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This paper examines the effects of Information Technology (IT) on the governance structure of vertically-related firms that are applying IT in search of competitive advantage via superior efficiency. By adopting transaction costs and resource-based perspectives on IT and governance, this paper examines how different types of IT systems change the boundary of the firm. It is proposed that a highly relation-specific IT system in inter-firm transactions plays a key role in the resulting inter-firm governance as a mutual sunk-cost commitment, in terms of both less integration (i.e., change in governance mode as a first-order effect) and a smaller number of suppliers (i.e., change within a governance mode as a second-order effect). As a result, this specific IT system can be an alternative governance mode of electronic integration as a substitute for managerial hierarchy. In addition, if a firm-specific IT system improves efficiency of internal transactions complementarily with other firm-specific resources, it can result in a larger scale of operations conducted within the firm as a co-specialized asset. From a strategic management perspective, this paper provides transaction costs and resource-based explanations for the organizational boundary decision and for sustainable competitive advantag