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Toward an integrated theory of the firm: the interplay between internal organization and vertical integration

Journal

Strategic Management Journal

Subject

Strategy and Entrepreneurship

Publishing details

Strategic Management Journal 2016 Vol 37:12 p 2481-2502

Authors / Editors

Brahm F;Tarzijan J

Biographies

Francisco Brahm

Publication Year

2016

Abstract

Two central issues in strategic management are the determination of a firm's internal delegation and its vertical boundaries. Despite the importance of these issues, there is scant analysis concerning their interaction. Using a comprehensive database of the construction industry, we show that vertical integration positively influences the centralization decision and that the main mechanism driving this relationship is an improvement in the hierarchically coordinated adaptation of firm activities when complexity and uncertainty are high. We also observe that centralization is negatively related to the extent of relational contracts between principals and agents, and positively related to an exogenous increase in the cost of employee layoffs. Our results suggest that managers cannot consider firm boundaries and internal organization to be independent decisions.

Keywords

Centralization; Vertical integration; Adaptation; Agency costs; Prior interactions

Available on ECCH

No


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