Firm Boundaries and the Geography of Digital Work

Will the core functions of the firm shrink as project-based contracting becomes more efficient?

I believe the boundary of the firm will shrink for many activities, but not for all functions. As digital coordination and monitoring technologies improve, firms can manage external contractors more easily than in the past. This reduces the transaction costs that historically encouraged firms to internalize large numbers of employees.

We already see this occurring in industries that rely heavily on project-based work. In media and entertainment workflows, for example, distributed teams of freelancers often collaborate using cloud infrastructure and remote workstations. Firms can host computing resources near specialized labor pools around the world, allowing companies to scale talent quickly to meet project deadlines.

However, the core strategic functions of firms will likely remain internal. Activities such as strategy, intellectual property development, and sensitive data operations require trust, long-term coordination, and protection of proprietary knowledge. These functions are difficult to outsource without increasing risk.

AI may accelerate outsourcing in the future, especially if autonomous systems can coordinate complex projects and monitor work quality. If AI agents eventually perform knowledge work that currently requires human judgment, firms may rely even more on project-based labor markets. However, this level of automation is still uncertain.

Therefore, while the boundary of the firm may shrink, organizations will likely retain core strategic capabilities internally while outsourcing increasingly modular tasks.

Will the multinational enterprise's geographic footprint become more dispersed or more concentrated?

Both outcomes are possible, but I believe digital technologies may lead to the emergence of concentrated global talent hubs rather than complete geographic dispersion.

On one hand, digital coordination allows firms to distribute work globally. Companies can hire talent anywhere and coordinate projects electronically, which reduces the importance of physical location.

However, there are still important constraints in digital infrastructure. Real-time data processing often requires computing resources to be located close to the data that is generated. In many industries, most data is not stored near the computing infrastructure required to process it. This creates natural incentives to cluster computing power and technical expertise in specific regions.

As AI and digital infrastructure expand, we may see the development of new technology hubs in countries that invest heavily in computing capacity and technical talent. India's rapid expansion of cloud and compute infrastructure is one example of this trend.

Rather than complete global dispersion, multinational enterprises may increasingly rely on specialized regional hubs that combine talent, infrastructure, and data access. Over time, these hubs could evolve into major innovation centers that compete with traditional technology regions in wealthier countries.