The Make or Buy Decision Across Borders: A Transaction Cost Economics Approach to Vertical Integration

Offshoring is a prominent business activity of American firms. This paper defines two types of offshoring that they practice. Intra-firm transactions, and arms-length transactions. When moving production abroad American Firms must choose between buying a good over the market, or opening facilities to make the good themselves. This paper outlines the make or buy decision by American firms with a transaction cost economics approach. I hypothesize that country specific effects like market thickness and legal strength influence this decision, as well as industry specific affects like asset specificity. I empirically test this choice using a sample of 163 countries, and 24 different industries through the related party database, which was developed by the US Census Bureau. I find statistically significant results that corroborate my hypothesis and align with the theory in the literature