An Empirical Examination of Transaction- and Firm-level Influences on the Vertical Boundaries of the Firm

A large literature has successfully employed transaction cost economic theory to describe how exchange conditions affect the optimal form of organization. However, this approach has historically not accounted for the influence of firm-specific attributes on the governance decision. This paper develops a model based on insights from transaction cost economics, the resourcebased view, and real options theory to examine how transaction-level characteristics, firmspecific capabilities, and product-market scope influence the governance of production. Empirical evidence derived from analysis of 469 make-or-buy decisions involving 117 semiconductor firms indicates that decisions regarding the governance of production activities are strongly influenced by both transactionand firm-level effects. Copyright  2003 John Wiley & Sons, Ltd.