Vertical Integration Versus Outsourcing: A Knowledge-Based Reconciliation

In vertical integration literature, controversy remains over how organizational cost changes after vertical integration and how technological uncertainty influences vertical integration decisions. To reach a reconciliation, I draw on knowledge-based view of the firm (Grant, 1996, 1998; Spender, 1996, 1998), and propose a contingency model that examines moderating effects of knowledge absorptive capacity. In the new competitive landscape featured by hypercompetition and knowledge-based competitive advantage (Bettis & Hitt, 1995; D’Aveni, 1994), a firm with high absorptive capacity (Cohen & Levinthal, 1990) can assimilate, utilize, and develop new knowledge to establish new cross-functional capabilities via vertical integration strategy. Consequently, the firm has high potential to realize synergic benefits of vertical integration and to cope with technological uncertainty.