Persistence of Integration in the Face of Specialization: How Firms Navigated the Winds of Disintegration and Shaped the Architecture of the Semiconductor Industry

Abstract

Although the stylized model of industry evolution suggests that firms transform from vertical integration to specialization over time, many industries still exhibit a continued persistence of integrated firms. In exploring this puzzle, I draw on detailed firm-level data from the semiconductor industry to analyze how integrated incumbents, beyond shifting to the specialized mode, reconfigured in the face of industry's vertical disintegration so as to coexist with the specialized firms. I propose and find that the incumbents who persist with vertical integration increase their emphasis on systemic innovations and transact with specialized firms in both upstream and intermediate markets. The value-creating opportunities associated with integrated incumbents' leveraging (a) their relative superiority in developing systemic innovations and (b) markets to pursue a broader menu of transactional choices may offset their costs of staying integrated. These firm-level factors also determine the pattern of industry's vertical disintegration and the extent of coexistence between integrated and specialized firms. Persistence of Integration in the AbstractA stylized model of industry evolution suggests that an industry is initially dominated by vertically integrated firms and over time, it transforms into a vertically specialized structure. Many industries, however, are characterized by a continued persistence of integrated firms despite a trend towards disintegration. In exploring this puzzle, I draw on detailed firm-level data from the semiconductor industry to analyze the response of integrated incumbents as the industry transitions towards greater specialization. I find a significant shift in the incumbents' capability development process following the emergence of specialized entrants as they seek to capitalize on their relative superiority in developing systemic innovations. Moreover, this shift occurs in parallel with an increase in transactions linking integrated incumbents with specialized firms in upstream and intermediate markets suggesting a source of potential complementarity between the two organizational forms. The findings argue that as an industry transitions from an integrated to a specialized structure, it presents new value creating opportunities for integrated incumbents that entail reconfiguration of their transactional environment and pursuing differentiated capability development processes. The extent to which these opportunities offset firms' costs of staying integrated will determine the pattern of industry's disintegration and the extent of co-existence between integrated and specialized firms.2

Science and research policy at the end of Moore’s law

“…In contrast to these start-ups, large firms competing in the CPU and memory markets tended not to vertically disintegrate because complementarities between design and manufacturing provided keys to their competitive advantage 24 . These integrated device manufacturers were more likely to patent 'systemic innovations' than their vertically disintegrated peers 26 , and they also drove the process innovations that spilled over to the rest of the industry through the industry's collaborative research institutions 27 . Throughout this period, increasing development costs, shortening product cycles, and growing domestic and foreign competition limited the ability of firms to capture the social and private returns from their R&D investments 28 .…”

Open standards, vertical disintegration and entrepreneurial opportunities: How vertically-specialized firms entered the U.S. semiconductor industry

“…Recent empirical studies have found such results for the semiconductor industry (Strojwas, 2005;Kapoor, 2012) and the electronics sector in general (Luo, 2010, pp. 114-5;Luo et al, 2012).…”

“…Incumbents may rationally remain vertically-integrated by capitalizing on their integrative or combinative capabilities by introducing systemic innovations from recombining or integrating existing technology and process components (Teece, 1996;Helfat and Campo-Rembado, 2010;Kapoor, 2012). While remaining vertically-integrated, the incumbents may further improve the efficiency of their internal units by allowing them to directly transact with and/or compete with specialized firms in the intermediate markets (Jacobides and Billinger, 2006).…”

Learning horizon and optimal alliance formation

“…As an illustrative example, consider Advanced Micro Devices Inc. (AMD) and National Semiconductor Corporation (NSC) during 1977-1999. 4 Both firms operated mainly in the semiconductors subsector of the high tech information technology industry, a setting that has historically experienced great variation in the level of technological uncertainty, the cost of residual technological uncertainty, and the cost of alliances (e.g., Bresnahan and Greenstein 1999;Frankort 2013;Grove 1996;Kapoor 2013;Schilling 2015;Sytch et al 2011), and so we might expect a priori that the learning horizon may have an effect consistent with Proposition 4.…”