Strategic and transaction cost explanations of forward integration into distribution channels

Vertical integration has been defined as the complete internalization of technologically distinct processes by a single firm. The extant literature offers to competing perspectives on vertical integration. The law and economics perspective has focused on the transaction cost aspects of the vertical integration decision. This perspective recommends that the firms should integrate when integration is the least cost alternative.;The strategic perspective, however, takes a more comprehensive approach by considering the strategic objectives of the firms, its bargaining power over the suppliers (distributors), and the life cycle phase of the industry. There are discrepancies in the recommendations of these two perspectives especially with respect to environmental uncertainty and life cycle stage of the product.;This dissertation incorporates the two perspectives in an attempt to examine the discrepancies toward a more complete explanation of the underlying phenomenon. A conceptual model of vertical integration was built by combining the variables from two perspectives. The variables influencing vertical integration were divided into three groups--strategic, transaction specific, and environmental. The model was tested by examining the distribution channel choices of electronic components manufacturing firms. Data was collected through a mail survey of sales/marketing managers. Structural equation modelling and multiple regression analysis were used as the tools to test the hypotheses. The findings indicate that the strategic perspective does a better job of explaining vertical integration than the transaction cost perspective.