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Losing sight of the forest for the trees? Productive capabilities and gains from trade as drivers of vertical scope
Author(s) -
Jacobides Michael G.,
Hitt Lorin M.
Publication year - 2005
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.501
Subject(s) - scope (computer science) , transaction cost , leverage (statistics) , industrial organization , corporate governance , business , database transaction , vertical integration , key (lock) , value (mathematics) , economics , comparative advantage , value chain , microeconomics , marketing , computer science , international trade , finance , supply chain , computer security , database , machine learning , programming language
Focusing on proving or disproving transaction cost economics has led to a relative neglect of some key drivers of vertical scope, such as differences in productive capabilities (as opposed to capabilities of governance). We consider how productive capability differences can shape vertical scope through gains from trade. Using highly detailed data from the mortgage banking industry, we find productive capabilities to be a key determinant of the make‐vs.‐buy decision. Our analysis also suggests firms' attempts to leverage a comparative advantage can also lead to the use of mixed governance modes (both ‘make’ and ‘buy’ in a particular part of the value chain). We conclude that the distribution of productive capabilities along the value chain, catalyzed by transaction costs, ultimately drives vertical scope. Copyright © 2005 John Wiley & Sons, Ltd.