Lean manufacturing and the decision to vertically integrate: some empirical evidence from the U.S. automobile industry

The introduction of a new manufacturing system provides a unique opportunity to analyze its effects on the governance structure of vertical relationships. This paper focuses on the possible effects of lean manufacturing on the decision to vertically integrate. Transaction cost theory provides the framework for the analysis. Lean manufacturing is characterized by a high degree of mutual commitment between up- and downstream firms; this is expected to lead to the formation of contractual vertical relationships. This analysis utilizes a new data set obtained directly from U.S. automobile manufacturers. The empirical results strongly suggest that the arrival of lean manufacturing has implications for the decision on governance structure.