EVIDENCE ON THE ROLE OF FIRM CAPABILITIES IN VERTICAL INTEGRATION DECISIONS

The capabilities approach to the firm postulates that firms vertically integrate activities for which they possess capabilities that are superior to potential suppliers'. The comparative contracting approach, in contrast, emphasizes high asset specificity as leading to vertical integration. This paper compares the two sets of explanations on make-or-buy decisions made by a large firm. It finds that in some cases asset specificity alone is determinant, but in others capabilities and combinations of considerations are explanatory. Analysis of the data also provides insights about the mechanisms through which capabilities operate. In particular, the similarity of the knowledge bases associated with various activities, and the time required to acquire knowledge, appear as important indicators of the importance of capabilities to vertical integration decisions.     

The role of functional conflict in international buyer-seller relationships: Implications for industrial exporters

In their attempt to compete successfully in foreign markets, exporting firms must comprehend the decision-making and attitude of their overseas customers. Yet, there is a noticeable lack of research dealing with the import behavior of the firm. Focusing on import distributor firms trading with export manufacturers of industrial products, this study investigates the role of functional conflict in importer-exporter relationships. Results indicate that functional conflict is related positively to exporter cultural sensitivity and asset specificity and negatively to exporter opportunism. More importantly, importers' future purchase intentions are associated negatively with opportunism and positively with asset specificity and functional conflict. Theoretical and managerial implications of the findings are discussed along with suggestions for future research.     

Toward an integrated theory of the firm: The interplay between internal organization and vertical integration

Research summary : Two central issues in strategic management are the determination of a firm's internal delegation and its vertical boundaries. Despite the importance of these issues, there is scant analysis concerning their interaction. Using a comprehensive database of the construction industry, we show that vertical integration positively influences the centralization decision and that the main mechanism driving this relationship is an improvement in the hierarchically coordinated adaptation of firm activities when complexity and uncertainty are high. We also observe that centralization is negatively related to the extent of relational contracts between principals and agents, and positively related to an exogenous increase in the cost of employee layoffs. Our results suggest that managers cannot consider firm boundaries and internal organization to be independent decisions. Managerial summary : We ask whether a firm's decision about vertically integrating or outsourcing its activities affects the choice of centralizing or delegating its internal decision‐making process. Our statistical analysis shows that firms with more vertical integration tend to centralize the decision‐making process and that firms that outsource more tend to decentralize more. Why? Vertical integration enables the use of centralized authority to coordinate activities that interact intensively. Accordingly, we found that the positive influence of vertical integration on centralization is especially significant in more complex and uncertain environments, when the need for coordination is higher. Thus, our results suggest that managers should choose vertical integration considering its effect on internal decision‐making processes, particularly when coordination is important. Copyright © 2015 John Wiley & Sons, Ltd.     

Conjectures, firm characteristics, and market structure : An empirical assessment

This paper makes use of a unique data set to investigate how firms in the Vancouver, British Columbia retail-gasoline market view their rivals and how consumers in turn view these firms. Own- and rival-price elasticities of demand, conjectural variations, and Lerner indices are estimated for thirteen service stations in a submarket of Vancouver. These variables are then related to firm characteristics such as type of ownership, degree of horizontal and vertical integration, and type of service. In this way, systematic patterns in seller behavior and in buyer attitudes are revealed.     

企业间网络的效率边界:经济组织逻辑的重新审视

企业间网络是一种既不同于市场也不同于企业科层的组织形式，它是一些经过筛选的独立的企业通过正式契约和隐含契约所构成的互相依赖、同担风险的长期合作的交易模式。本文综合交易成本理论以及企业能力理论对影响企业网络边界的因素分别进行了阐释，对资产专用性、企业能力、不确定性等因素对企业边界的影响机制进行了分析。随着资产专用性的逐步提高，在其他条件不变的情况下，交易的治理机制逐步从市场过渡到企业网络，当资产专用性进一步提高时，企业科层将替代企业网络。当企业之间的能力是互补但不相似时，交易将通过企业网络来进行。同时，产品需求的不确定性也将导致企业间网络组织的出现。     

Vertical integration and innovation

Innovation is a driving force for most industries, where it moreover affects many stages of the vertical chain. We study the impact of vertical integration on innovation in an industry where firms need to undertake risky R&D investments at both production and distribution stages. Vertical integration brings better coordination within the integrated firm, which boosts its investment incentive at both upstream and downstream levels. However, it is only mutually beneficial for firms to integrate when both upstream and downstream innovations are important. When innovation is irrelevant at one level, firms favor instead vertical separation. The analysis provides insights for the wave of mergers and R&D outsourcing observed in the pharmaceutical industry and other vertically related industries.     

The role of design method and process technology in stable outsourcing equilibria

We analyze a model of vertical (dis)integration between manufacturing and design in a monopolistically competitive market. Specialized input manufacturers can serve multiple design firms and the manufacturer-designer pairs negotiate a non-binding contract to share input customization cost and production surplus. Hand-collected data on 387 product lines from 118 semiconductor firms are used to predict the firm’s decision to outsource manufacturing. We find that, for instance, the use of design tools that facilitate collaboration and process technologies that facilitate learning are both positively associated with outsourcing, consistent with the model’s prediction.     

Vertical integration and downstream collusion

We investigate the effect of a vertical merger on downstream firms’ ability to collude in a repeated game framework. We show that a vertical merger has two main effects. On the one hand, it increases the total collusive profits, increasing the stakes of collusion. On the other hand, it creates an asymmetry between the integrated firm and the unintegrated competitors. The integrated firm, accessing the input at marginal cost, faces higher profits in the deviation phase and in the non-cooperative equilibrium, which potentially harms collusion. As we show, the optimal collusive profit-sharing agreement takes care of the increased incentive to deviate of the integrated firm, while optimal punishment erases the difficulty related to the asymmetries in the non-cooperative state. As a result, vertical integration generally favors collusion.     

Corporate Headquarters Relocation: Evidence from the Capital Markets

This paper assesses the stock market reaction to announcements of corporate headquarters relocations and examines financial and geographical factors related to wealth effects and factors that influence the decision to relocate corporate headquarters. The results indicate that announcements of relocations are associated with significant positive stock price effects. On average, the stock price of relocating firms increases by 1.29% during the two-day period around the announcement. Abnormal returns are positively related to the availability of labor and negatively related to the cost of living in the new location and the change in employment levels. A logit analysis indicates that the probability of a firm relocating is partially determined by the firm size and the rental expenses/sales ratio. The results also indicate that firm size, the employment/asset ratio levels, and listing in the NYSE/AMEX affect the decision to relocate to a Fortune-ranked city. Finally, firms relocating to Fortune -ranked cities are characterized by a high level of insider ownership relative to firms moving to non-ranked cities.     

M-form organization and firm profitability

Theoretical discussions of internal organization stress the importance of organization for firm success and profitability. The Williamsonian hypothesis that firms organized using M-form should be more profitable than firms organized using U-form or other organizational structures is the focus of empirical testing in this paper. Pairs of firms are observed over two periods of time. In the first period, the principal firm adopts M-form while the control firm is organized with a non-M-form structure. In the second period, the control firm adopts the M-form structure. Using this matched firm technique across a number of industries, we find the adoption of M-form leads to statistically significant increases in return on asset and return on equity measures.     

Insurance and ownership structure in India’s corporate sector

In this study we examine the effect of ownership structure on the decision of Indian firms to purchase property insurance. We find that firms with a high degree of managerial ownership and leverage, plus firms with high growth options, high asset tangibility, and public listing status are more likely to insure their assets than other entities. We also observe that different factors determine the amount of property insurance purchased, in particular, the higher the degree of managerial ownership and indebtedness the less indemnity coverage acquired. Additionally, the younger the firm the greater the amount of insurance purchased. We contend that our results shed light into the strategic risk management behavior of Indian firms and that such insights could be of relevance to various parties, including international and domestic business investors.     

The consequences of voluntary traceability system for supply chain relationships. An application of transaction cost economics

This paper analyses the effects of voluntary traceability on vertical relationships within food supply chains using a transaction cost perspective. The analysis makes reference to the Italian situation where the national standard organization has introduced a private standard for traceability that provides a higher degree of information associated with the individual product than the European mandatory traceability system. A survey was conducted by questionnaire to assess changes in transaction characteristics, costs and governance after the introduction of voluntary traceability. The sample represents all Italian firms applying this standard. Factorial and cluster analyses were applied to find the different reorganizations of transactions. The results highlight an increase in asset specificity and a decrease in the uncertainty level throughout the supply chains. The introduction of voluntary traceability shows increased vertical coordination for firms that previously used oral agreements and variation in transactions conditions for firms using contracts. Instead vertically integrated firms do not reveal any variation in the governance of transactions as they are already internally safeguarded.     

Can systems integration lead to improved performance? The role of strategic alliances

Despite growing research attention to systemic products and systems integration, there is still a dearth of research on the performance benefits that firms can attain from increased systems integration capabilities. We address this research gap using a longitudinal sample of 245 first-tier automotive suppliers and find that an increased systems integration capability positively affects financial performance. By considering the crucial role of manufacturing alliances, we also find evidence that vertical alliances with buyers positively moderate the relationship between systems integration capabilities and performance, while horizontal alliances have a negative moderating effect. These results contribute to the dynamic capabilities literature by providing empirical evidence that systems integration capability is a relevant predictor of firm performance, and expands the current understanding of how system manufacturers should manage their business-to-business (B2B) relationships.     

Market size and vertical integration: Stigler's hypothesis reconsidered

According to Stigler [1951], vertical disintegration should be the typical development in growing industries, vertical integration in declining industries. The basic argument is that firms will spin off production stages subject to increasing returns to scale in response to market growth. This paper re-examines Stigler's hypothesis within an equilibrium model of industrial structure in which the organization of firms is endogenous. Stigler's hypothesis is confirmed when entry into markets is free and firms compete. However, when entry into the intermediate good market is restricted, or intermediate good producers collude, vertical integration increases with market size.     

Technological capabilities and firm performance: The case of small manufacturing firms in Japan

The purpose of this study is to investigate the relationship between technological capabilities and firm performance. We divide technological capabilities into two types—refinement capability, which involves the improvement of the existing asset portfolio, and reconfiguration capability, which involves the restructuring of the asset portfolio through the integration of new assets. The results of an analysis of a sample of 302 small and medium-sized manufacturing firms in Japan suggest that refinement capability relates more positively to operational efficiency than does reconfiguration capability, and that reconfiguration capability relates more positively to strategic performance than does refinement capability. The results also suggest that firms with superior refinement capability tend to possess superior reconfiguration capability. Our findings show that both external and internal factors, such as technological volatility, inter-firm collaboration, and firm age and size, are significantly associated with the level of refinement and reconfiguration capabilities possessed by a firm.

Managerial Style and Firm Value

This study analyzes the effect of managerial style on firm value by partitioning general and administrative (G&A) expenses in the real estate investment trust industry into a nondiscretionary "structural" component associated with the costs of asset and liability management and a discretionary or "style" component. The discretionary component is significantly related to at least one measure of style—specifically, the portfolio focus/diversification of the firm. Gross (project-level) cash flows are invariant to the nondiscretionary or structural component of G&A but are positively related to the style component of G&A. The structural component has a negative impact on share price while the style component has a neutral impact. Therefore, for this industry, creating larger, less-levered firms would result in enhanced value.     

Vertical integration and product differentiation

We study a new channel of downstream rent extraction through vertical integration: competition for integration. Innovative downstream firms create value and profit opportunities through product differentiation, which however affects an upstream monopolist’s incentive to vertically integrate. By playing the downstream firms against each other for integration, the upstream firm can extract even more than the additional profits generated by the downstream firms’ differentiation activities. To preempt rent extraction, the downstream firms may then reduce differentiation, which reduces social welfare. We show that this social cost of vertical integration is more likely to arise in innovative and competitive industries, and that the competition for integration channel of downstream rent extraction is robust to upstream competition.     

The hidden costs of outsourcing: evidence from patent data

Drawing on patent data for approximately 500 firms over 20 years, we advance recent theory on firm boundaries and test these propositions for the first time. We first provide evidence for the existence of knowledge complementarities between vertically related activities in a firm's value chain by showing that firms face increasing (decreasing) performance in conducting downstream activities (i.e., patent litigation) the less (more) they outsource related upstream activities (i.e., patent filing). We then propose and empirically demonstrate that vertical integration benefits through learning differ from vertical outsourcing costs through forgetting. We show that firms can partly offset these hidden outsourcing costs by sourcing similar upstream products from internal and external suppliers. Copyright © 2010 John Wiley & Sons, Ltd.     

Subprime governance: Agency costs in vertically integrated banks and the 2008 mortgage crisis

Research summary: This study uses the 2008 mortgage crisis to demonstrate how the relationship between vertical integration and performance crucially depends on corporate governance. Prior research has argued that the vertical integration of mortgage origination and securitization aligned divisional incentives and improved lending quality. We show that vertical integration improved loan performance only in those firms with strong corporate governance and that this performance‐integration relationship strongly decreases and actually reverses as governance quality decreases. We interpret these findings as suggesting that the additional control afforded by vertical integration can, in the hands of poorly monitored managers, offset gains from aligned divisional incentives. These findings support the view that corporate governance influences the strategic outcomes of a firm, in our case, by influencing the effectiveness of boundary decisions. Managerial summary: One of the unanswered questions of the 2008 mortgage crisis is why some firms produced toxic mortgages and others did not. Many have argued that vertically integrated banks—banks that both originated and securitized mortgages—had incentives to monitor themselves and thereby avoid overaggressive lending and outright fraud. Yet many of the worst lenders, such as Washington Mutual and New Century Financial, were in fact integrated. This study shows that the behavior of these firms critically depended on their corporate governance. We find that poorly monitored executives used their additional control over the integrated businesses to issue low quality loans that supported short‐term growth. Our results suggest that governance is a crucial prerequisite for financial services, particularly for firms whose managers control multiple, interrelated businesses. Copyright © 2015 John Wiley & Sons, Ltd.     

Innovation and integration in the agri-food industry

We deal with the link between innovation and market structure using the empirical example of the Danish agri-food industry. Vertical integration may resolve hold-up problems and here we test for the importance of vertical integration and networks on innovation. We further examine the effects of network relationships on innovation behaviour. We use data from an extensive survey of 444 Danish firms over two years, 2000 and 2005 to estimate a bootstrapped zero-inflated Poisson regression model. The first and most significant result is that organization matters. Further we find that vertical integration as well as contractual arrangements are significant determinants for firms’ innovation behaviour. The direction of integration is important as well. Also, economies of size seem to play an important role. Similarly, the export orientation of the firm is a significant determinant of innovation whereas the sector the firm is operating in is not significant for its innovation behaviour.