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  

Michael G. Jacobides

London Business School

Lorin M. Hitt

University of Pennsylvania - Operations & Information Management Department

Date Written: May 16, 2005

Abstract

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

Jacobides, Michael G. and Hitt, Lorin M., Losing Sight of the Forest for the Trees? Productive Capabilities and Gains From Trade as Drivers of Vertical Scope (May 16, 2005). LBS Digital Transformations Paper No. 2004/04. Available at SSRN: https://ssrn.com/abstract=596041 or http://dx.doi.org/10.2139/ssrn.596041

Michael G. Jacobides (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 20 7706 6725 (Phone)
+44 20 7724 7875 (Fax)

HOME PAGE: http://faculty.london.edu/mjacobides/

Lorin M. Hitt

University of Pennsylvania - Operations & Information Management Department ( email )

571 Jon M. Huntsman Hall
Philadelphia, PA 19104
United States
215-898-7730 (Phone)
215-898-3664 (Fax)

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