Firm Survival and Industry Evolution in Vertically Related Populations
Management Science
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Research on industry life cycles suggests that competitive pressures are more severe during the shakeout stage, which could be associated with the emergence of a dominant design, than at other stages. Transaction-cost theory, on the other hand, assumes generally competitive markets and does not address the industry life cycle. It therefore implies that transaction-cost economizing is a superior firm strategy regardless of the stage of the life cycle. This paper seeks to reconcile these two streams of research by investigating whether aligning transactions with governance modes in accordance with transaction-cost prescriptions has a differential effect on firm survival in preshakeout versus shakeout stages of the industry life cycle. Analyzing data from the early U.S. auto industry (1917--1933), we find that while transaction misalignment did not have a significant impact on firm survival during the preshakeout stage or during the period as a whole, it did have a significantly larger negative impact on survival during the shakeout stage than during the preshakeout stage. We also find that the negative effects of misalignment on survival were significantly weaker for larger firms during the shakeout stage. This suggests that applications of transaction-cost theory which assume uniformly severe selection pressures across the industry life cycle and uniform effects of misalignment across firms of different sizes could be misleading. It also suggests that theories of the industry life cycle could usefully take transaction costs into account along with production costs in their analyses of competition over the life cycle.