Business Management Dynamics Vol.1, No.1, July 2011, pp.56-65 ©Society for Business and Management Dynamics Integration Decision: A Qualitative Study of Producer-Supplier Relation Reza Azarian 1 Abstract Using qualitative data collection methods, this article investigates the characteristics of the repeated transaction between a plastic manufacturer and its key supplier of injection molds in order to pin down the effects of the properties of this transaction on the firm’s uncertainty perceptions. Furthermore it aims to explore the impact of these perceptions on the firm’s choice of transaction structure. The main finding suggests that – despite the vulnerability stemming from the relatively high level of asset specificity – the firm is rather reluctant to integrate this transaction flow and prefers instead to organize it in form of a long-term, non-contractual, trust-based relation with the supplier. The rationale for this preference is two-folded: On the one hand a backward integration is perceived as a source of increased uncertainty and vulnerability rather as an assuring shield against risks and hazards; on the other hand, the existing and well-functioning relation with the mound supplier performs the most important functions of vertical integration, and it does so without the costs and uncertainties involved in such a move. Keywords: Inter-firm relations, Supply chains, Transaction costs, Trust, Uncertainty, Vertical integration Available online www.bmdynamics.com ISSN: 2047-7031 INTRODUCTION OF THE STUDY Supply chains often involve long-run, hand-in-glove supplier relations, and although this type of inter-firm co-ordination is not new, its importance seems to have grown significantly in the last few decades. There indeed seems to be something of a trend today toward using long-term relations for structuring the flows of transaction among firms, and an ever-growing bulk of transactions in contemporary economy is canalised through this kind of linkages which are rapidly becoming a crucial vehicle of trade. As some observers have pointed out, a new era has dawned in which corporations increasingly shun the previous centralised-type of economic organisation, and instead build up a new, more disintegrated and flexible production apparatus, and organise the inflow of resources and their boundary transactions in form of diversified inter-firm linkages in order to boost the required flexibility and adaptability of the new market conditions (Barlett and Ghoshal 1989; Contractor and Lorange 1988; Piore and Sabel 1984; Porter and Fuller 1986). Boundary transactions characterised by high levels of asset specificity appear to be no exception. On the contrary, a growing body of literature proposes that there are various considerations that may counterbalance the favourable impact of asset specificity on integration decision and instead induce firms to choose to remain separated and prefer to structure their asset-specific transactions through various types of inter-firm co-operative agreements – such as long-term, hand-in-glove relations – rather than integrating these transactions into the organisation of a single firm. As a result, some scholars have recently questioned the validity of the well-known argument that the more specific the asset, the more likely is vertical integration to be optimal (Williamson 1985), suggesting instead that higher levels of asset specificity need not always lead to vertical integration (Carter and Hodgson 2006; David and Han 2004; Dietrich 1994; Gilson et. al. 2009; Heide and John 1990; von Hirschhausen and Neumann 2008; Holmström and Roberts 1998; Kvaløy 2007; Ruzzier 2009; da Silva and Saes 2007; Woodruff 2002). For instance, Kvaløy (2007: 566) goes even further, and in a theoretical elaboration of the issue suggests that the increasing levels of asset specificity may “even favour non-integration” and that asset specificity can become “a blessing for ongoing relationships between firms.” Against this background the present article investigates in detail the flow of repeated transaction between a plastic manufacturing firm and its key supplier of injection moulds. Paying special attention to the role of asset specificity, the article examines the properties of this flow, and explores some of the risks and uncertainties perceived by the plastic producer firm. The main purpose of the conducted study is to provide some first-hand evidence regarding the effects of these perceptions on the firm‟s choice of transaction structure. In what follows the results of this qualitative examination are presented first. The article continues then with a discussion of some the findings, and finally ends with highlighting some of the implications and potential leverages of these findings. 1 Department of Sociology, Stockholm University; Reza.azarian@sociology.su.se