Configuration of Value Chain Activities: The Effect of Pre-Entry Capabilities, Transaction Hazard and Industry Evolution on the Decision to Internalize

Abstract

We integrate insights from organizational capabilities, organizational economics, and industry evolution to examine the firm’s decisions regarding the organization of activities in a value chain, and test our hypotheses using a near census of US bio-ethanol producers during the 1978-2009 period. We find support for our predictions that transaction hazards, decomposed as either enduring or transient over the stages of industry evolution, are positively associated with the choice to internalize value chain activities. Pre-entry value chain related capabilities result in an increased likelihood of internalization of these activities in the focal industry context, and are additionally associated with a better management of transactions hazard, thus reducing the effect of enduring transaction hazard on the internalization choice. Importantly, we find support for the conjecture that diversifying entrants possess integrative capabilities, causing them to be more likely to internalize value chain activities relative to entrepreneurial startups, and this effect persists across the industry life cycle. Findings of this study contribute to a better understanding of the relationships between capability development, boundary choice and firm evolution.