Innovation and the Firm: A New Synthesis

Posted by Social Science Research Network

Innovation and the Firm: A New Synthesis

By Peter Lee (University of California)

Abstract:       Recent scholarship highlights the prevalence of vertical disintegration in high-technology industries, wherein specialized entities along a value chain transfer knowledge-intensive assets between them. Patents play a critical role in this process by lowering the cost of technology transactions between upstream and downstream parties, thus promoting vertical disintegration. This Article, however, challenges this prevailing narrative by arguing that vertical integration pervades patent-intensive fields. In biopharmaceuticals, agricultural biotechnology, information technology, and even university-industry technology transfer, firms are increasingly absorbing upstream and downstream technology providers rather than simply licensing their patents.

This Article explains this counterintuitive development by retheorizing the relationship between innovation and the firm. Synthesizing previously disconnected lines of theory, it first argues that the challenge of aggregating tacit technical knowledge — which patents do not disclose — leads high-tech companies to vertically integrate rather than simply rely on licenses to transfer technology. Relatedly, the desire to obtain not just discrete technological assets but also innovative capacity, in the form of talented engineers and scientists, also motivates vertical integration. Due to t…

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