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

Research output: Contribution to journalArticle

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.

Original languageEnglish (US)
Pages (from-to)559-584
Number of pages26
JournalStrategic Management Journal
Volume13
Issue number8
DOIs
StatePublished - Nov 1992

Keywords

  • Vertical integration
  • agency theory
  • organizational form
  • transaction costs

ASJC Scopus subject areas

  • Business and International Management
  • Strategy and Management

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