ABSTRACT
Vertical integration refers to the corporate level strategy by which a firm diversifies its activities along the industry value chain, whether by producing its own input or disposing of its own outputs. Vertical integration, as a corporate level strategy, is often one of the first diversification strategies that firms embrace. Vertical integration can be assimilated to a corporate level strategy because it refers to the scope of a firm when it chooses to compete in particular value-adding stages of an industry value chain. Yet vertical integration also constitutes an internalization strategy in transaction cost theory terms, because the firm performs activities itself instead of relying on external suppliers or buyers. Four main theoretical frameworks rationalize a firm's choice to vertically integrate: transaction cost economics, industrial organization economics and market power, the resource based theory and real option theory.
