Explaining vertical integration strategies: market power, transactional attributes and capabilities

Abstract

We analyse vertical boundaries of firms by identifying and comparing industrial, transactional and firm-specific factors in such a way that industrial organization, new institutional economics and the capability-based view are all taken into account. After testing the model in 155 firms in the Spanish meat industry, we observe that only factors associated with both transaction costs and capabilities have a statistical and economic relevance for explaining vertical integration. Firms vertically integrate to create specific investment between stages of the value chain, to internally exploit their pool of knowledge and capacities, and to guarantee quality of inputs and services employed. On the other hand, firms avoid high levels of vertical integration in the presence of high demand changes in order to stay flexible. Finally, providers or clients with market power do not seem to affect vertical boundaries in any consistent way.