Week 14_Kapoor and Adner (2012)_Xinyu

What Firms Make vs. What They Know: How Firms’ Production and Knowledge Boundaries Affect Competitive Advantage in the Face of Technological Change

This paper is an exploration of how the relationship between technological change and firm performance is affected by ways in which firms are organized. According to transaction cost theory, firms typically choose to vertically integrate (hierarchies) or not (markets), whereas knowledge-based view says that firms have the option to integrate knowledge even they don’t want to integrate labor (vertical integration). Draw on these notions, this paper proposes that, when facing technological change, 1) vertically integrated firms generally perform better and have greater competitive advantage than non-integrated firms; 2) the type of technological changes (component change vs architectural change) moderates the advantage firms gain from vertical integration; and 3) among non-integrated firms, those with knowledge integration generally do better than those without knowledge integration.

The research is conducted in the context of global dynamic random access memory (RAM) industry. Firms’ performance as the dependent variable is measured by the time needed to launch product with new technology to the market (time-to-market). Key independent variables include a dummy to indicate vertical integration or not, knowledge of externally produced components (patent-based measurement), and a dummy to indicate the type of technological changes. The paper adopts an accelerated failure time (AFT) model, which is one kind of survival analysis assuming that the effect of a covariate is to accelerate or decelerate the life course of a process by some constant.

The empirical findings show that vertical integration increases time-to-market performance, moderating by the type of technological changes, and knowledge integration also increases time-to-market performance. However, the results reveal an interesting fact that knowledge integrated firms with partial vertical integration benefit less than their counterparts with no vertical integration at all.