VERTICAL INTEGRATION

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VERTICAL INTEGRATION

• Definition backward and forward integration
• Measurement and extent
• Reasons for integration
• - economic - technical
• - control
• - historical  
• Significance in Irish context
• Disintegration and quasi-integration

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MAKE OR BUY

• The decision of a a firm to make a product
  itself or to buy it from subsidiaries is known as
  a make or buy decision
• - e.g. whether to develop its own source of raw
  materials, provide its own shipping services, or
  operate its own retail site
• Close to make integrated firms can use wholly
  owned subsidiaries
• Close to buy firms can enter into a long-term
  contract
• In between are a range of options
• - tapered integration
• - strategic alliances
• - joint ventures
• - close co-operation

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• Peter Collins

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TRANSACTIONS COSTS

• First devised by Robin Coase in The Nature of
  the Form pointing to the fact that there are
  costs associated with market activity that can be
  removed through internal centralised control
• Transactions costs include the time and expense
  of negotiating, writing and enforcing contracts
  and arise when one or more parties to a
  transaction act opportunistically for private
  gain
• Some transaction cost concepts
• - relationship-specific assets taking at least
  four forms
• site specificity
• physical asset specificity
• dedicated assets
• human asset specificity
• - quasi-rents
• - the hold-up problem

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ECONOMIC ADVANTAGES OF VERTICAL INTEGRATION

• Eliminates transactions costs
• Eliminates excess profit margins  
• Reduces business risks  
• Removes uncertainty due to fixed price contracts
   
• Can take advantage of complementary activities  
• Increased communications and control  
• Development of market  
• Disintegration  
• Effects on Competition  
• Overseas Firms - importance of vertical
  inetgration
• - Tax System and transfer pricing
• - Repatriation of Profits      
•                                                   
    

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