited, but in line with Mayer and Solomon (2006) and Parmigiani (2007) we suggest that: Hypothesis 3a (H.3a.): The greater the expertise of the municipality, the higher the percentage of requirements the municipality will produce internally.

5 Hypothesis 3b (H.3b.): The greater the expertise of the potential suppliers, the lower the percentage of requirements the municipality will produce internally. Hypothesis 3c (H.3c.): The greater the expertise of the municipality, the higher the performance of the internal production of the municipality. Hypothesis 3d (H.3d.): The greater the expertise of the potential suppliers, the higher the performance of the suppliers. Neoclassical economics: economies of scale and economies of scope In his analysis of vertical integration Porter (1980) primarily emphasises the ability to exploit available economies of scale and scope by producing internally. Economies of scope reduce the cost of producing two different goods or services when the goods share the same input and the simultaneous production of the two different goods leads to better utilisation of the shared input (Panzar & Willig 1981). Economies of scale reduce the average cost per unit of the same good or service as the number of units produced is increased (Stigler 1958). Larger internal scale economies in internal service production increase the likelihood that it is efficient to keep the service production internally in the municipality and thus discourages outsourcing. On the other hand, municipalities that operate at an inefficient scale may operate at higher costs than municipalities that have outsourced the production (Stigler 1968). However, contrary to this prediction a recent study of the cost of school cleaning (Christoffersen, Paldam & Würtz 2007) found that private production had significantly lower costs than public production, and that the difference increased with school size. Despite the mixed empirical results, we propose that: Hypothesis 4a (H.4a.): The greater the economies of scale of internal production, the higher the percentage of requirements the municipality will produce internally. Hypothesis 4b (H.4b.): The greater the economies of scope of internal (external) production, the higher (lower) the percentage of requirements the municipality will produce internally. Hypothesis 4c (H.4c.): The greater the economies of scale and scope of internal production, the higher the performance of internal production. Hypothesis 4d (H.4d.): The greater the economies of scope of external production, the higher the performance of external suppliers. Institutional theory: central government, rules and regulations, political majority etc. Institutions provide socially accepted ways of acting, are supported by regulative and normative frameworks (Scott 2001, Oliver 1997), and may be relevant to consider in a public context where municipal decision makers are surrounded by many different stakeholders (Frumkin and Galakiewicz 2004). Therefore it seems important to take into account the influence from different regulative and normative pressures surrounding municipal decision makers make-or-buy decisions (Brown and Potoski

6 2003). Sources of institutional pressure include rules and regulations from central government and the European Union, the politics of the political majority in the town council, and the top management team in the municipality. Besides, substantial normative pressures may derive from both the central government and LGDC, the powerful national association of municipalities, which have both actively promoted increased use of the market. These institutional factors will probably have a negative effect on the overall cost when they influence the organisation of activities in ways that contradict transaction cost theory, agency theory, and the resource-based view of the firm (Oliver 1997). When they are in accordance with the above theories, the institutional factors will hold the role of catalyst for the economic theories and thus will not affect performance directly. We acknowledge that different institutional forces may promote market solutions, while other institutional forces promote internal governance, but since the present Danish government and the two ruling parties have traditionally advocated more privatisation, and due to the new public management wave (e.g. Greve 2006), we limit this study to focus on the forces promoting the use of market solutions. Thus, we propose that: Hypothesis 5a (H.5a.): The more the institutional forces (e.g. the political majority) expect the use of private suppliers, the lower the percentage of requirements the municipality will produce internally. Hypothesis 5b (H.5b.): The more the institutional forces (e.g. the political majority) expect the use of private suppliers, the lower the performance of external suppliers. METHOD Research setting The 98 Danish municipalities are, among other things, responsible for school cleaning, road maintenance, IT maintenance, and activation of unemployed, and we selected these four areas as the setting for our study as several features made it appropriate for our investigation. First, activation of unemployed has since the beginning of this decade been subject to make-or-buy-decisions by municipalities. According to the Act on active labour market policy the municipalities are responsible for providing services in relation to unemployed persons seeking work or education/training. A liberalisation at the beginning of this decade allowed municipalities to contract with private companies or other organisations to provide courses or practical job training (Lind & Moller 2006). The municipalities may also choose between internal production or external service suppliers for school cleaning, IT maintenance, and road maintenance. Second, field and expert interviews, and a scanning of the literature indicated that the four areas would be governed by a varying mix of market and hierarchical governance, and thus we expected high variance in the answers. Third, the municipalities are tax-financed and managed by a democratically elected town council, a mayor, and a professional and specialised public administration. As both economic and institutional forces influence boundary choices, the necessary conditions for testing the hypotheses thus appear to be satisfied.

7 Measures of the variables The measures were borrowed, adapted from, or developed based on measures in the literature (primarily Poppo & Zenger 1998; Parmigiani 2007), pre-tests, and field interviews. Dependent variable: degree of internal production and performance The degree of internal production was measured by asking the key informant to report the percentage of the service production done internally by the municipality. Performance was measured by the same scale and items as used by Poppo and Zenger (1998). We asked the key informants to evaluate the general satisfaction with a certain service in the municipality on a 7-point scale in which 1 represents dissatisfied and 7 represents satisfied. The first three items used to measure the performance of the internal activities are: The overall cost of using the municipality s own employees, The quality of the service delivered by the municipality s own employees, and The municipality s own employees responsiveness to problems and enquiries. Three similar items measured the performance of the externally sourced service. Independent variables (examples from IT maintenance) We used a response scale from 1=completely agree to 7=completely disagree, and each section instructed the respondents to answer with relation to the municipalities and the specific areas of school cleaning, IT maintenance etc. The following shows examples of items used in IT maintenance. Transaction-specific assets (Parmigiani 2007; Walker & Weber 1984; Poppo & Zenger 1998): (1) There are several suppliers with the required skills; (2) There is a large number of private IT companies in the market; (3) It would be quick and easy to switch IT maintenance supplier. For volume uncertainty, technological uncertainty, municipality scope economies, supplier scope economies, and municipality expertise all items were similar to those used by Parmigiani (2007: ). Performance uncertainty (Parmigiani 2007) was measured by three items: (1) With drawings and written material we can easily describe the tasks involved in maintaining the municipality s IT applications; (2) With a simple evaluation of an IT maintenance supplier we can easily determine whether they can satisfy our demands; (3) When there is a problem with the maintenance, we can easily find the cause. Supplier knowledge expertise (Parmigiani 2007; Walker & Weber 1984; Stump & Heide 1996) was measured by: (1) The leading private suppliers of IT maintenance have knowledge that gives them an advantage over other companies (R=reversed); (2) We use our suppliers to help us stay updated with innovations (R). Supplier output expertise (Parmigiani 2007; Anderson 1985) was measured by: (1) Compared to private suppliers, our own IT maintenance has lower costs; (2) Compared to the private suppliers, our own IT maintenance is of a better quality; (3) Compared to the private suppliers, our own employees are more responsive to problems and inquiries. The measure for municipality economies of scale was: If the municipality handles all IT maintenance, we can reduce the total costs of IT maintenance (R). Central government and association of municipalities: (1) The government expects that we use private suppliers for activities like IT maintenance (R), (2) The

8 association of municipalities expects that (R). State/EU rules and directions: State/EU rules and general directions influence whether we choose a private supplier of IT maintenance (R). Political majority and top management in municipality: (1) In the municipality the political majority expects that we use private suppliers for activities like IT maintenance (R), and (2) In the municipality the top management team expects that (R). Data collection Each of the 98 Danish municipalities received four questionnaires one for each selected area except the largest municipality (Copenhagen), which has split its job activation activities into three independent job centres and therefore received three questionnaires about job activation. We used a single key informant data collection methodology (Cambell 1955), and the respondents names were identified via the internet or by phoning the municipalities. The respondents had on average been working for a municipality for 16.6 years (s.d. = 11.4), and had on average 4.9 years of experience in their present position (s.d. = 7.0). The four page questionnaire was sent by mail with a cover letter and a return envelope, and approximately three weeks later we sent out a reminder. Response rates are shown in Table 1. Based on several tests (Armstrong and Overton 1977) we concluded that non-response bias is not a serious problem in this study. Table 1: Sample and response rate Activity areas Municipalities Typical titles of key informants Questionnaires sent out Questionnaires received (1/8-07) Response rate (per cent) School cleaning 98 School manager Road maintenance 98 Road / park manager IT maintenance 98 IT operations manager Job activation 98 Job centre manager Total METHODOLOGY We used Kendall s τ and order logit models because of the ordinal scale used to measure most of the dependent variables. Many of the measures consisted of multiple items, and Cronbach s alphas were over 0.60 for all variables, except for supplier knowledge expertise (Cronbach s α = 0.39) and for performance uncertainty (Cronbach s α = 0.59), suggesting an acceptable reliability (Nunnally 1967). For each variable measured by multiple items we did a factor analysis (principal component analysis), which indicated that all measures were unidimensional. The extracted principal components were used as the aggregate scores in the subsequent analysis. Kendall s tau-b correlations between the independent variables were all below

9 0.50, and the items used for the multiple item measures all had higher correlations with the variable they were measuring than with any other variables in the study, indicating acceptable discriminant validity. We constructed two variables in order to measure the interaction between asset specificity, volume uncertainty, and technological uncertainty. First the asset specificity measure was split into three parts: The third of the observations with the lowest values for asset specificity was given the value zero; the next highest third the value 1, and the last third the value 2. We then rescaled the measures of volume uncertainty and technological uncertainty to make the measures positive, and the new values were multiplied by the new values for asset specificity, which resulted in two new interaction terms: asset specificity * volume uncertainty and asset specificity * technological uncertainty. RESULTS The partial tests of the hypotheses are reported in Table 2. The percentage of the service requirements produced by the municipalities were significantly (p<0.01) positively correlated with municipality expertise, municipality scale economies, and municipality scope economies (τ = 0.40; 0.30; 0.29). This supports the resource-based view and neoclassical economics explanations. Supplier knowledge expertise, supplier output expertise, supplier scope and political majority and top management in municipalities were significantly negatively correlated with the percentage of internal production, which supports the institutional explanations as well as the resource-based view and the neoclassical economics explanations. The relationships with the performance variables are also shown in Table 2. Degree of asset specificity (τ = -0.12; -0.13; -0.13), degree of asset specificity * volume uncertainty (τ = -0.16; -0.16; -0.17), as well as degree of asset specificity * technological uncertainty (τ = -0.21; -0.23; -0.21) are significantly negatively correlated with the three performance measures for the use of external supplier. This supports the transaction cost theory, i.e. H.1b and H.1d. The uncertainty variables were also negatively correlated with many of the performance variables for both internal service production and external service suppliers, thus supporting the agency theory. Both measures of supplier expertise were positively correlated with all the measures of performance of external suppliers, supporting H.3d. Municipality scale and scope were positively correlated with the performance of internal service production, supporting H.4c, and supplier scope is positively correlated with the performance of the external suppliers, supporting H.4d. The institutional theory did not receive support from the correlations. Political majority and top management team were negatively correlated with performance of the internal production (τ = -0.23; -0.21; -0.21), which could indicate that the lower the performance of the internal service production, the higher the pressure from the political majority and the top management team to outsource.

10 Table 2: Kendall s tau-b first-order correlations Independent variables: Percent internal Cost satisfaction internally with quality internally Dependent variables: with responsiveness internally Cost satisfaction externally with quality externally Table 3 presents the results of the separate tests of the five alternative models. Asset specificity * volume uncertainty was eliminated from the analysis because of multicollinarity. The resulting variance inflation factors were all below 10. However, asset specificity * technological uncertainty and asset specificity are highly correlated (τ = 0.68), indicating that multicollinarity might still be a problem. The percentage of internal service production is best explained by the resource-based model for which R 2 = 0.41 (see Table 3). However, the only significant variable is municipality expertise, indicating strong support for H.3a, but no support for H.3b. Next best models are the institutional model (R 2 =0.31) and the neoclassical model (R 2 =0.29). The institutional model is supported because political majority and top management team is significantly negatively related to percentage of internal production (-13.48; see Table 3), which partly supports H.5a. State/EU rules and directions is positively correlated with percentage of internal production indicating that rules and directions push towards more internalisation of activities. The results in Table 3 also support H.4a and partly H.4b. The models deduced from transaction cost theory (R 2 = 0.19), and agency theory (R 2 = 0.20) explain the least variation in percentage of internal production in the Danish municipalities, indicating no support for H.1a, and partly support for H.1c, and H.2a. with responsiveness externally Asset specificity * -0.13* Volume uncertainty * -0.15* Technological uncertainty * -0.19** -0.18** -0.13* Performance uncertainty -0.11* * Asset specificity * volume unc * -0.16* -0.17** Asset specificity * techno. unc ** -0.23** -0.21** Municipality expertise 0.40** 0.12* Supplier knowledge expertise -0.16** ** 0.21** Supplier output expertise -0.29** -0.23** -0.23** -0.22** 0.21** 0.27** 0.20* Municipality scale economies 0.30** 0.20** ** -0.15* Municipality scope 0.29** 0.17** 0.15* 0.14* -0.15* -0.15* Supplier scope -0.29** -0.19** -0.17* Central government and association of municipalities State/EU rules and directions Political majority and top management in municip. p < 0.10; * p < 0.05; ** p < <n< ** -0.23** -0.21** -0.21**

11 Table 3: Regression or ordered logit models of dependent and independent variables for each model Independent variables: Percent internal (regression) Cost satisfaction internally (logit) with quality internally (logit) Dependent variables with responsiveness internally (logit) Cost satisfaction externally (logit) with quality externally (logit) Transaction cost model: Asset specificity * Volume uncertainty Tech uncertainty * -0.68** -0.60* Perform uncertainty with responsiveness externally (logit) Asset specificity * tech uncertainty ** -0.36** -0.43** R 2 / Likelihood ratio test β=0 0.19/ 0.10/ / / / / /.0037 Agency model: Volume uncertainty Tech uncertainty 5.82* -0.43* -0.63** -0.58** Perform uncertainty R 2 /Likelihood ratio test β=0 0.20/ 0.10/ / / / / /.17 Resource-based model: Municipality expertise 16.93** Supplier knowledge expertise * 0.47* 0.62** Supplier output expertise * -0.71** -0.61** 0.57* 0.81** 0.71** R 2 /Likelihood ratio test β=0 0.41/ 0.11/ / / / /< /<.0001 Neoclassical model: Municipality scale economies 3.16* Municipality scope 7.24* Supplier scope * -0.28* R 2 /Likelihood ratio test β=0 0.29/ 0.14/ / / / / /.086 Institutional model: Central government and association of municipalities * State/EU rules and directions Political majority and ** -0.51** -0.40* -0.52** Top management team R 2 /Likelihood ratio test β=0 0.31/ 0.12/ / / / / /.096 p < 0.10; * p < 0.05; ** p < 0.01 Note: The performance measures have been reversed so that positive parameter estimates for the independent variables suggest that a greater amount of these variables lead to a higher percentage of services produced internally or a higher satisfaction with price, quality, or responsiveness. Note: The estimations also included dummy variables for municipality size and the four empirical areas, but for simplicity they are left out.

12 Overall, the results indicate that the boundary choices are best explained by economic efficiency models like the resource-based and neoclassical economics models, and by the institutional model pointing to the local institutional factors, which push towards a greater degree of market governance. The results in the last six columns of Table 3 support one of the central predictions from transaction cost theory, namely the negative relationship between technological uncertainty * asset specificity and market performance; see H.1d. (-0.32; -0.36; -0.43). Asset specificity was positively related to the three market performance measures, and thus H.1b could not be supported. The agency model in Table 3 has more mixed results. Only technological uncertainty is significantly negatively related to most of the performance variables (- 0.43; -0.63; -0.58; -0.31), and thus H.2b is only partly supported. For the resource-based model in Table 3 are both supplier output expertise and supplier knowledge expertise significantly positively related to performance of the suppliers, supporting H.3d. Municipality expertise is insignificantly related to the three measures of hierarchical performance, and thus H.3c is not supported. Though the variables in the neoclassical economic model in Table 3 have the right signs, they are not significantly related to the performance measures as predicted in H.4c and H.4d. In the institutional model presented in Table 3 only State/EU rules and directions and external price performance are significantly negatively correlated (- 0.15), and thus only a part of the institutional model and H.5b is supported. Table 4: Full models integrating all explanations Dependent variables: Independent variables: Per cent internal (regression analysis) Cost satisfaction internal (logit) with quality internal (logit) with responsiveness internal (logit) Cost satisfaction external (logit) with quality external (logit) with responsiveness external (logit) Asset specificity Volume uncertainty 5.88* Tech uncertainty ** -0.69** -0.71** Perform uncertainty Asset specificity * tech. uncert * -0.29* Municipality expertise 16.91** * Supplier knowledge expertise * 0.44* ** 0.55** Supplier output expertise ** -0.63* ** 0.82** Municipality scale economies Municipality scope * Supplier scope * Central government and * association of municipalities State/EU rules and directions Political majority and top -9.34** -9.71** -0.59** -0.54** -0.60** management in municipality R p < 0.10; * p < 0.05; ** p < 0.01; Note: Positive parameter estimates suggest that a greater amount of the independent variables lead to a higher percentage of services produced internally or a higher satisfaction with price, quality and response.

13 Table 4 presents the results from the test of the seven full models, and they corroborate many of the results from Table 3. The percentage of internal production is significantly correlated with Municipality expertise (16.91) and political majority and top management in municipality (-9.34), thus supporting H.3a and H.5a. Volume uncertainty is significantly positively correlated with percentage of internal production (5.88), which supports H.2a. When municipality expertise is eliminated from the analysis, Municipality scope becomes significantly positively related to percentage of internal production (7.44) supporting H.4b. Asset specificity * technological uncertainty is significantly negatively related to satisfaction with quality and responsiveness of external suppliers, thus supporting H.1d. Technological uncertainty is significantly negatively related to all internal performance variables, and thus only part of H.2b is supported. The two variables for Supplier expertise are significantly positively correlated with most of the external performance measures, and thus H.3d receives support. Supporting H.5b and the institutional theory political majority and top management in municipality is significantly negatively related to satisfaction with quality from external suppliers. However, Central government and the Association of municipalities is positively significantly related to performance of external suppliers, which is the opposite of H.5b. CONCLUSION AND DISCUSSION The results indicate that decision makers in Danish municipalities are guided by resource-based and neoclassical economic models when making boundary choices, but performance is also affected by market failure, technological uncertainty, and performance uncertainty. The results indicate that the expectations of the political majority in the municipalities and top management pressure to use private suppliers are related negatively to the performance of both internal and external service production. Furthermore, the more the central government and the association of municipalities expect that the municipalities use private suppliers, the higher the performance. This result points in the opposite direction of H.5b, and one explanation may be that the central government and the Association of municipalities push for greater use of private suppliers because they have registered that satisfaction with external suppliers is relatively high. This explanation suggests that high performance affects the institutional pressure, and thus it reverses the initial hypothesis. Although future research may focus on improving the measures of the variables, a development of theories and models seems needed. This may imply a closer look at capabilities, the institutional setting (Villadsen, Hansen & Mols 2007), plural governance (Parmigiani 2007, Heide 2003, Mols 2000, 2007) and the dynamics of the choice process, for example greater emphasis on the strategic actions of institutions (Knights, 1992) and service providers.

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