ادغام عمودی و عملکرد نوآورانه: اثرات شیوه های تأمین منابع دانش خارجی

We set out in this study to analyze the impact of vertical integration on the innovative performance of a firm and to explore the interaction between vertical integration and different modes of external knowledge sourcing. Our empirical results reveal an initial increase in the effect of vertical integration on innovative performance up to a certain level of integration, although this is subsequently followed by a decline; that is, the relationship is characterized by an inverted U-shape. The results further reveal that external knowledge sourcing is positively related to the innovative performance of a firm, albeit with a negative interaction with the level of vertical integration. In other words, firms with higher levels of vertical integration may be faced with barriers to the acquisition of external knowledge. Our findings suggest that firms should be cautious in their pursuit of a strategy of vertical integration, given the non-monotonic impact on innovative performance, whilst an increase in the level of vertical integration is also likely to diminish the effectiveness of the external knowledge sourcing.

An area of particular interest in the field of strategic management is the analysis of the underlying reasons for the differences in the investment choices made by firms and their subsequent performance (Rumelt et al., 1994). In their pursuit of the answers to this extremely intriguing issue, many researchers have attempted to provide empirical evidence on whether the allocation of resources is affected by firm boundaries (Mullainathan and Scharfstein, 2001), or whether the firms’ investment decisions may be affected by its organizational form (Ciliberto, 2006). Despite the widespread consensus on the importance of the decision by a firm to pursue vertical integration, it remains unclear as to whether, or the way in which, these vertical boundary decisions affect the various dimensions of firm performance (Harrigan, 1985a, Martin, 1986, D’Aveni and Ravenscraft, 1994 and Leiblein et al., 2002). The empirical evidence in the prior studies is rather mixed, with some studies suggesting that a strategy of vertical integration does not induce performance differentials (Reed and Fronmueller, 1990), some reporting that vertical mergers have a negative impact on profits due to the failure of such mergers to create differential advantages for the integrated firm (Bhuyan, 2002), and some noting that whilst vertical integration is associated with lower transaction and overhead costs, this is nevertheless accompanied by higher production costs (D’Aveni and Ravenscraft, 1994). Peyrefitte et al. (2002) argue that a better understanding of the relationship between vertical integration and performance may be achieved by considering the role of managerial capabilities in directing such integration; they note that a lack of understanding of non-core businesses as well as a lack of the necessary managerial approach to the management of the activities being integrated both contribute to inferior performance. From an examination of the issue of costs after firms changed their vertical integration strategies, Mpoyi and Bullington (2004) found that such strategic changes significantly reduced production costs, although these changes did not affect inventory costs. Thus, the relationship between vertical integration and performance remains both inconclusive and unpredictable. As a result of this rather ambiguous relationship between vertical integration and performance, the extant empirical literature has tended to focus mainly on issues relating to economic or financial performance. However, faced with such a rapidly changing environment and advancing technology, innovation has clearly become a prerequisite for any firm hoping to develop or maintain its competitive advantage. Thus, some of the more recent studies have begun to focus more on firm performance through the measurement of innovative capability. Although the benefits and costs of vertical integration have been debated for several decades, few studies have gone on to link a firm’s vertical integration strategy with technological innovation. Armour and Teece (1980) argue that vertical integration and R&D expenditure are positively correlated, suggesting that vertical integration can facilitate the transfer of technical information, and that when complex inter-stage interdependencies are involved, this can also facilitate the implementation of new processes or the introduction of new products. Amongst the more recent studies, Jacobides and Winter (2005) argue that the scope of a firm is related to the process of capability development, whilst Macher (2006) undertakes a comparative analysis of the ways in which firms efficiently organize themselves to solve different types of problems relating to technological development. These studies highlight a very interesting and potential direction for further study aimed at clarifying the relationship between vertical integration and the innovative performance of a firm. The need for flexibility in organizational capabilities has also emerged as a critical issue with regard to firm boundaries and the choices made by a firm between internal and external knowledge integration (Grant, 1996a), particularly in conditions of dynamically competitive markets. In such cases, the optimal growth of the firm involves a fine balance between the exploitation of existing resources and the development of new resources and capabilities (Penrose, 1959 and Wernerfelt and Montgomery, 1988). Firms are thus forced to search for external sources of knowledge in order to diversify their research portfolios and to broaden their knowledge base. Any increase in the technological diversification of a firm can promote the cross-fertilization between different areas of technological expertise whilst simultaneously reducing the lock-in effect in those technologies with low profitability (Garcia-Vega, 2006). This thereby highlights the importance of external knowledge sourcing with regard to the development of the innovative capability of a firm. However, we still know relatively little about whether, or the ways in which, organizational structure interacts with the external knowledge sourcing modes with regard to determining the innovative performance of a firm. As noted earlier, vertical integration is likely to influence the potential returns to R&D investment, which determines the firm’s absorptive capacity, and which in turn influences the effectiveness of external knowledge sourcing. We therefore set out in this study to explore the ways in which the innovative performance of a firm interacts with its vertically-integrated structure and its external knowledge sourcing modes. Using the ‘quality of innovation output’ and the ‘technological scope’ of a firm as the intermediate measures of innovative performance, the main contribution made by the present study is its clarification of the relationship between the level of vertical integration and the innovative performance of a firm. We also provide some contribution to the literature on organizational learning. Vertical integration and external knowledge sourcing modes are beneficial for firms with regard to enhancing their level of innovativeness; however, it should be noted that for firms with higher levels of vertical integration, a negative correlation is found in the interplay between vertical integration, external knowledge sourcing modes and innovative performance. The remainder of this paper is organized as follows. Section 2 provides a brief review of the extant literature on vertical integration and technological innovation and discusses the relationship between vertical integration and innovative performance; the role of external knowledge sourcing and its impact on the relationship between vertical integration and innovative performance is also discussed in this section. Section 3 provides information on the data and methodology used to test our hypotheses, as well as our data analysis, with the results subsequently being presented in Section 4. Section 5 provides a discussion of our results, as well as a review of the limitations and recommendations for future research. Section 6 provides the conclusions drawn from this study.

The primary aim of this study is to provide a more refined understanding of vertical integration strategies and their impact on the innovative performance of a firm. Our main finding is that vertically-integrated firms are more likely to enhance their innovative performance; however, this finding becomes negative for those cases where firms have higher levels of vertical integration. In other words, the influence of a strategy of vertical integration on the innovative performance of a firm will tend to vary based upon the level of vertical integration; that is, the relationship is non-monotonic. The results of this study further highlight the importance of the modes of external knowledge sourcing with regard to the building and expansion of a firm’s innovative capability; however, we also find that this negatively moderates the relationship between the level of vertical integration and a firm’s innovative performance. The results point to the importance of external knowledge sources, and suggest that firms need to have a sound mechanism in place for the coordination of their external resources, upon which they can build new capabilities, thereby strengthening their existing capabilities; however, the effects of the mode of external knowledge sourcing will diminish with increasing levels of vertical integration. Our findings indicate that by engaging in a strategy of vertical integration at a moderate level, firms may be able to strike an appropriate balance between internal and external learning.