An empirical investigation of the transfer process and transfer pricing: A multi-case research design

The objective of this dissertation was to undertake a theoretically based empirical study of factors relevant to the transfer process and transfer pricing. Using a transaction costs framework a theory of the transfer process is developed. A multi-case research design, employing questionnaire and interview responses from corporate and divisional mangers in four large high technology firms, is used to empirically investigate the theory.;I investigate three theoretical propositions. First, whether the extent to which firms constrain subunit managers in the sourcing and selling decisions is positively related to the extent of asset specificity borne by the subunit's counterpart to the internal transfer. Second, whether the weight given to manufacturing costs in setting transfer prices is positively related to the extent of asset specificity borne by the component supplier. Third, whether the extent to which firms constrain subunit managers in the sourcing and selling decisions is positively related to the importance of the component and/or the capability of the component supplier to the firm's competitive strategy.;The findings in general support the theory. First, in general, firms in this study vary the constraints imposed on the sourcing decision of buying divisions and the selling decision of component suppliers consistent with the level of asset specificity reported by their counterparts to internal transfers. An exception to this is that, inconsistent with the theory, a number of component divisions are constrained from selling externally even though the asset specificity reported by related buying divisions is minor. Second, in general, where component operations report a low level of asset specificity market prices are given significant weight and, where component divisions report a high level of asset specificity manufacturing costs are given significant weight. Third, some component operations are regarded as being of greater importance to the firm's competitive strategy because they provide a secure source of advanced technology. For these component operations buying divisions are constrained from sourcing externally and the component divisions are constrained from selling externally when it involves advanced technology.