Linking Alternative Theories of the Firm - A First Empirical Application to the Liquified Natural Gas Industry

This paper provides an empirical analysis linking two theories of the firm. We analyze corporate strategies in the emerging global market for liquefied natural gas. First, following Porter, we identify three strategic target market positions: chain optimization versus flexibility strategy versus national oil companies (NOCs). Each target market position is supported by an underlying resource profile. Second, following transaction cost economics, we hypothesize that specific investments under uncertainty provide incentives to integrate vertically. We test these economic relationships empirically applying a two-stage procedure. Estimation results show that the three strategic choices of target market position, resource profile, and organizational structure are interrelated. We show that NOCs rely on less idiosyncratic assets than companies following a flexibility strategy and companies following a flexibility strategy rely on less idiosyncratic assets than chain optimizers. An increase in hold-up potential results in a higher probability of a firm organizing transactions within its own hierarchy