ABSTRACT
Chapter 3 presented a theoretical account of the interaction of innovation, the distribution of capabilities, and the level of transaction costs in helping to determine the boundaries of the firm. By examining the first four decades of the development of the American automotive industry, this chapter attempts to confront that theory with the historical record. It illustrates how changing patterns of internal and external capabilities and dynamic transaction costs altered firm boundaries in the long run as the industry progressed from its earliest stages to maturity. The auto industry is not, of course, a case that has never been studied before. It is, however, a case that has never been interrogated comprehensively and systematically on the question of vertical integration. Indeed, examples from the early auto industry appear in piecemeal fashion to support seemingly contra-dictory theoretical propositions about vertical integration.54 What is lacking in the literature is a thorough treatment that sorts through both the facts of history and the claims of theory.
