Kirk
Monteverde &
David Teece -
1982

 Authored by:
 Kirk Monteverde (Stanford University)
 David J. Teece (Stanford University)
 Published:
 Spring 1982 by ‘The Bell Journal of Economics’ (now ‘RAND Journal of
Economics’)
 1995 in The Legacy of Ronald Coase in Economic Analysis (S. Medema)
 1995 in Transaction Cost Economics, Volume II: Policy and Applications
(O. Williamson & S. Masten)
 1996 in Case Studies in Contracting and Organization (S. Masten)
 1998 in Economic Performance and the Theory of the Firm: The Selected
Papers of David J. Teece, Volume One
 2004 in Modes of Organization in the New Institutional Economics
(C. Menard)
 2005 in Strategic Management (J. Birkinshaw)

 Transactions Cost Theory and Vertical Integration
 Production is internally organized when external transaction costs exceed those of internal transaction costs (Coase)
 Market Imperfection(s)
 ‘Know-how’ (more than a book of blue-prints)
 Costs associated with transferring (production) ‘know -how’
 Theories tested using data from U.S. automobile manufacturers General Motors Company and Ford Motor
Company

 “Assemblers will vertically integrate when the production process… generates specialized, non -patentable know -how”
 Why?
 Ex post information sharing
 Generation of high switching costs
 Knowledge based rather than financial based
 Possibility of opportunistic re-contracting (dependence on supplier)
 Risk of economic rent appropriation due to transaction -specific know-how (dependence on supplier)

 Dependent Variable
 113 automotive components coded in-house / contracted
 Extent of vertical integration (looked for 80% in-house)
 Independent Variables
 Cost of component development (applications engineering)
 Component specificity (GMC vs. FMC vs. generic)
 Firm identity (GMC & FMC)
 Systems effects (or ‘component effect on the system’)

 Engineering
 1-10 scale for engineering effort
 Specificity
 1 = firm specific component; 0 = otherwise
 Company
 1 = GMC; 0 = FMC
 Engine (engine and emissions)
 Chassis (chassis, transmission, steering)
 Ventilation (ventilation)
 Electrical (electrical)
 Body (body, fuel tank, cap)

 ‘Engineering’ (component development effort) is positively related to vertical integration
 ‘Specificity’ is statistically significant
 “Only components specific to a single assembler [firm] will be candidates for vertical integration”
 Individually (except ‘Electrical’), no category indicated a significant relationship with vertical integration
 All five, however, taken together showed significance in the Probit model

 “GM and Ford are more likely to bring component design and manufacturing in-house if relying on suppliers for preproduction development service will provide suppliers with an exploitable advantage.”
 HOWEVER – “[GM] and Ford also have a preference for backward vertical integration when the components are firm -specific and their design must be highly coordinated with other parts of the automobile system”
 This shows an efficiency-driven vertical integration policy which may operate without regard to supplier opportunism
 Findings do not apply in Japan, where “the relationship between the major auto firm and its satellite suppliers is one of total cooperation” ( Ouchi,
1981)