Vertical Integration in the Value Chain and New Technological Knowledge Creation

Abstract

This paper shows that the firm’s ability to create new knowledge is influenced by the extent to which the firm vertically integrates. The creation of new knowledge in high technology firms is expedited by three major factors: 1) learning by focus – emphasizing core innovative activities by outsourcing non-core value chain activities; 2) the enhancing effect of focus on learning from partners through RD and 3) learning from customers by maintaining in-house marketing and sales channels in house. Hence, firms designing their value chains with a focus on combining internal learning, learning from partners and learning from customers, while eschewing non-core activities, are superior creators of new knowledge. Empirical analysis of panel data for 147 Israeli high technology firms supports the view that these three factors are instrumental in enhancing new technological knowledge creation.