Source:
Strategic Management Journal, Volume 26, Issue 13, p.1209-1227 (2005)
Keywords:
productive capabilities;
gains from trade;
transactions cost;
vertical integration
Abstract:
Focusing on proving or disproving transaction cost economics has led to a relative neglect of
some key drivers of vertical scope, such as differences in productive capabilities (as opposed
to capabilities of governance). We consider how productive capability differences can shape
vertical scope through gains from trade. Using highly detailed data from the mortgage banking
industry, we find productive capabilities to be a key determinant of the make-vs.-buy decision. Our
analysis also suggests firms’ attempts to leverage a comparative advantage can also lead to the
use of mixed governance modes (both ‘make’ and ‘buy’ in a particular part of the value chain).
We conclude that the distribution of productive capabilities along the value chain, catalyzed by
transaction costs, ultimately drives vertical scope.
Notes:
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