Knowledge Inheritance, Vertical Integration and Entrant Survival in the Early U.s. Auto Industry
Abstract: The economics and strategy literatures have shown that vertical integration decisions are determined by transaction costs and differential firm capabilities. The sources of differential capabilities, however, are not well understood. This paper studies the impact of new firms’ capability endowments on their early vertical decisions, and the implications for their survival chances. We do this by studying employee spinoffs: new firms founded by former employees of incumbents. We find that in the early U.S. auto industry, a spinoff was more likely to vertical integrate a key transaction if its parent firm did, even after controlling for asset specificity. This suggests a mechanism by which spinoffs seek to exploit production knowledge inherited from their parent firms. However, we argue and find evidence that this knowledge inheritance only enhances spinoff survival if it enables the spinoff to establish a defensible strategic position in the market.
