Forest-mill Integration from a Transaction Costs Perspective

How to source wood is a critical strategic question for all sawmills and pulpmills. Owners of these mills can source wood on the open market, through contracts, or from their own forests. This research investigates the extent to which those choices can be explained by transaction cost economics (TCE) theory, which holds that organizations will choose transaction governance forms that minimize transaction costs. The research was based on a survey of sawmills and pulp mills in New Zealand and Sweden. Fractional logit models were developed to explore the factors that may influence the integration decision. Considerable evidence was found for the importance of TCE factors in driving fibre supply integration, especially factors related to asset specificity.