6 . FOCUS STUDIES The Role of Knowledge Spillovers in Buyer - Supplier Co - Development

This paper presents a model of cooperative technology development undertaken by a buyer and a supplier of capital equipment in the semiconductor industry. In order to meet the demanding technical requirements of their production processes, chip producers, the "buyers," often spearhead technology development projects with their equipment suppliers to advance the processing capabilities of their capital stock. The model developed in this paper captures the tradeoffs a buyer faces when initiating an equipment improvement project. On one hand, the buyer wants the piece of equipment, or "tool," to be tailored to its particular processing needs. On the other hand, the buyer wants the modification to be incorporated into multiple generations of the tool, and equipment suppliers will more readily incorporate hardware changes that have general applicability across its customer base. The model shows that buyers will pursue equipment modifications that have some applicability to other chip producers' processing needs and may have to offer inducements to the supplier to ensure participation. In this modeling framework, knowledge spillovers across buyers occur not because one buyer uses another's modification without compensation but instead are embodied in capital equipment purchased from a common supplier. This paper finds that the growth of and access to the supplier's stock of knowledge discourages vertical integration in the semiconductor industry. A case study from the industry highlights the features of the model by detailing the decisions a buyer faces when initiating co-development with an equipment supplier. This case study describes how the buyer initiated the project, the degree of general applicability of the resultant modification, and the types of inducements the buyer had to offer the supplier to secure its participation. * Assistant Professor, Colgate Darden Graduate School of Business Administration, University of Virginia. This research is part of the Competitive Semiconductor Manufacturing Program funded by the Sloan Foundation at U.C. Berkeley. The author greatly appreciates the funding from Sloan and the helpful comments from her colleagues including Clair Brown, David Mowery, Bronwyn Hall, and her dissertation group.