The choice of organizational form: Vertical financial ownership versus other methods of vertical integration

The choice of organizational form: Vertical financial ownership versus other methods of vertical... Vertical integration is a fundamental corporate strategy of interest to the fields of strategic management and organizational economics. This paper synthesizes theoretical arguments and empirical findings from this literature to identify the underlying advantages and disadvantages of choosing vertical financial ownership relative to vertical contracts. It then suggests that in the absence of agency and transaction costs, vertical financial ownership and vertical contracting are equivalent governance structures for achieving corporate objectives. However, given a world of positive agency and transaction costs, the key theoretic question then becomes predicting when market mechanisms are sufficient, when intermediate forms of vertical contracting become necessary, and when vertical financial ownership becomes the preferred governance structure. The concluding section of the paper provides a framework for making this analysis based on a synthesis of agency and transaction costs perspectives. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Strategic Management Journal Wiley

The choice of organizational form: Vertical financial ownership versus other methods of vertical integration

Strategic Management Journal, Volume 13 (8) – Nov 1, 1992

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Publisher
Wiley
Copyright
Copyright © 1992 John Wiley & Sons, Ltd.
ISSN
0143-2095
eISSN
1097-0266
DOI
10.1002/smj.4250130802
Publisher site
See Article on Publisher Site

Abstract

Vertical integration is a fundamental corporate strategy of interest to the fields of strategic management and organizational economics. This paper synthesizes theoretical arguments and empirical findings from this literature to identify the underlying advantages and disadvantages of choosing vertical financial ownership relative to vertical contracts. It then suggests that in the absence of agency and transaction costs, vertical financial ownership and vertical contracting are equivalent governance structures for achieving corporate objectives. However, given a world of positive agency and transaction costs, the key theoretic question then becomes predicting when market mechanisms are sufficient, when intermediate forms of vertical contracting become necessary, and when vertical financial ownership becomes the preferred governance structure. The concluding section of the paper provides a framework for making this analysis based on a synthesis of agency and transaction costs perspectives.

Journal

Strategic Management JournalWiley

Published: Nov 1, 1992

References

  • Technical change, competition, and vertical integration
    Balakrishnan, Balakrishnan; Wernerfelt, Wernerfelt
  • The use of collateral to enforce debt contracts
    Benjamin, Benjamin
  • Transaction costs and networks
    Blois, Blois
  • Managing markets: Implications for the make‐buy decisions
    Butler, Butler; Carney, Carney
  • Vertical integration in franchise systems: Agency theory and resource explanations
    Carney, Carney; Gedajlovic, Gedajlovic
  • The nature of the firm
    Coase, Coase
  • Factors influencing divestment decision‐making: Evidence from a field study
    Duhaime, Duhaime; Grant, Grant
  • Matching vertical integration strategies to competitive conditions
    Harrigan, Harrigan
  • A transaction costs theory of equity joint ventures
    Hennart, Hennart
  • Multilectic methods of inquiry
    Huff, Huff
  • On strategic networks
    Jarillo, Jarillo
  • Comments on 'transaction costs and networks
    Jarillo, Jarillo
  • Transaction cost analysis of strategy‐structure choice
    Jones, Jones; Hill, Hill
  • Joint ventures: Theoretical and empirical perspectives
    Kogut, Kogut
  • Strategic groups: Theory, research and taxonomy
    McGee, McGee; Thomas, Thomas
  • Organizational boundaries and economic performance: An empirical study of entrepreneurial computer firms
    Mosakowski, Mosakowski
  • Research on corporate diversification: A synthesis
    Ramanujam, Ramanujam; Varadarajan, Varadarajan
  • Power plays: Regulation, diversification, and backward integration in the electric utility industry
    Russo, Russo
  • A hierarchical theory of the firm
    Sandler, Sandler; Cauley, Cauley
  • The influence of secondary production on industry definition in the extended vertical market model
    Stiles, Stiles
  • Networks, between markets and hierarchies
    Thorelli, Thorelli

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