A Capabilities Perspective on the Evolution of Firm Boundaries: A Comparative Case Example from the Portuguese Moulds Industry*

ABSTRACT The issue of vertical firm boundaries continues to attract interest both for economics and management research. The transaction cost economics approach, emphasizing transaction‐specific assets and opportunism in order to explain discrete ‘make‐or‐buy’ decisions, dominates the literature. Nevertheless, alternative perspectives, developed under the guise of the capabilities, competence or knowledge‐based theories of the firm, have gained attention recently. They focus on the evolutionary dynamics of boundaries in the context of the division of labour among firms in an industry and on what is to be divided and co‐ordinated – i.e. productive knowledge. The conceptual links between this line of research, which some refer to as neo‐Marshallian, and the Industrial Networks approach are explored in this paper. The paper emphasizes both a vision of firms as sets of direct and indirect capabilities, developed and combined in different ways over time, and the connectedness between inter‐firm relationships. The discussion is illustrated with the cases of two firms, which are contrasted in terms of the dynamic evolution of their boundaries. The analysis made supports the argument that firms’ vertical boundaries reflect their relationships with specific counterparts and the way they address through time the division and integration of knowledge through the configuration of direct and indirect, counterpart specific, capabilities.     

Vertical integration and innovative performance: The effects of external knowledge sourcing modes

We set out in this study to analyze the impact of vertical integration on the innovative performance of a firm and to explore the interaction between vertical integration and different modes of external knowledge sourcing. Our empirical results reveal an initial increase in the effect of vertical integration on innovative performance up to a certain level of integration, although this is subsequently followed by a decline; that is, the relationship is characterized by an inverted U-shape. The results further reveal that external knowledge sourcing is positively related to the innovative performance of a firm, albeit with a negative interaction with the level of vertical integration. In other words, firms with higher levels of vertical integration may be faced with barriers to the acquisition of external knowledge. Our findings suggest that firms should be cautious in their pursuit of a strategy of vertical integration, given the non-monotonic impact on innovative performance, whilst an increase in the level of vertical integration is also likely to diminish the effectiveness of the external knowledge sourcing.     

Endogenous vertical structure and trade policy in an import-competing market

We examine the endogenous determination of a vertical market in an import-competing market with import tariff. We show that if firms commit to vertical organization before the government's commitment to trade policy, the home and foreign firms choose vertical separation and vertical integration, respectively, at equilibrium under Bertrand competition. Under Cournot competition, the subgame perfect Nash equilibrium entails both firms separating their retailers. Comparing profits between Bertrand competition to Cournot competition, we find that upstream manufacturer's profit can be higher under Bertrand competition with integration than under Cournot competition with separation when comparing foreign upstream manufacturer's profit.     

Revisiting the Emergence of the Modern Business Enterprise: Entrepreneurship and the Singer Global Distribution System

abstract    This paper approaches the question of why entrepreneurial firms exist from a broad business historical perspective. It observes that the original development of the modern business enterprise was very strongly associated with entrepreneurial innovation rather than an extension of managerial routine. The widely-used theory of the entrepreneur as a specialist in judgmental decision making is applied to the particular point in time when entrepreneurs had to develop novel organizational designs in what Chandler described as the prelude to the 'managerial revolution'. The paper illustrates how the theory of entrepreneurship then best explains the rise of the modern corporation by focusing on the case study of vertical integration par excellence , Singer.     

Vertical integration and first-mover advantages in environmental taxes

This paper analyzes whether vertical integration between firms and suppliers encourages governments to behave as leaders in environmental policies. To study this issue, we consider transboundary pollution and two countries, with one firm in each country. We find that whether governments prefer to be leaders or followers in environmental taxes depends on two factors: whether firms are vertically integrated or not and the degree to which environmental pollution spills over to trading partners. When this overspill takes an intermediate value, taxes are set sequentially under vertical integration, but they are set simultaneously without it.     

Capability-based governance patterns over the product life-cycle: an agent-based model

In recent literature, there is disagreement over the temporal pattern of vertical governance of firms over the product life-cycle. We use a novel neo-Schumpeterian agent-based simulation model to investigate emerging patterns of vertical governance for different levels of imitability and substitutability of capabilities. We find that, in the mature phase of the product life-cycle, firms generally prefer vertical specialization. However, in the early phase, imitability and substitutability, in interplay, determine the governance form preferred. High imitability frustrates appropriation and thereby discourages integration for synergistic advantages. However, firms need not vertically specialize: under low substitutability, incompatibilities reduce the advantages of specialization. When both substitutability and imitability are low, firms can appropriate the value of their inventions and there is no combinatorial advantage of specialization, so firms predominantly integrate. If substitutability is high and imitability is low, the combinatorial advantage of specialization balances with the synergistic advantage of integration.     

供应链管理下的企业纵向边界

在阐述交易成本理论对企业纵向边界的解释的基础上,指出供应链管理影响资产专用性、不确定性和交易频率,降低了供应链上企业的交易成本,使企业纵向边界趋于缩小。然后针对企业如何结合核心能力理论进行重组提出一些建议。     

Vertical integration and disruptive cross‐market R&D

We study how vertical market structure affects the incentives of suppliers and customers to develop a new input that will enable the innovator to replace the incumbent supplier. In a vertical setting with an incumbent monopoly upstream supplier and two downstream firms, we show that vertical integration reduces the R&D incentives of the integrated parties, but increases that of the nonintegrated downstream rival. Strategic vertical integration may occur whereby the upstream incumbent integrates with a downstream firm to discourage or even preempt downstream disruptive R&D. Depending on the R&D costs, vertical integration may lower the social rate of innovation.     

Vertical Foreclosure, Technological Choice, and Entry on the Intermediate Market

This paper analyzes the profitability of vertical integration for an upstream monopoly facing a potential competitor. We show that it depends on the technology used by the firm when it integrates. We distinguish two types of technologies: standard technologies, used by nonintegrated firms, and nonstandard technologies, reserved for integrated firms and implying the complete foreclosure of nonintegrated firms. Vertical integration with the adoption of a nonstandard technology dominates vertical integration with the adoption of a standard technology and is profitable, as long as the degree of competition in the downstream industry is sufficiently low.     

Vertical Foreclosure, Technological Choice, and Entry on the Intermediate Market

This paper analyzes the profitability of vertical integration for an upstream monopoly facing a potential competitor. We show that it depends on the technology used by the firm when it integrates. We distinguish two types of technologies: standard technologies, used by nonintegrated firms, and nonstandard technologies, reserved for integrated firms and implying the complete foreclosure of nonintegrated firms. Vertical integration with the adoption of a nonstandard technology dominates vertical integration with the adoption of a standard technology and is profitable, as long as the degree of competition in the downstream industry is sufficiently low.     

Vertical Integration and Firm Productivity

This paper uses three cross‐industry datasets from China and other developing countries to study the effect of vertical integration on firm productivity. Our findings suggest that vertical integration has a negative impact on productivity, in contrast to recent studies based on U.S. firms. We argue that in settings with poor corporate governance, vertical integration reduces firm productivity because it enables inefficient rent‐seeking by insiders.     

Fostering product innovation in industry networks: the mediating role of knowledge integration

The locus of innovation has shifted from single entrepreneurial firms to groups of networked firms. Inter-organizational cooperation rather than competition to exploit the value of knowledge through new product innovation lies at the heart of the knowledge-based economy. This paper focuses on the phenomenon of network product innovation and the holistic integration of distributed knowledge across organizational boundaries to foster production innovation. A new construct, knowledge integration, is found to have a strong positive impact on new product performance. Resource complementarity, market orientation, and information sharing are three antecedents that positively affect knowledge integration across organizational boundaries. Survey data also suggest that knowledge integration serves as a mediator between the three antecedents and product innovation performance. Managerial implications and future research directions are discussed.     

Foreclosure with Incomplete Information

We investigate the robustness of the new foreclosure doctrine and its associated welfare implications to the introduction of incomplete information. In particular, we let the upstream firm's marginal cost be private information, unknown to the downstream firms. The previous literature has argued that vertical integration is harmful because it allows an upstream monopolist to limit output to monopoly levels, whereas a disintegrated structure will "over-sell," producing more in equilibrium. By contrast, we find that with incomplete information, high-cost firms will often "under-sell" in equilibrium, that is, supply less than their monopoly output. Low-cost firms continue to over-sell, so all types of firms have a reason to integrate downstream, but this is socially harmful only for low-cost types. For high-cost firms vertical integration can be Pareto-improving, resulting in higher output, profits, and consumer surplus.     

Option Contracts and Vertical Foreclosure

A model of vertical integration is studied. Upstream firms sell differentiated inputs; downstream firms bundle them to make final products. Downstream products are sold as option contracts, which allow consumers to choose from a set of commodities at predetermined prices. The model is illustrated by examples in telecommunication and health markets. Equilibria of the integration game must result in upstream input foreclosure and downstream monopolization. Consumers may or may not benefit from integration.     

The impact of supply-side electronic integration on customer service performance

Although information technologies have been expected to directly enhance firm performance in specific value chain activities (e.g., supplier performance or customer service performance), their advanced capabilities offer the promise of organizational integration and spill-over benefits. Enterprise systems provide firms with platforms for electronically integrating their supplier and demand chain activities. Spill-over benefits refer to the impacts that occur when IT investments in one organizational domain benefit performance in a different value chain side of the firm. Supply-side electronic integration (SEI) refers to the use of electronic means to integrate the exchange of information and transactions with suppliers through enterprise systems. In our research, we examine whether SEI generates spill-over effects on customer service performance, over and beyond firms’ direct investments in customer-side digitization. We also examine whether structural attributes of the firm (e.g., vertical integration, diversification, and centralization) moderate the effects of supply-side electronic integration on customer service performance. Our analysis of a secondary dataset of InformationWeek 500 firms shows that SEI helps firms realize cost-savings in their customer service performance, especially if they are less vertically integrated. In addition, SEI investments help diversified and centralized firms achieve cross-selling with their customers. We also find that SEI is more likely to help decentralized and diversified firms achieve customization in their customer service activities. These results suggest that SEI helps firms achieve twin goals in customer service: cost reduction and revenue expansion. Overall, our research reveals how supply-side electronic integration could generate benefits in customer service performance in firms.     

United we stand,divided we fall? Clustered firms’ relationships after the 2008 crisis

Abstract

Research on clusters or industrial districts within various schools of thought focuses on the relationships between clustered firms. We observed that the territory can produce sources of advantage, but also disadvantages, for firms. Using an exploratory and qualitative approach, the aim of this work is to determine what happened in the Spanish ceramic tile industrial district firms’ relationships after the 2008 crisis. The analysis has been performed in three of the dimensions in which these connections can take place: cooperation – horizontal and vertical cooperation, knowledge transfer and supporting institutions, along with innovation as a measure of performance. In order to examine these shifts, members of the firms and institutions in the cluster were interviewed, resulting in eight propositions for changes that may take place when the competition is intensified within a cluster, suggesting an analytical framework that could be tested in future research.     

Locational Choices of Firms and Decentralized Environmental Policy with Various Instruments

Suppose there exists a federation with a given number of mobile firms generating waste emissions in the jurisdiction in which they locate. This paper demonstrates that if jurisdictions use emission taxes or marketable emission rights to control pollution within their boundaries and distribute the revenues captured by these instruments in a socially efficient way, firms locate efficiently, taking their pollution externalities into account. Decentralized environmental policy relying on direct controls, however, prevents locational efficiency of mobile firms. Furthermore, if jurisdictions are small, decentralized environmental policy with emission taxes and marketable pollution rights also support an efficient environmental quality, while a policy using direct controls sets too high emission standards.     

The impact of competition on vertical integration: The role of technological niche width

Despite there being numerous studies exploring the relationship between competition and vertical integration, the empirical findings regarding the nature of this relationship are still unclear. The current study suggests that technological niche width mediates the relationship between competition and vertical integration. It also suggests that technological niche width and vertical integration play a complementary role in enhancing firm performance. These arguments have found empirical support in the examination of the U.S. hybrid electric vehicle market from 2008 to 2016. In so doing, this study provides an opportunity to better understand the relationship between competition, vertical integration, and technological niche width. In addition, it explains how firms can effectively manage fierce competition and achieve the goal of superior performance through strategic decisions regarding vertical integration and technological niche width.     

Vertical Integration, Foreclosure, and profits in the Presence of Double Marginalization

Whether vertical integration between a downstream oligopolist and an upstream oligopolist is profitable for an integrated pair of firms is shown to depend on whether one means by this that profits increase no matter what other firms do, that all integrated firms are better off when all firms are integrated than when none are, or simply that no downstream-upstream pair of firms has an incentive to deviate from a situation where all firms are integrated. It is also shown to depend on the number of firms in each oligopoly and on the type of interaction that is assumed between firms that are integrated and firms that are not. In particular, it is shown that if no restriction is put on trade between integrated and nonintegrated firms, integrated firms may continue to purchase inputs from the nonintegrated upstream firms, with the goal of raising their downstream rivals' costs. Furthermore, even though firms are identical, asymmetric equilibria, where integrated and nonintegrated firms coexist, may actually arise as an outcome of the integration game.     

Vertical integration as a remedy for imbalances in the ‘Porterian’ value system. The Dutch financial securities industry at the beginning of the 20th century

The way of accounting for vertical integration, of this paper is based on the ‘Porterian’ value system and focuses on the relation between the creation and appropriation of value. The essence of a value system is that at each stage in the system value is created and added to the value created at previous stages. We propose that firms which are unable to appropriate the value they create at the stage they currently inhabit, would find it advantageous to integrate vertically towards stages offering a more attractive relation between value appropriation and value creation. This argument will be illustrated here by the case of a large Dutch bank that integrated vertically towards securities trading.