Vertically or Horizontally Running?: A Study of The Organization of Firms in The Fashion Industry Using Transaction Costs Theory

The apparel industry has experienced a substantial change when mass-produced fashion with standardized designs is replaced by trendy and stylish silhouettes, outsourcing is preferable to on-shore production, and orders take only weeks rather than months to complete. The new key to success for apparel firms is to respond quickly to the market and carry trendy but high-quality products. As a result of such transition in the industry, firms need to make adjustments to their organizational structures. This study investigates which government type apparel firms favor and what factors affect their ownership decisions. A spectrum of ownership is presented to illustrate where the common organization of apparel firms locates. Conforming to Transaction Costs theory (Williamson, 1985), this study hypothesizes that brand logos, ethical commitment, and the number of employees have a positive impact on the level of integration; whereas lead time negatively influences firms’ decisions to integrate. Data is collected by conducting surveys as well as using published data on publicly traded companies’ websites. As the level of integration is a discrete variable, I choose to run multinomial logit regressions to examine the relationship between hypothesized variables and level of ownership. Results suggest that brand logos and ethical commitment have significant effects on the integration level. Ethical commitment increases the probability of firms choosing a higher level of integration over nonintegration, which aligns with the theoretical prediction. However, brand logos’ signs indicate mixed influence, requiring further work to conclude its validity