Retrievability, Productivity, and Firm Boundary Decisions

Productivity, relationship-specificity, and contract enforcement are important factors driving firm boundary decisions. While the extant literature models these factors in the unilateral decision of a multinational parent, this paper incorporates these factors in a buyer-seller relationship where both firms decide whether to integrate the relationship and, if so, who becomes the parent. The setup allows the author to incorporate both firms’ characteristics into the integration decision. The model makes two predictions: (1) the more productive party in a buyer-seller relationship is more likely to become the owner, and (2) firms use integration to compensate for low investment retrievability, measured as the product of relationship-specificity and contract enforcement quality. The predictions are examined and confirmed by a database featuring 293,966 buyer-seller relationships between 95,669 firms in 171 countries/regions. Furthermore, the author estimates industry-level relationship-specificity measures, which were unavailable for non-manufacturing industries and have not been updated since constructed by Nunn (2007)