The Study On The Model Of Firms' Vertical Boundaries Based On Technical Distance

We see considerable differences in the organization of firms and the economy in general between technologically leaders and those that are technological followers. The firms'vertical boundaries of leaders are smaller and those of followers are larger. Combing with enterprise resource and capability theory, we instigate the relationship between technical distance and firms'vertical boundaries.We construct a model where the equilibrium organization of firm changes as an economy approaches the world technology frontier. The equilibrium organization of firm here includes vertical integration and outsourcing. In vertically integrated firms, owners (managers/agents) have to spend time both on production and innovation activities, and this creates managerial overload, and discourages innovation. Outsourcing of some production activities mitigates the managerial overload, but creates a holdup problem, causing some of the rents of the owners to be dissipated to the supplier. Far from the technology frontier, imitation activities are more important, and vertical integration is preferred. Closer to the frontier, the value of innovation increases, and encourages outsourcing.