Determinants of Firm Boundaries: Empirical Analysis of the Japanese Auto Industry from 1984 to 2002
AbstractWe have assessed the determinants of the choice of integration, relational contracting (keiretsu sourcing) and market sourcing by seven Japanese automobile manufacturers (OEMs) with respect to 54 components in light of contract economics. Our major findings are the following. First, the specificity and interdependency of a component significantly promotes vertical integration over keiretsu and keiretsu over market, consistent with transaction cost economics. Second, interdependency is a more important consideration for the former choice than for the latter choice, and the reverse is the case for specificity. This suggests that the hold-up risk due to specific investment can be often effectively controlled by a relational contracting based on keiretsu sourcing, while accommodating non-contractible design changes may often require vertical integration. Third, while higher testability of a component makes the effects of specificity significantly smaller, it also promotes the choice of keiretsu sourcing over market sourcing. One interpretation of this last result is that while higher testability improves the contractibility of the component with high specificity, it simultaneously enhances the advantage of keiretsu sourcing since it provides more opportunities for the supplier to explore new information for a collaborative exploitation with an OEM.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13063.
Date of creation: Apr 2007
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Publication status: published as Sadao Nagaoka, Akira Takeishi, Yoshihisa No. "Determinants of firm boundaries: Empirical analysis of the Japanese auto industry from 1984 to 2002," in George Baker, Takeo Hoshi, Hideshi Itoh, and Sadao Nagaoka, organizers, "Organizational Innovation and Firm Performance" Journal of the Japanese and International Economies 22(2), June 2008 (Elsevier Inc.) (2008)
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- Nagaoka, Sadao & Takeishi, Akira & Noro, Yoshihisa, 2008. "Determinants of firm boundaries: Empirical analysis of the Japanese auto industry from 1984 to 2002," Journal of the Japanese and International Economies, Elsevier, vol. 22(2), pages 187-206, June.
- Sadao Nagaoka & Akira Takeishi & Yoshihisa No, 2008. "Determinants of firm boundaries: Empirical analysis of the Japanese auto industry from 1984 to 2002," NBER Chapters, in: Organizational Innovation and Firm Performance, pages 187-206 National Bureau of Economic Research, Inc.
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
- L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
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