Description
Title: What Guides the Decision Between Self-Expansion and Internalization as the Two Processes of Vertical Integration?
Abstract: The two processes that lead to vertical integration—namely, (1) self-expansion of the scope of activities based on internal capabilities and (2) internalization of activities with external capabilities—have not been distinguished in the literature on the subject. However, managers have the option of using internal capabilities or incorporating external capabilities, and in actuality, differentiating between the two is essential. This study aims to distinguish self-expansion from internalization and to systematically explain when they are likely to happen. This study combines transaction cost economics and the apability approach to create a novel vertical integration model. We systematically examined (1) self-expansion and (2) internalization using the model. The findings show that the firm prefers self-expansion to internalization if it is simple to develop the necessary capabilities internally or challenging to acquire them from outside the firm, if the costs of acquiring a firm or business with the necessary capabilities are high, or vice versa. Our model helps people comprehend vertical integration better.
Keywords: vertical integration; self-expansion; internalization; transaction cost economics; capability approach
Paper Quality: SCOPUS / Web of Science Level Research Paper
Subject: Economics
Writer Experience: 20+ Years
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