Firm Size Effects on Vertical Boundaries

Abstract

Firms vertically integrate to avoid dependence on external providers/clients. At the same time, vertical integration offers the possibility to exploit existing capabilities among similar stages and pursue flexibility. This article attempts to analyze how firm size affects these vertical integration drivers, proposing a model and testing it in 155 firms. For all firms, the decision to vertically integrate is a trade-off; firms exchange greater flexibility for the security of lower opportunism and better use of their own capabilities. Results indicate that the impact of vertical integration is more noticeable in small firms than in large ones. As firms grow in size, they are less likely to worry about staying flexible and instead focus more on leveraging capabilities along the value chain.

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