Internal or External Production and Satisfaction with the Chosen Sourcing in Danish Municipalities: Different Theoretical Explanations

Abstract

There is a large literature on both why local governments and public organisations choose internal or external production of services and what explains the performance of internal and external production. A range of different theories have been used to answer these questions. However, these studies show mixed results. In this study we investigate four theories: transaction cost economics, neoclassical economics, the resource-based view of strategy and institutional theory. Can these theories explain whether local governments choose internal or external production and can they explain the satisfaction with the internal and external production? Do the same variables explain the choice and the satisfaction? Based on a survey of four different service areas in Danish municipalities, it is shown that different theoretical variables explain the choice and satisfaction with the sourcing mode. Internal expertise is strongly related to the choice of internal or external production, whereas most transaction cost variables are unrelated to this choice. However, other variables such as supplier expertise and technological uncertainty are related to satisfaction with service production. The results corroborate the view that different variables are needed for explaining the performance of suppliers and the choice between internal and external suppliers. Furthermore, the results suggest that the study of local governments' sourcing may benefit from integrating theories focusing on internal expertise and markets. Studies may also benefit from integrating economic theories, which assume rationality, with institutional theory emphasising more unreflective and socially determined behaviour.