Make, buy, or ally?—A configurational approach to governance choices in vertical expansion

Abstract

Firms expand vertical boundaries by obtaining ownership of relevant resources. There are three means by which firms can achieve this goal: internal development, mergers and acquisitions (M&As), and equity joint ventures. From transaction cost theory and resource‐based view, this study analyzed how resource characteristics, environmental conditions, and firms' capabilities influence their governance choices by studying 30 cases involving architectural, engineering, and construction firms and employing a fuzzy‐set qualitative comparative analysis method. The findings reveal that all the antecedents jointly influenced firms' governance choices; however, they did so in a way that led to the firms' rejection as opposed to the implementation of one strategy. Firms avoided choosing internal development to circumvent high internal transaction costs or expand into new business rapidly. Firms excluded M&As when the similarity between new and existing resources was high to avoid resource redundancy. When market uncertainty was high, they did so to avoid investment risks. Moreover, when high external transaction costs were evident due to interactions and interdependency between firms and their partners, firms tended to choose a more integrated strategy and excluded equity joint ventures. The research indicates that firms' relational capabilities help them reduce external transaction costs and identify strategies with the lowest efficiency.

Offshoring, hierarchical control and transnational and dynamic environments

“…more safety inventory or production lead time) and additional coordination costs in exploratory MD 62,3 innovation offshoring (Mesquita and Brush, 2008;Vivona et al, 2023). The aforementioned distortions and additional coordination costs can be effectively managed and minimized using high-level hierarchical control, for hierarchy allows MNEs to set up formal communication channels conducive to facilitating the understanding and transfer of different and complex knowledge sets (Cuervo-Cazurra et al, 2018;Lai et al, 2023;Yang et al, 2014).…”

“…The aforementioned distortions and additional coordination costs can be effectively managed and minimized using high-level hierarchical control, for hierarchy allows MNEs to set up formal communication channels conducive to facilitating the understanding and transfer of different and complex knowledge sets (Cuervo-Cazurra et al. , 2018; Lai et al. , 2023; Yang et al.…”

“…Second, the informal organizational socialization process facilitates information and knowledge flows between individuals and groups, contributing to tacit knowledge integration and the resulting creation of new knowledge (Cuervo-Cazurra et al, 2018;Yang et al, 2014). The aforementioned tacit knowledge integration is likely to be smoother and more efficient when long-term relationships within the organization develop a shared common code/language and understanding within the organization via repeated interactions and sufficient communication (Khraishi et al, 2023;Lai et al, 2023). Hence, we predict that:…”

“…Under this circumstance, hierarchy will enable MNEs to quickly provide formal channels supported by a shared language for knowledge transfer (Cuervo-Cazurra et al, 2018;Lai et al, 2023;Yang et al, 2014). It is therefore the least costly governance solution for MNEs to integrate tacit knowledge sets under transnational environments.…”