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Determinants of Firm Boundaries: Empirical Analysis of the Japanese Auto Industry from 1984 to 2002

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  • Sadao Nagaoka
  • Akira Takeishi
  • Yoshihisa Noro

Abstract

We have assessed the determinants of the choice of integration, relational contracting (keiretsu sourcing) and market sourcing by seven Japanese automobile manufacturers (OEMs) with respect to 54 components in light of contract economics. Our major findings are the following. First, the specificity and interdependency of a component significantly promotes vertical integration over keiretsu and keiretsu over market, consistent with transaction cost economics. Second, interdependency is a more important consideration for the former choice than for the latter choice, and the reverse is the case for specificity. This suggests that the hold-up risk due to specific investment can be often effectively controlled by a relational contracting based on keiretsu sourcing, while accommodating non-contractible design changes may often require vertical integration. Third, while higher testability of a component makes the effects of specificity significantly smaller, it also promotes the choice of keiretsu sourcing over market sourcing. One interpretation of this last result is that while higher testability improves the contractibility of the component with high specificity, it simultaneously enhances the advantage of keiretsu sourcing since it provides more opportunities for the supplier to explore new information for a collaborative exploitation with an OEM.

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  • Sadao Nagaoka & Akira Takeishi & Yoshihisa Noro, 2007. "Determinants of Firm Boundaries: Empirical Analysis of the Japanese Auto Industry from 1984 to 2002," NBER Working Papers 13063, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13063
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    References listed on IDEAS

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    Cited by:

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    2. Michal ?indelá? & Barbora Janasová, 2020. "Are accounting services threatened by moving to shared service centers? - An empirical evidence of czech companies," International Journal of Economic Sciences, International Institute of Social and Economic Sciences, vol. 9(2), pages 111-127, December.
    3. NISHITATENO Shuhei, 2015. "Market Structure and Entry: Evidence from the intermediate goods market," Discussion papers 15081, Research Institute of Economy, Trade and Industry (RIETI).
    4. Genjiro Kosaka & Koichi Nakagawa & Seiji Manabe & Mizuki Kobayashi, 2020. "The vertical keiretsu advantage in the era of Westernization in the Japanese automobile industry: investigation from transaction cost economics and a resource-based view," Asian Business & Management, Palgrave Macmillan, vol. 19(1), pages 36-61, February.
    5. Luo, Jianxi, 2018. "Architecture and evolvability of innovation ecosystems," Technological Forecasting and Social Change, Elsevier, vol. 136(C), pages 132-144.

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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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