The Evolution of Vertical Firm Boundaries in New High Technology Ventures

Research summary We argue that interrelated processes of knowledge codification and uncertainty reduction lead to the contraction of vertical firm boundaries of new high technology ventures over time. Consistent with our arguments we show that, over time, the outsourcing of R&D is slower than outsourcing of manufacturing, while outsourcing of marketing and sales is the fastest. We further show heterogeneity in the pace of vertical boundary contraction, where new high technology ventures that engage in knowledge exploration and those whose founders have a strong technological background exhibit slower vertical boundary contraction. Typically, the slowdown in the pace of outsourcing, once again, is the strongest for R&D and the weakest for marketing and sales. Managerial summary Cash-constrained managers in new high technology ventures often wish to outsource their R&D, manufacturing, and marketing and sales activities, but may initially be limited in doing so. This likely happens because these new ventures rely heavily on founders' tacit knowledge about new products and how to commercialize them, and because uncertainty makes it difficult to reach contractual agreements with external partners. We show that with time such outsourcing becomes increasingly possible, especially for marketing and sales activities, and less so for R&D. Yet, when new high technology ventures experiment with new products and in new high technology ventures whose founders have a technological background, the pace of outsourcing is slower