Dynamic Boundaries of the Firm: Are Firms Better Off Being Vertically Integrated in the Face of a Technological Change?

Building on transaction cost economics and the knowledge-based theory of the firm, it is argued that, following a technological change that is competence-destroying to firms and their suppliers, firms that are integrated vertically into the new technology will perform better than those that are not. At the same time, firms that had been vertically integrated into the old technology will perform worse than those that had not been. This argument suggests that the efficient boundaries of a firm are dynamic. The adoption of reduced instruction set computer (RISC) technology by makers of computer workstations was used to explore the hypotheses.