Losing Sight of the Forest for the Trees? Productive Capabilities and Gains From Trade as Drivers of Vertical Scope
LBS Digital Transformations Paper No. 2004/04
36 Pages Posted: 27 Sep 2004
Date Written: May 16, 2005
Focusing on proving or disproving Transaction Cost Economics has led to a relative neglect of some key drivers of vertical scope, such as differences in productive capabilities (as opposed to capabilities of governance). We consider how productive capability differences can shape vertical scope through gains from trade. Using highly detailed data from the mortgage banking industry, we find productive capabilities to be a key determinant of the make-vs.-buy decision. Our analysis also suggests firms' attempts to leverage a comparative advantage can also lead to the use of mixed governance modes (both "make" and "buy" in a particular part of the value chain). We conclude that the distribution of productive capabilities along the value chain, catalyzed by transaction costs, ultimately drives vertical scope.
Keywords: Productive Capabilities, Gains from Trade, Transaction Costs, Vertical Integration
JEL Classification: L23,L14,L22,D20,D21,D23,D24,D51,D52,D82,G34
Suggested Citation: Suggested Citation