Make, Buy, or Ally? — A Configurational Approach to Governance Choices in Vertical Expansion

Firms expand their 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&A), and equity joint venture. From a transaction cost economics and resource-based view perspective, this study analyzed how resource characteristics, environmental conditions, and firms’ capabilities influence their governance choices. By studying 30 cases involving architectural, engineering, and construction (AEC) firms and employing a fuzzy-set qualitative comparative analysis (fs-QCA) method, the findings of this study reveal that firms did not use configurational approaches when choosing to adopt one strategy over another. Rather, firms avoid to choose certain mean in a configurational approach. All the antecedents jointly influenced firms’ governance choices; however, they did so in a way that led to the firms’ rejection as opposed to implementation of one strategy. The results indicated that firms’ relational capabilities could help them handle external transaction costs and help them identify and exclude strategies with the lowest efficiency. The findings revealed that firms did not choose internal development to avoid high internal transaction costs or expand rapidly into new business. Firms excluded M&A 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 venture.