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

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  • Lihong Qian

    (School of Business Administration, Portland State University, Portland, Oregon 97207)

  • Rajshree Agarwal

    (Department of Management and Organization, Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742)

  • Glenn Hoetker

    (Department of Management, W. P. Carey School of Business, Arizona State University, Tempe, Arizona 85287)

Abstract

We integrate insights from organizational capabilities, organizational economics, and industry evolution to examine industry entrants' boundary choices about value chain activities and test hypotheses in 1978–2009 data from a sample of U.S. bioethanol producers. 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 experience in an activity increases the likelihood of its internalization and reduces the effect of enduring transaction hazards on the internalization choice. Importantly, we also distinguish between firm- and founder-level pre-entry capabilities (that is, the capabilities of firms versus those of founders). Diversifying entrants with firm-level integrative capabilities are more likely to internalize value chain activities than start-ups, and this effect persists over the industry's life cycle. The relationship between pre-entry experience with an activity and the likelihood of internalizing it is also stronger for diversifying entrants. Findings improve understanding of the relationships among capability development, boundary choice, and industry evolution.

Suggested Citation

  • Lihong Qian & Rajshree Agarwal & Glenn Hoetker, 2012. "Configuration of Value Chain Activities: The Effect of Pre-Entry Capabilities, Transaction Hazards, and Industry Evolution on Decisions to Internalize," Organization Science, INFORMS, vol. 23(5), pages 1330-1349, October.
    • Handle: RePEc:inm:ororsc:v:23:y:2012:i:5:p:1330-1349
    DOI: 10.1287/orsc.1110.0682
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