The Make-or-Buy Decision Revisited

Abstract

This chapter builds on Klein (2005) to provide an updated literature review on make-or-buy decisions incorporating the most recent theories, methods, and data sources used and considering newer phenomena related to vertical boundaries, as well as sketching out some future directions of this literature. After summarizing the most common explanations for make-versus-buy we discuss methodological challenges including data, measurement, and estimation techniques then review empirical findings on component procurement, the use of contracts and contractual design, and newer organizational forms such as platforms. We then discuss ongoing challenges and implications for future work. While the literature on make-or-buy decisions has grown and diversified over the last twenty years, the core insights of the transaction cost approach and its basic explanatory power in helping us make sense of vertical boundaries remain the same.

Keywords: vertical integration, outsourcing, supply chains, transaction costs, firm boundaries, organizational structure

JEL Classification: L14, L23, L24, M55