Virtual integration and profitability: some evidence from Taiwan's IC industry

Abstract

Taiwan's Integrated Circuit (IC) industry is of particular interest due to its increasing global importance and its unique, virtually integrated infrastructure. This study was conducted to examine the strategy-performance consequences of strategic group membership and attempted empirically to investigate the relationship between the profitability of Taiwan's IC firms (dependent variables) and both firms' business strategies (virtual integration versus IDM) and industrial business cycles (contingent variable). Data was taken from the Taiwan's Integrated Circuit industry for the period 1994–2001. Significant and interesting results were obtained. First, the main factor of business models significantly affects a firm's profitability and the variation over time. Secondly, the significance of the effect of the business models was still found when the variable of business cycle was included. It implied that the effectiveness of virtual integration to increase a firm's return on assets and return on equity existed at any stage of business cycles. An increasing number of independent IC design firms worldwide seem to support the findings of this study. However, the IDM firms may still exist due to their strategic commitment though the virtually integrated firms have higher profitability.