JIMS8M: The Journal of Indian Management & Strategy
Year : 2006, Volume : 11, Issue : 4
First page : ( 30) Last page : ( 34)
Print ISSN : 0973-9335. Online ISSN : 0973-9343.

Transaction costs, resource-based and real options views on vertical integration an appraisal

Ansari Valeed Ahmed, Reader

Department of Business Administration, Aligarh Muslim University, Aligarh, 2002 (India).

Abstract

Vertical integration decisions define the level of involvement of a firm in the stages of value chain. There are three views: transaction costs, resource based, and real option approach that offer explanation for the firm's decision to engage in a particular stage of value chain. The transaction costs approach emphasizes the importance of opportunism, resourcebased approach underlines capabilities and real options analysis focuses on flexibility in the boundary decisions of the firm. The paper appraises these three views. It concludes that those considering vertical integration choices should evaluate the relative merits of the three models (Barney 2002). One should use tenets of TCE to guide vertical integration decision when elimination of the threat of possible opportunism is top priority for the firm. The capabilities logic should be dormnant consideration if the value of gaining access to another firm's valuable, rare, costly to imitate resources and capabilities, is high. If uncertainity about future value of investment is high. the importance of flexibility in transaction will be high. In such context, real options logic should take precedence.

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