A multi-case investigation of a theory of the transfer pricing process

Abstract

Drawing on published work by Williamson [Journal of Law and Economics (October 1979) pp. 233–261; The Economic Institutions of Capitalism (New York: Free Press, 1985)], Spicer [Accounting, Organizations and Society (1988) pp. 302–322], and Walker [Interfaces (May–June 1988) pp. 62–73] this paper first develops a theory of the sourcing and transfer pricing process from a transaction costs perspective. The paper then reports on an empirical investigation of the theory using a multi-case research design involving internal transfers in four large, vertically integrated high-technology companies in the electronics industry in the U.S.A. The ways in which these firms manage internal transfers and set transfer prices are found to be positively related to the reported degree of transaction-specific investment (asset specificity) associated with each transfer and to the strategic importance of the transferred component and the nature of the component division's production capabilities. Suggestions are made for future research.