The Governance Paradox: Preferences of Small Vulnerable Firms in the Homebuilding Industry

Abstract

This article explores the variables that drive small firms to choose quasi–integration as an alternative to vertical integration in situations of high asset frequency. Drawing on transaction cost theory and institutional approaches, we develop and test several hypotheses regarding quasi–integration among homebuilders and land developers in a major Canadian city. Our focus is on the preferences of small, vulnerable firms operating in an environment where quasi–integration has been institutionalized as a trusted form of governance. The findings indicate that the preference for quasi–integration is driven by asset specificity, bargaining power, and opportunistic expectations, supporting a paradoxical view that small, vulnerable firms pursue both efficiency and institutional legitimacy in making governance choices regarding large dominant suppliers.