This paper examines the diffusion of transfer pricing as an innovation in a government trading enterprise (GTE) as it moved from protected monopolistic status to commercialization. Using data from semi-structured interviews and documentation, the paper draws on theories of transfer pricing choice and diffusion of innovation to analyse and explain events surrounding the introduction, abandonment and reintroduction of transfer pricing in the case organization over the ten-year period from 1991 to 2000. The study demonstrates the importance of multiple theories and perspectives in understanding how and why management accounting innovations diffuse or not, as well as the importance of focusing on the secondary stage of innovation adoption and on organizational values, norms and past experiences as they affect secondary adoption. The study also provides support for the role of transfer pricing as an accounting mechanism to effect cultural and strategic change in organizations and for the reciprocal relationship between transfer pricing and organizational strategy over time. © 2003 Elsevier Science Ltd. All rights reserved.
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