Research Paper Number

12/2008

Document Type

Article

Publication Date

2008

Keywords

assurance; compliance; enforcement infrastructure; global commerce; quasi-regulatory standards; standardization; third-party inspectors

Abstract

In this article we examine the rapid emergence and expansion of standardized product and process frameworks and a private-sector compliance and enforcement infrastructure that we believe may increasingly be providing a substitute for public and legal regulatory infrastructure in global commerce. This infrastructure is provided by a proliferation of performance codes and standards, many of which define acceptable social and environmental behavior, and a rapidly-growing number of privately-trained and authorized inspectors and certifiers that we call the third-party assurance industry. We offer reasons for this development, evidence of its scope and scale, and then describe the phenomenon in more detail by examining supply chain arrangements in two industries, food products and apparel, where the use of third-party standards and assurance services has expanded especially rapidly. We conclude with a discussion of the implications for the "make or buy" decision at the core of the theory of the firm. We argue that as quasi-regulatory standards are developed within various industries, and as performance to these standards can be systematically evaluated using third-party inspectors and certifiers, the costs of moving production outside of vertical firm hierarchies drop. We believe this may be an important factor in accelerating the shift to outsourcing that has been observed over the last two decades.

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