What Firms Make vs. What They Know : How Firms' Production and Knowledge Boundaries Affect Competitive Advantage in the Face of Technological Change

Product innovation often hinges on technological changes in underlying components. We examine how firms' success in managing such component-enabled innovation is impacted by their knowledge and production strategies with respect to key components. We further consider how this relationship depends on whether the innovation is incremental or architectural. Using data on all firms in the DRAM industry across 12 technology generations from 1974 to 2005, we find that vertical integration into component production improves firms' success in managing technological change. Although non-integrated firms have lower performance, their disadvantage is muted by the extent of their component knowledge. We find that the relative advantage of extending production vs. knowledge boundaries is determined by two factors. The first is the nature of the innovation: integrated firms have a greater advantage over non-integrated firms when the change is architectural than when it is incremental. The second is the degree of integration: non-integrated firms derive greater benefit from their knowledge of external components than do integrated firms. Our results clarify the conditions under which extending knowledge boundaries can be a substitute for extending production boundaries in managing technological change