Vertical integration and technological innovation: A transaction cost approach

The purpose of this research is to investigate the relationship between a firm's decision to integrate vertically and its research and development (R & D) strategy. Specifically, the following two hypotheses are presented: (1) the more vertically integrated a firm is, the more efficient will be the firm's R & D activity, and (2) the more a firm expects future innovation to be significant, the more the firm will be vertically integrated. The concept of the knowledge complementarity effect of vertical integration will be developed to explain the first hypothesis. The high transaction costs related to technology transactions are adopted as an economic reason for the second hypothesis.; The knowledge complementarity effect of vertical integration means that upstream and downstream production processes within a firm use some common knowledge and provide relevant information to help one another become more efficient in R & D through open communication and the unrestricted transfer of persons. The transaction cost of technology trading is due mainly to the problem of information asymmetry. Information asymmetry means that technology buyers necessarily know less about the technology than the sellers, because the information about the technology is the product itself. This transaction cost explains why they prefer internal R & D to external contract R & D or technology licensing (purchasing).; Empirical evidence for these hypotheses is derived from an analysis of vertical integration and technological innovation in the electronics industry. The empirical test featuring the rational expectations hypothesis uses a dynamic simultaneous equation model with an expectation variable and various time lags.