Organizational Growth of Small Firms: An Outcome of Markets and Hierarchies?

Abstract

The success of small manufacturing firms is premised on their ability to develop alternative organizational strategies. This research, centered in Modena, a province of 600,000 located in the region of Emilia Romagna in north central Italy, demonstrates that when small companies expand through vertical and horizontal integration, they usually create other small firms that they control. This strategy preserves the advantages that Italian small firms enjoy in terms of state support, labor-market flexibility, and organizational efficiencies. Though this organizational form replaces market relations with bureaucratic relations, it bears little resemblance to the markets-versus-hierarchies theory of Oliver Williamson. Small firms integrate vertically and horizontally to insulate themselves from competition, not from the opportunistic practices of buyers and sellers. Indeed, greater reliance by smallfirms on bureaucratic relations is frequently compensated by their increased dependence on market relations through intensified subcontracting.