Ishva Minefee September 11 , 2012

1. An Empirical Examination of Transaction- and Firm-Level Influences on the Vertical Boundaries of the FirmLeiblein, Michael and Miller, Douglas. 2003. Strategic Management Journal Ishva Minefee September 11, 2012

2. Overview of Presentation • Study’s Motivation • Literature Background • Hypotheses and Conceptual Model • Data Sample • Findings • Implications • Discussion Questions

3. 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

4. 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

5. Hypotheses and Conceptual Model

6. 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

7. 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

8. 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).

9. 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).

10. 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?