Open Business Model: An Empirical Study of IC Industry

Abstract

In the Integrated Circuit (IC) industry, the closed business model which are composed of integrated device manufacturers (IDM) and the open business model which consists of virtual integrated (VI) manufactures are prevalent and both can be well justified. Whether the IDM or the VI model would better position the firms in terms of providing a higher return or less risk in the IC industry remains to be explored. This study aims to examine the relationship between the profitability of IC companies and their business models (IDM versus VI). NASDAQ listed IC companies were selected as research subjects. The data were collected for the period 2000-2007 and analyzed by using the Fama-French three-factor model. The results show that VI companies significantly outperform IDM counterparts; however, they also take higher risks than IDM firms. In addition, a comparison of data between the periods of 2000-2003 and 2004-2007 reveals the risks of IDM firms increased while that of VI firms decreased after 2004. This finding provides a valuable insight that business model of virtual integration has been emerging as a trend and more companies have been adopting open business model in many growing industries. Events within different industries are utilized to generalize the empirical results.