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Determinants of Firm Boundaries: Empirical Analysis of the Japanese Auto Industry from 1984 to 2002

In: Organizational Innovation and Firm Performance

Author

Listed:
  • Sadao Nagaoka
  • Akira Takeishi
  • Yoshihisa Noro

Abstract

We 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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Suggested Citation

  • Sadao Nagaoka & Akira Takeishi & Yoshihisa Noro, 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.
  • Handle: RePEc:nbr:nberch:12173
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    References listed on IDEAS

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    1. Patrick Bajari & Steven Tadelis, 1999. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," Working Papers 99029, Stanford University, Department of Economics.
    2. Kirk Monteverde & David J. Teece, 1982. "Supplier Switching Costs and Vertical Integration in the Automobile Industry," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 206-213, Spring.
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    Cited by:

    1. NISHITATENO Shuhei, 2015. "Market Structure and Entry: Evidence from the intermediate goods market," Discussion papers 15081, Research Institute of Economy, Trade and Industry (RIETI).

    More about this item

    JEL classification:

    • 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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