Abstract
While theory proposes that firm boundary decisions have profound performance implications, there is little direct evidence on the consequence of vertical integration decisions for firm innovation. In this paper, I draw from transaction cost economics and the knowledge-based view to argue that vertical integration increases firm innovation and that this effect is contingent on characteristics of the knowledge involved in the integration. Using a quasi- experimental research design and a sample of vertical mergers, I find a causal impact of vertical integration on firms’ subsequent innovation outcomes; moreover, the causal impact is stronger when integration involves complex or original knowledge. Thus, while firm boundary decisions have a direct impact on firm innovation on average, such impact is also contingent on particular knowledge characteristics such as complexity and originality.
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