Download - Ishva Minefee September 11 , 2012
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An Empirical Examination of Transaction- and Firm-Level Influences on the
Vertical Boundaries of the Firm
Leiblein, Michael and Miller, Douglas. 2003. Strategic Management Journal
Ishva Minefee
September 11, 2012
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Overview of Presentation
• Study’s Motivation
• Literature Background
• Hypotheses and Conceptual Model
• Data Sample
• Findings
• Implications
• Discussion Questions
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Study’s Motivation
• Foundational question: Why do firms vertically integrate?
• Transaction cost economics (TCE) accounts for significant amount of previous research, and suggests ‘that the optimal form of organization is primarily a function of the characteristics underlying a given exchange’ (p. 839)
• This research article however, maintains that TCE is limited in its explanation of vertical integration
• The literature typically does not account for firm-specific attributes as drivers of vertical integration
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Literature Background
• Transaction Cost Economics• Vertical boundary decisions are likely to be influenced by
‘characteristics associated with the efficiency of the chosen form of organization’ (Williamson, 1975; Klein et al., 1978)
• Neglects capabilities
• Resource-based view (RBV)• Firm-specific governance decisions may arise from prior
commitments, exchange relationships, and capability differentials
• Real options theory• Explains trade-off between efficiency of competing forms of
organization and the value to operate flexibly in an uncertain future
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Hypotheses and Conceptual Model
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Data Sample
• Sample
• Production activities of 117 global integrated circuit manufacturers (ICE, 1997)
• Non-random
• Unit of analysis: production decision (total of 469)• 358 – internal production• 111 – external production-sourcing relationships
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Variables
• Dependent Variable• Production decision
(Make versus Buy)
• Independent Variables
• Asset specificity• Demand uncertainty• Fabrication experience• Sourcing experiencing• Diversification strategy
• Control Variables
• Ex Ante small numbers• Firm size• Firm tenure• Geographic region• Year
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Findings• The interaction of high asset specificity (measured by exchange involving
analog, memory, or customized ASIC products), and high demand uncertainty (measured by the variance surrounding a time trend in the demand for similar products) increase the likelihood of vertical integration (TCE hypothesis 2b is corroborated).
• A firm’s past experiences (embodied in past production expertise using the relevant process technology) increase the likelihood of vertical integration (RBV hypothesis 3 is corroborated).
• A firm’s past experiences (measured by the number of prior outsourcing relationships over the past 5 years) reduce the likelihood of vertical integration (RBV hypothesis 4 is corroborated).
• Firms with higher levels of diversification across product-markets increase the likelihood of vertical integration (Real options hypothesis 5 is corroborated).
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Research Limitations
• Model Specification Problems• Are there any omitted variables based on:• Transaction cost economics• Resource-based view; and/or• Real Options
• Measurement Problems• Which measurement do you regard as the weakest in the paper?• For example, is the asset specificity a good one?• In theory, firm-level specificity would lead to small numbers
by definition, and yet the correlation between these two variables is very slightly negative (in Table 1).
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Research Limitations
• Endogeneity/Econometric Identification Concerns
• Potential for self-selection bias:
• Heckman (1978) correction• Inverse Mills ratio used in two-stage Probit analysis
• Potential simultaneity problem between dependent and independent variables:
• Instrumental variables via a Hausman test
• Any other issues concerning alternative stories of causality?