From transaction costs to transaction capacity: Machining firms' dual challenges of vertical- and horizontal integration

Abstract

In the management literature great emphasis has been put on the concept of transaction costs, whereas firms' very capacity to carry out economic transactions has received less attention. Western Norway has numerous small- and medium-sized machining enterprises (SMEs), but these lack capacity to collaborate in complex and large-scale projects with the supplying companies for the operators at the oil fields in the North Sea. As a consequence, this decreases the potential for value creation in the region. In this paper we argue that SMEs in particular face a dual challenge of horizontal- and vertical integration to pursue inter-firm collaboration. Qualitative interview data indicate that the SMEs perceive the managing of human resources to be the greatest challenge in this regard. To overcome the lack of collaborative capacity they report that inter-firm agreements should be relatively formalized through some kind of common ownership, such as joint ventures.